Performance review
Results for the first quarter of 2020 were slightly lower than we expected.
Revenue in the first quarter of 2020 was 2 billion yuan, an increase of 5.6 percent over the same period last year, while adjusted net profit was 875 million yuan, an increase of 9.3 percent over the same period last year. The results were slightly lower than we expected, mainly due to lower-than-expected growth in Kewei sales.
Trend of development
The impact of COVID-19 's epidemic on Kewei sales has gradually weakened. Kewei sales rose 7 per cent year-on-year in the first quarter of 2020 as the spread of influenza weakened during the COVID-19 outbreak. We expect the outbreak to continue to affect Kewei's sales performance in the second quarter, but the impact has gradually diminished since the third quarter. In addition, the company stressed that sales of Kewei in grass-roots hospitals, retail pharmacies and online platforms grew strongly, accounting for 42% in the first quarter of 2020 (28% in the first quarter of 2019). We expect Kewei to achieve high single-digit sales growth in 2020.
New products may start to contribute revenue in 2020. The company expects to get licenses for 10 to 15 generic drugs this year. The company predicts that human insulin and imitamivir will be approved in the second half of 2020; human insulin (30R), glargine insulin, aspartate insulin and aspartate insulin 30, and verariclovir will be approved in 2021; Jongelejing and Lilarutide will be approved in 2022 and 2023, respectively.
Profit forecast and valuation
Due to the decline in Kewei sales, we lowered our earnings per share forecasts for 2020 and 2021 by 10.8% and 6.8% to 4.50 yuan and 5.27 yuan. The company's current share price corresponds to 5.8 times 2020 earnings and 4.9 times 2021 earnings. Maintain an industry rating that outperforms. Due to lower sales expectations and declining market sentiment, we cut our target price by 24% to HK $45 (corresponding to 8.6 times 2020 price-to-earnings ratio and 7.4 times 2021 price-to-earnings ratio), which is 53% upside from the current share price.
Risk
The price of Kewei was cut more than expected; the launch of new drugs was postponed.
