Company Reports

Narrow-moat CR Pharma's interim revenue growth is slower than expected, but offset by a higher gross margin due to product mix. We tweak our 2024 annual assumptions accordingly while keeping our long-term outlook unchanged. Our fair value estimate remains at HKD 5.80 per share. We think the share price is fairly valued.

The revenue of China Resources Pharmaceutical Group grew at a compounded annual growth rate of 10.4% over the past 10 years. The growth is driven by its medical distribution segment due to industry consolidation and industry expansion. Similar to other larger pharmaceutical distributors, CR Pharma, in our view, is likely to grow faster than the distribution industry average in the next three years as the industry consolidates further.

We reinitiate coverage of China Resources Pharmaceutical Group, or CR Pharma, with a narrow moat rating and fair value estimate of HKD 5.82 per share. CR Pharma is the third-largest pharmaceutical distributor by revenue in China. The stock is currently trading at a 15% discount to our fair value estimate. CR Pharma has little revenue cyclicality and no specific business exposure to geopolitical risks.

The revenue of China Resources Pharmaceutical Group grew at a compounded annual growth rate of 10.4% over the past 10 years. The growth is driven by its medical distribution segment due to industry consolidation and industry expansion. Similar to other larger pharmaceutical distributors, CR Pharma, in our view, is likely to grow faster than the distribution industry average in the next three years as the industry consolidates further.

We will discontinue analyst coverage of China Resources Pharmaceutical Group 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 China Resources Pharmaceutical 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 6.40.

Narrow-moat CR Pharma's full-year results were in line with our expectations. Revenue in the second half and full-year was HKD 129 billion and HKD 254 billion, respectively, or 5% and 7.3% year-on-year growth. Core operating profit margin (calculated with cost of sales, sales and administrative expense, research and development, other income, and trade receivables impairment) for the full year improved 22 basis points to 4.8%.

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 CR Pharmaceutical’s interim results were better than our expectation, with 10% year-on-year revenue growth despite COVID-19 lockdowns. Core operating profit margin (calculated with cost of sales, sales and administrative expense, research and development, other income, and trade receivables impairment) improved 39 basis points to 5.8%. Although profitability for each business line was relatively stable, there was more revenue contribution from the drug manufacturing segment, which is higher-margin than distribution and retail pharmacies.

China Resources Pharmaceutical Group, or CR Pharma, is a healthcare conglomerate that operates manufacturing, distribution, and retail pharmacy segments. Chinese healthcare industries have grown faster than GDP, and will continue to do so due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat CR Pharma reported full-year results that were in line with our expectation. Revenue for the full year and second half were CNY 237 billion and CNY 122 billion, respectively, representing 18% and 10% year-on-year growth. Operating profit margins were slightly weaker than expected, mostly from elevated cost of sales but partially offset by lower sales and distribution expenses.

China Resources Pharmaceutical Group, or CR Pharma, is a healthcare conglomerate that operates manufacturing, distribution, and retail pharmacy segments. Chinese healthcare industries have grown faster than GDP, and will continue to do so 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.

China Resources Pharmaceutical Group, or CR Pharma, is a healthcare conglomerate that operates manufacturing, distribution, and retail pharmacy segments. Chinese healthcare industries have grown faster than GDP, and will continue to do so due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat CR Pharma reported interim results that were in line with our expectations. Revenue was CNY 114.5 billion for the six months, which is a 28% increase compared with last year’s low base due to COVID-19. Note that this is only slightly ahead of our full-year target of CNY 212 billion, which is only 4% year-on-year growth, and we do not expect double-digit growth for the second half. Gross profit margin fell by 1.38 percentage points, although we estimate some of this is due to last year’s high base, which enjoyed higher margins from the export of anti-pandemic supplies.

CR Pharma is a healthcare conglomerate that operates manufacturing, distribution, and retail pharmacy segments. Chinese healthcare industries have grown faster than GDP, and will continue to do so due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.

Narrow-moat CR Pharma reported earnings that were slightly better than our expectation. Although revenue growth was weak, this was more than made up for by lower selling, general, and administrative, or SG&A, expenses. Additionally, the company’s working capital metrics such as accounts receivable days and inventory days have completely normalized, indicating a recovery from the COVID-19-stricken first half.

CR Pharma is a healthcare conglomerate that operates manufacturing, distribution, and retail pharmacy segments. Chinese healthcare industries have grown faster than GDP, and will continue to do so 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 CR Pharma reported interim results with very disappointing revenue, but robust profit margins brought earnings in line with our expectations. Our fair value estimate is unchanged at HKD 6.40 per share. The shares trade at a 30% discount to our valuation, although we caution investors that sentiment toward drug distributors is likely to remain negative for the foreseeable future due to lack of catalysts and investor focus on high-growth biotech firms.