Sino Biopharm’s Earnings Outperform on Lower Sales Expense

Narrow-moat Sino Biopharmaceutical 01177 reported full-year earnings that exceeded our expectations due to significantly lower sales and distribution expense. SBP’s revenue for the second half and full year was CNY 13.6 billion and CNY 28.8 billion, respectively, or 8.6% and 7.1% growth. Although the top line was within 2% of our expectations, operating profit margin (calculated with cost of sales, other expenses, and sales, general, and administrative expenses) was 20.4% for the full year, which is a 4.8-percentage-point improvement over 2021 and 2 percentage points better than our expectation. This was primarily driven by lower sales expenses in the second half. However, we expect this to be temporary as the company will likely need to increase spending to prepare for new product launches.

Our fair value estimate remains HKD 6.50 per share, and we think the stock is cheap, trading at a 32% discount to this. We don’t necessarily see a clear near-term catalyst, and acknowledge that earnings growth slowdown across the sector and concerns about price controls in the domestic Chinese market will continue to weigh on Big Pharma companies this year. However, the two Chinese Big Pharma companies under coverage, CSPC Pharma and SBP, are both trading at such a deep discount, and we feel it is worth considering these companies as long-term investments in China’s healthcare market.

We do not have a preference between CSPC or SBP at current prices. They are similarly discounted to our fair value estimates, and we think their long-term strategies are now equally compelling. CSPC’s pipeline is more organic and heavily leverages its existing capabilities in lipid-based delivery manufacturing. SBP’s strategy is more focused on global collaborations and in-licensing, which is now more plausible to us after the recent clearance of its F-star acquisition from the Committee on Foreign Investment in the United States.