CSPC Pharmaceutical’s First-Quarter Results Below Expectations; Shares Undervalued

Narrow-moat CSPC Pharmaceutical’s first-quarter earnings were below our expectations due to elevated cost of sales. Revenue for the three months was CNY 7.9 billion, which is 17% year-on-year growth and 4% lower than our estimate. Cost of sales was 26.2% of revenue, or 3.2 percentage points lower than the same period last year and 3.4 points lower than our estimate. We attribute this to higher contribution from lower-margin products, such as bulk drugs and caffeine. Although this is a weak quarterly report, we think it is in line with usual seasonal fluctuations.