Sinopharm’s Earnings Slightly Better Than Expected

Narrow-moat Sinopharm’s 01099 full-year earnings were slightly stronger than our expectation due to better-than-expected resilience in the fourth quarter, despite China’s COVID-19 outbreak that began in December. Revenue for the quarter and full year was CNY 146 billion and CNY 552 billion, respectively, or 4.3% and 6.0% year-on-year growth. Net profit margin for the full year was 1.54%, which shows good margin stability despite a challenging year.

Our fair value estimate is unchanged at HKD 29.50 per share; the market price is a 24% discount to this. Although Chinese medical distributors have rallied significantly in the past six months, we think there is still room for upside. Sinopharm remains our top pick in this subsector as the only large-scale pure-play distributor. Its price/earnings ratio is approximately 8 times, using our 2023 earnings as the base, and the dividend yield is over 3.5%. We continue to view Sinopharm as a defensive stock that is well insulated from the broader concerns about U.S. and China tensions that affect other subsectors in China healthcare.

We saw modest improvement in working capital, with accounts receivable days falling to 112 (from 120 in 2021) and a cash conversion cycle of 57 days (from 61 days in 2021). Financing costs were well controlled, as the company is able to access low-interest financing, and were only 0.58% of total revenue in 2022 compared with 0.65% in 2020 and 2021. Outstanding debt was CNY 65 billion at the end of the year, which is similar to 2021 and higher than we would like, but we think it is manageable in light of Sinopharm’s low interest rates and improving working capital.