Shanghai Pharmaceuticals' Second-Quarter Earnings in Line; Effects of COVID-19 Fading

Narrow-moat Shanghai Pharmaceuticals Holding announced interim results that were in line with our expectations, with flat growth in the second quarter and solid profit margins. Our fair value estimate is unchanged at HKD 20.30 per H share. With the H shares trading at a 33% discount to our valuation, we think they are cheap, although we caution investors that sentiment toward drug distributors is likely to remain negative for the foreseeable future due to a lack of catalysts and investor focus on high-growth biotech firms. Among distributors, we prefer Sinopharm as it is a pure play on the medical distribution businesses, whereas SPH and CR Pharma have sizable drug manufacturing businesses that lack competitive differentiation, in our view.