Company Reports

We slightly lower our fair value estimate for narrow-moat Sinopharm to HKD 23.80 per share from HKD 24.70 after interim revenue missed expectations. We think the weaker outlook will continue into 2025 but should normalize thereafter. As such, we keep our long-term assumptions unchanged as we think Sinopharm will continue to benefit from industry consolidation. We still think Sinopharm is undervalued, currently trading at 0.4 price/book and 8.0 price/earnings. We believe our projected 25% year-on-year fall in 2024 earnings is already reflected in its share price, but we think news flow will still be lackluster in the near term.

Unlike its two main, yet smaller, competitors Sinopharm is a pure-play medical distributor that does not have a sizable portion of revenue from the manufacturing business. As the largest medical distributor, Sinopharm has been growing at a 10-year compound annual growth rate, or CAGR, of 10.7%, with both industry expansion and industry consolidation. It aims to further increase distribution market share by deepening its network coverage and focusing on industry policies.

Sinopharm's first-quarter 2024 performance is weaker than we expected. Total revenue increased 1.2% year over year, lower than our initial forecast of 7.4%. While we were aware of the January 2024 price cuts on 121 products, with some having price cuts of over 60%, we underestimated the sales of higher-priced inventory at the lower pricing. We think it will be difficult for Sinopharm to make up the shortfall, and we lower Sinopharm's 2024 full-year revenue growth forecast to 4.0% even though we expect to see some volume gains. We also cut gross margins for 2024 and 2025 to 7.5% from 8.1%, reflecting our view of continuous price cuts from the medical device sector. As a result, our fair value estimate is reduced to HKD 24.70 per share from HKD 29.40 per share. While the stock is currently trading at a discount to our valuation, we think the key factor to watch out for is whether Sinopharm successfully brings more value-added services to pharmaceutical companies and public hospitals.

Unlike its two main, yet smaller, competitors Sinopharm is a pure-play medical distributor that does not have a sizable portion of revenue from the manufacturing business. As the largest medical distributor, Sinopharm has been growing at a 10-year compound annual growth rate, or CAGR, of 10.7%, with both industry expansion and industry consolidation. It aims to further increase distribution market share by deepening its network coverage and focusing on industry policies.

Narrow-moat Sinopharm’s 2023 revenue grew 8.0% year over year, largely in line with our forecast of 7.7%. Net profit did beat our estimate, but this was due to lesser minority interest. While core performance was well within our projection, we marginally lower our fair value estimate to HKD 29.40 per share from HKD 30.70, after some slight tweaks to our margin assumptions.

Unlike its two main, yet smaller, competitors Sinopharm is a pure-play medical distributor that does not have a sizable portion of revenue from the manufacturing business. As the largest medical distributor, Sinopharm has been growing at a 10-year compound annual growth rate, or CAGR, of 10.7%, with both industry expansion and industry consolidation. It aims to further increase distribution market share by deepening its network coverage and focusing on industry policies.

We reinitiate coverage of China’s largest pharmaceutical distributor Sinopharm, with a narrow moat rating and fair value estimate of HKD 30.70 per share. We think Sinopharm is undervalued, trading at a 32% discount to our fair value.

Unlike its two main, yet smaller, competitors Sinopharm is a pure-play medical distributor that does not have a sizable portion of revenue from the manufacturing business. As the largest medical distributor, Sinopharm has been growing at a 10-year compound annual growth rate, or CAGR, of 12.2%, with both industry expansion and industry consolidation. It aims to further increase distribution market share by deepening its network coverage and focusing on industry policies.

We are placing coverage of narrow-moat-rated Sinopharm under review pending the transfer of coverage to a new analyst. We expect to revisit our coverage of this company over the next three months. Our most recent fair value estimate was HKD 29.50.

Narrow-moat Sinopharm’s 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.

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 Sinopharm reported third-quarter results that were in line with our expectation, showing signs of improvement after a rough second quarter. Revenue for the quarter was CNY 144.9 billion, or 9.6% year-on-year growth, which is better than the first half which only grew 5.0% year on year due to the effects of COVID-19-related restrictions. Net profit margin for the third quarter and the first nine months were 1.49% and 1.44%, respectively. Despite China’s lockdowns, these margins have been reasonably stable both year on year and sequentially.

Sinopharm is well positioned in the fast-growing and rapidly consolidating Chinese drug distribution industry. Like most healthcare sectors in China, drug distribution has grown faster than GDP, and will continue to grow quickly due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Sinopharm’s interim earnings were in line with our expectations. Revenue for the six months was CNY 261 billion, or 5% year-on-year growth, which is slower than our forecast. However, gross profit margin was stable at 8.28%, which is better than our expectation and surprisingly resilient despite a challenging second quarter. Management was confident that growth would be higher in the second half, noting that near-term performance couldn’t possibly be worse than the second quarter during China’s COVID-19 restrictions. We agree with this assessment, and expect a rebound in the second half. We maintain our full-year growth projection of 8%-9%.

Sinopharm is well positioned in the fast-growing and rapidly consolidating Chinese drug distribution industry. Like most healthcare sectors in China, drug distribution has grown faster than GDP, and will continue to grow quickly due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Sinopharm is well positioned in the fast-growing and rapidly consolidating Chinese drug distribution industry. Like most healthcare sectors in China, drug distribution has grown faster than GDP, and will continue to grow quickly due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Sinopharm’s full-year 2021 revenue was in line with our expectations. Full-year revenue was CNY 508 million, growing at 14% year on year and just 2% higher than our forecast. Our fair value estimate is unchanged at HKD 29.50 per share, and shares are 38% undervalued relative to this.

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.

Sinopharm is well positioned in the fast-growing and rapidly consolidating Chinese drug distribution industry. Like most healthcare sectors in China, drug distribution has grown faster than GDP, and will continue to grow quickly due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Sinopharm’s first-half revenue and profit margins were in line with our expectations. The firm once again increased its debt, bringing its net debt/equity ratio up from 4% at the end of 2020 to 43% at the end of June, which is in line with our expectation. Our fair value estimate is unchanged at HKD 29.50 per share; the shares are 32% undervalued relative to our valuation.