Company Reports

We cut our fair value estimate for narrow-moat Shanghai Pharmaceuticals, or SPH, to HKD 11.60 per share from HKD 13.50, following a disappointing 5.1% year-on-year growth in revenue. The miss is due to a sectorwide slowdown, which we think reflects weak macroeconomic conditions and also a larger-than-expected sensitivity to a cut in generic drug prices. As a result, we lower our 2024 sales growth rate to 6.5% from 10.7%. We believe SPH is fairly valued, and its faster-than-peer growth is reflected in its current share price.

Shanghai Pharmaceuticals’, or SPH’s, revenue grew at a compounded annual growth rate of 10.9% in the past 10 years. The growth is driven by its medical distribution segment due to industry consolidation and expansion. Similar to other larger pharmaceutical distributors, SPH, in our view, is likely to grow faster than the distribution industry average in the next three years as the industry further consolidates.

We reinitiate on Shanghai Pharmaceuticals Holding, or SPH, with a narrow moat rating and a fair value estimate of HKD 13.50 per H share. SPH is the second-largest pharmaceutical distributor by revenue in China. The stock is currently trading at a 17% discount to our fair value estimate. SPH has little revenue cyclicality. While some of SPH’s drug pipelines are currently conducting clinical trials in the North American region, we think its exposure to geopolitical risks is small. As of 2023, only 1.2% of total revenue comes from overseas.

Shanghai Pharmaceuticals’, or SPH’s, revenue grew at a compounded annual growth rate of 10.9% in the past 10 years. The growth is driven by its medical distribution segment due to industry consolidation and expansion. Similar to other larger pharmaceutical distributors, SPH, in our view, is likely to grow faster than the distribution industry average in the next three years as the industry further consolidates.

We will discontinue analyst coverage of Shanghai Pharmaceuticals on or about Jan. 31, 2024. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We are placing coverage of narrow-moat-rated Shanghai Pharmaceuticals 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 20.30.

Shanghai Pharmaceuticals Holding is a vertically integrated drug distributor and operates a large drug manufacturer and retail pharmacy chain as well. Chinese healthcare industries have grown faster than GDP and should continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Shanghai Pharmaceuticals, or SPH, reported full-year results that beat our expectations due to lower-than-expected selling, general, and administrative expenses. Revenue for the six months and full year was CNY 120.3 billion and CNY 232 billion, respectively, or 8.8% and 7.5% year-on-year growth. These were within 0.2% of our top-line forecast. However, core operating profit (calculated with other income, cost of sales, SG&A, research and development, and credit losses) for the year was 3.65%, or 2 basis points worse than last year and 31 basis points better than our forecast. The stable margins in spite of 2022’s challenges reinforces our view that SPH will continue to exhibit steady earnings.

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 Shanghai Pharmaceuticals announced interim results that were better than our expectations, despite strict coronavirus restrictions during the second quarter, which had an adverse effect on hospital traffic. Revenue was CNY 111.7 billion for the six months, representing 6% year-on-year growth. Profit margins were stable as cost of sales for the distribution segment fell 78 basis points, but was offset by higher costs in production and retail pharmacies.

Narrow-moat Shanghai Pharmaceuticals, or SPH, announced full-year results that were in line with our expectations. Revenue was CNY 216 billion and CNY 111 billion for the full year and second half, respectively, representing 12.5% and 5.6% year-on-year growth. Profit margins were stable as expected.

Shanghai Pharmaceuticals, or SPH, is a vertically integrated drug distributor and operates a large drug manufacturer and retail pharmacy chain, as well. Chinese healthcare industries have grown faster than GDP and will continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

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.

Shanghai Pharmaceuticals, or SPH, is a vertically integrated drug distributor and operates a large drug manufacturer and retail pharmacy chain, as well. Chinese healthcare industries have grown faster than GDP and will continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Shanghai Pharmaceuticals Holding, or SPH, announced interim results that were in line with our expectations. Revenue was CNY 105 billion, or 21% year-on-year growth from last year’s low base, and profit margins were in line with our expectations. External revenue for production, distribution, and retail segments grew 8%, 24%, and negative 2% respectively, and gross profit margins were within expectations. Our fair value estimate is unchanged at HKD 20.30 per H-share, and the market price is a 23% discount to this.

Shanghai Pharmaceuticals, or SPH, is a vertically integrated drug distributor and operates a large drug manufacturer and retail pharmacy chain, as well. Chinese healthcare industries have grown faster than GDP and will continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat Shanghai Pharmaceuticals, or SPH, announced full-year results that were in line with our expectations. Our fair values are unchanged at HKD 20.30 per H-share and 17.00 per A-share. The market is pricing them at a 24% discount for H-shares and 16% premium for A-shares.

Shanghai Pharmaceuticals, or SPH, is a vertically integrated drug distributor and operates a large drug manufacturer and retail pharmacy chain, as well. Chinese healthcare industries have grown faster than GDP and will continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

We upgrade Innovent’s moat to narrow from none. We raise our fair value estimate to HKD 80.00, from HKD 33.00, which implies a 12-month forward price/sales ratio of 21. While our price remains below the market value, we believe this is primarily due to discount rate assumptions rather than a difference in view on earnings. The stock now has a 3-star rating, and we believe sentiment toward it will remain strong given positive pipeline developments expected over the next year.

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.