CSPC announced results with revenue up by 1.7% YoY to RMB31.5bn and adjusted net profit up by 2.8% YoY to RMB6.28bn in 2023, 1.1%/1.4% below BOCI estimates/consensus, mainly due to (i) impacts from industry rectification activities and soft API price, partially offset by rapid growth in anti-infective and respiratory segment. Looking into 2024, the management was upbeat on double-digit growth in both top line and bottom line. Post results, we fine tune our 2024/25 estimates and introduce our 2026 estimates, slightly revised down TP to HK$10 and maintain BUY rating.
Key Factors for Rating
4Q results missed: CSPC delivered 4Q23 results with RMB7.6bn of sales (- 2.6% QoQ or +1.9% YoY), 4.4% below BOCI estimates, which we attributed to impacts from industry rectification activities and soft API price of vitamin C and caffeine. Finished drugs recorded revenue of RMB6.3bn, up 6.6% YoY but down 1.6% QoQ with nervous system disease/oncology/anti-infective/ cardiovascular/respiratory/digestion and metabolism/others delivering QoQ changes of -8.8%/-7.4%/+9.3%/+10.0%/+40.7%/-7.7%/-6.0%, respectively. We believe QoQ decline in nervous system and oncology was due to decreasing prescription amidst industry rectification while rapid growth of anti-infective and respiratory drugs was owing to (i) sales ramp up of Anfulike (+100% YoY per management) and (ii) outbreak of respiratory tract infection in China. The performance of oncology segment was still dragged by the price cut of Keaili, while we see positive YoY growth (+0.6%) in oncology business in 4Q23. Pressure from API remained, with revenue from vitamin C products/antibiotics dropping by 12.0%/19.1% QoQ but caffeine up by 9.5% QoQ. Core profits increased by 5.3% YoY due to (i) improved gross margin and (ii) save in selling expenses.
2024 outlook: during the call, the management provided 2024 guidance of double-digit growth in topline and bottom line, not less than 30% dividend payout ratio, and at least sales of RMB3bn from new and sub-new products (hospital level, or sales of RMB3.5bn-3.6bn in ex-factory level). The management was upbeat on the guidance given (i) good sales/ hospital admission momentum of new and sub-new products, (ii) favourable policies towards hospital entry and pricing of innovative drugs, including actively held drug management committee meetings, etc., (iii) normalised academic conferences and physician prescription volume as the industry rectification activities now mainly target at key person in hospitals, and (iv) importance that government attaches to pharmaceutical industry.
Valuation
Post result, we fine tune our 2024/25E revenue on higher contribution from new and sub-new products given the hospital entry momentum seen in 1Q24, and lower revenues from APIs. Besides, we expect gross margin to recover in 2024 given higher contribution from finished drug, while we also expect increased selling expense ratio considering new products to be launched in 2024/25. Overall, we revise our 12-month TP to HK$10.0, and maintain BUY (WACC: 10.2% and terminal growth: 2.5%)
Key Risks for Rating
(i) Slower-than-expected ramp-up of newly launched drugs; (ii) failure of R&D and (iii) price cut on core drugs.