Company Reports

CSPC’s 2023 results were mixed. While the top and bottom lines were in line with our forecasts, we lower our 2024 revenue growth forecast to 5% from 8% as we see nervous system and oncology drugs setting the pace. While profit was below market consensus, we view CSPC’s performance largely favorably as the decline in net margin was driven by record-high research and development spending composed of CNY 4.8 billion on clinical trial adjustments, such as adding weight-loss drug pipelines or filling market approvals in North America. We don’t think it will instantly boost growth in 2024 and 2025, but we view it positively from a long-term perspective. Similar to its global big pharma peers, it is a necessary step to offset patent loss and remain competitive. We slightly lower our CSPC fair value estimate to HKD 7.8 per share from HKD 8.4 after fine-tuning 2024 and 2025 assumptions. The current share price is about a 15% discount to our fair value estimate.

CSPC is one of the largest and oldest pharmaceutical companies in China. Anchored by its nervous system business segment due to its flagship drug NBP, CSPC has a portfolio of innovative and generic drugs covering a wide range of diseases. NBP is a Class 1 new chemical drug for acute ischemic stroke. Class 1 drugs under the Chinese classification system are innovative drugs that have never been marketed globally. Thanks to its portfolio breadth, CSPC has been growing its revenue with a 10-year historical compounded annual growth rate of 25.0%, exceeding GDP growth.

We transfer coverage of narrow-moat CSPC following its third-quarter earnings results with our fair value estimate only slightly changed to HKD 8.40 per share. We think CSPC’s shares are undervalued with long-term potential supported by its increasing research and development spending. With its flagship drug NBP exclusivity expiring soon, 2024 is a pivotal year for CSPC with seven new expected product launches.

CSPC is one of the largest and oldest pharmaceutical companies in China. Anchored by its nervous system business segment due to its flagship drug NBP, CSPC has a portfolio of innovative and generic drugs covering a wide range of diseases. NBP is a Class 1 new chemical drug for acute ischemic stroke. Class 1 drugs under the Chinese classification system are innovative drugs that have never been marketed globally. Thanks to its portfolio breadth, CSPC has been growing its revenue with a 10-year historical compounded annual growth rate of 25.0%, exceeding GDP growth.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2022, about 80% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

Narrow-moat CSPC’s interim results fell short of expectations. Revenue for the six months grew 3% year on year whereas operating profit, calculated with cost of sales and expenses for sales, general, and administration, and research and development, had no growth. Gross profit margin fell to 70%, or 2.75 percentage points worse than the same period last year, reflecting lower prices for both finished drugs, especially oncology, and vitamin C. We lower our fair value estimate to HKD 8.90 per share from HKD 11.10 to reflect a more challenging business environment for domestic drug sales, but we still view shares as undervalued.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2021, about 80% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

Narrow-moat CSPC’s 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.

Narrow-moat CSPC’s third-quarter earnings were in line with our expectations as growth rebounded after a weak second quarter. Top line revenue for the three months was CNY 7.9 billion, or 15.6% year-on-year growth, which continues to be boosted by higher prices and revenue in bulk drugs such as caffeine and vitamin C. Finished drugs, which we view as CSPC’s core business, grew 13.5%. Although the oncology and cardiovascular disease portfolios remain slow due to COVID-19 restrictions, nervous system disease and respiratory disease portfolios showed improvement and supported the company’s overall performance. Profit margins were in line, as lower gross profit margins due to centralized procurement and product mix were offset by lower sales and distribution costs associated with these businesses.

Chinese healthcare companies have rallied dramatically in the past month. Within our coverage, biotech names Innovent (narrow moat), Junshi (narrow moat), I-Mab (no moat), and Genscript (no moat) have rallied 39%, 47%, 5%, and 45%, respectively, since Oct. 11. Big pharma names CSPC and Sino Biopharm (both narrow moat) have rallied 26% and 16% in the same period. CR Pharma and Shanghai Pharma are narrow-moat drug distributors with drug manufacturing segments and have rallied 15% and 14%. No-moat WuXi Biologics has lagged, having sold off 6% despite rallies from other CDMOs. 3SBio (narrow moat biopharma) and Sinopharm (narrow moat distributor) have also lagged their respective comparables.

Narrow-moat CSPC’s second-quarter earnings were below expectations due to contraction in oncology sales, largely due to COVID-19-related lockdowns. Although top-line revenue was CNY 7.7 billion, or 9% year-on-year growth, this was padded by higher prices and revenue in bulk drugs such as caffeine and vitamin C, which we think is temporary. Finished drugs, which we view as its core business, only grew 4% year on year, dragged by a 9% decline in oncology and no growth in the cardiovascular disease portfolio. On the bright side, profit margins improved slightly, as lower gross profit margins due to centralized procurement were more than offset by lower sales and distribution costs.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2021, about 80% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2021, about 80% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

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.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2021, about 80% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2020, about 87% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

Narrow-moat CSPC’s 2021 full-year earnings were in line with our expectations. Revenue for the year was CNY 28 billion, which is 12% growth year on year and 1% higher than our forecast. Gross profit margin rose 93 basis points, in line with our expectation that the launch of new drugs would offset the 50% price cut to NBP that took effect in March. Although the company does not disclose drug revenue, we estimate revenue of CNY 6.6 billion for NBP, CNY 1.6 billion for Xuanning, CNY 2.3 billion for Jinyouli, CNY 2.4 billion for Keaili, and CNY 2.9 billion for Duomeisu.

On Dec. 1, the Chinese biotech company BeyondSpring Pharmaceuticals (Nasdaq: BYSI, not covered) received a complete response letter, or CRL, from the U.S Food and Drug Administration, or FDA, regarding its application for approval of plinabulin for the prevention of chemotherapy-induced neutropenia, or CIN. Although this is likely contributing to the negative sentiment weighing on the Chinese biotech sector, we believe the read-through to other companies should be limited. We are not updating our fair value estimates s at this time.

CSPC operates in a fast-growing and rapidly changing environment. Like most healthcare sectors in China, drug manufacturing has grown faster than GDP, and is projected to continue this trend over the next two decades. Additionally, this industry is undergoing massive regulatory change, which will likely be supportive of CSPC's drug portfolio and pipeline for at least the next decade. As of 2020, about 87% of revenue comes from finished drugs, and the remainder comes from bulk drugs like vitamin C, caffeine, and antibiotics. The firm's flagship drug is NBP, which is indicated for acute ischemic stroke and constitutes approximately 25% of total revenue. CSPC also boasts a fast-growing portfolio of chemotherapy drugs, mostly early-to-market generics or new preparations.

Narrow-moat CSPC’s second-quarter earnings were in line with our expectations. We maintain our fair value estimate of HKD 11.10 per share. Although the market price is a 12% discount to our fair value, we view this as within the range of fair value given the very high uncertainty rating.