CSPC’s 2022 Results In Line; COVID Vaccine Approved

Narrow-moat CSPC Pharmaceutical’s 01093 full-year results were in line with our expectations. The company announced emergency approval from China’s National Medical Products Administration of its SYS6006 mRNA COVID-19 vaccine, which reinforces our long-standing view that the company’s expertise in lipid manufacturing offers a pathway to organic growth that doesn’t rely on innovative but risky drug targets or antibody designs. Finally, the company emphasized stable growth, although it did not give clear numerical guidance. We suspect this may be in part due to uncertainty on revenue from its COVID-19 vaccine.

Revenue for the three months was CNY 7.4 billion, or 3% year-on-year growth. As expected, this was adversely affected by China’s COVID-19 wave, and we should see a continued impact in the first quarter of 2023. Oncology was especially affected, declining 22% year on year. Gross profit margin for the quarter declined 6.3 percentage points, which we think is mostly due to a collapse in vitamin C prices. This was largely offset by lower spending on sales and distribution, with promotional activities being curtailed by China’s COVID-19 situation.

We maintain our fair value of HKD 11.10 per share. The shares trade 25% below our fair value estimate, which we view as a modest discount, and we would be enticed by further dips in price. The market may be focused on slower growth in the company’s older drugs, many of which are expected to have flat growth or even see declines over the next few years. This includes flagship drugs such as NBP and Keaili (albumin-bound paclitaxel). Moreover, the company has yet to break out revenue for new drugs, so the growth trajectory of these product launches is not broadly visible to investors. Nonetheless, we think the company has shown decent pipeline progress this year and believe its future launches can largely replace lost revenue from older drugs.