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2 Oct, 2019 (Wednesday)



CIRC(1763)
Analysis¡G
It is the leading enterprise in the field of isotopes and irradiation technology applications in China. In 2017, it is the largest manufacturer of imaging diagnostic and therapeutic radiopharmaceuticals, UBT kits and analyzers and radioactive source products, respectively, in terms of revenue in China. Its business can be categorize into four sectors as pharmaceuticals, radioactive source products, irradiation, independent clinical laboratory services and other business. The company's revenue in 1H of 2019 increased by 20.5% y.o.y. to RMB1.655 billion, and net profit increased by 25.8% y.o.y. to RMB147 million. The medical application of isotopes in China primarily includes the imaging diagnostic and therapeutic radiopharmaceuticals, UBT kits and analyzers, RIA kits and medical radioactive source products. PRC isotopes medical application market reached RMB 4382.0 million in 2017, growing at a CAGR of 12.1% during 2013 to 2017, and is expected to grow to RMB 10634.1 million in 2022, with a CAGR of 19.4%.
Strategy¡G
Buy-in Price: $19.26, Target Price: $23.00, Cut Loss Price: $15.00



CR PHARMA(3320.HK) - Distribution Business of 1H2019 Keeps Stable

Company Update

For the six months ended June 30, 2019, the company recorded revenue of HKD 101.923 billion (1H2018: HKD 93.741 billion), representing an increase of 8.78% YoY (up 15.7% YoY in terms of RMB), the revenue of pharmaceutical manufacturing, distribution and retail segments accounted for 15.5%, 81.5% and 2.9%, respectively, which was slightly lower than our expectations, it is mainly due to the slower growth of the pharmaceutical manufacturing business by Dong-E-E-Jiao. The company achieved gross profit of HKD 17.434 billion (1H2018: HKD 16.881 billion), showing an increase of 3.3% YoY (up 9.9% YoY in terms of RMB). The gross profit margin was 17.1% (1H2018: 18%), decreasing 0.9 ppts YoY, mainly because the distribution business grew faster than the pharmaceutical manufacturing business. The net profit attributable to shareholders was HKD 3.035 billion (1H2018: HKD 2.25 billion), a YoY increase of 34.9% (up 43.6% YoY in terms of RMB), mainly due to the investment income of Shenzhen Sanjiu.

Optimize Business Structure and Promote Terminal Coverage 

The company's pharmaceutical distribution business achieved revenue of HKD 84.949 billion, a YoY increase of 9.5% (up 16.5% YoY in terms of RMB). The gross profit margin was 7.0%, a slight decrease of 0.4 ppts compared with 1H2018. The coverage of terminals has increased year by year. The total number of downstream customers of 1H2019 has exceeded 100,000, of which 6,862 are high-end hospitals, increasing 17.2% YoY. The proportion of emerging businesses continued to increase. The growth rates of equipment, importing and Chinese medicine decoction pieces businesses were more than 50%, 30% and 30% in 1H2019, respectively, and third-party logistics revenue increased by more than 80% (in terms of RMB). The company's direct sales to medical institutions increased by 23% YoY, and the proportion has increased to 77.5%, the business structure has been further optimized. In addition, in July 2019, CR Pharmaceutical Commercial completed the subscription and increased its holding of Zhejiang Int`l, accounting for 20% of the total share of Zhejiang Int`l, which will help enhance the company's comprehensive competitiveness in the Eastern China.

Leader of OTC Industry, DTP Business Grows Rapidly

Affected by the revenue decline of Dong-E-E-Jiao and consolidation of Jiangzhong Pharmaceutical, the company's pharmaceutical manufacturing business achieved revenue of HKD 17.367 billion, a YoY increase of 2.9% (up 9.5% in terms of RMB). The gross profit margin was 63.6%, a slight decrease of 0.1 ppts compared with 1H2018. After the acquisition of Jiangzhong Pharmaceutical, the leading position of the company in the CHC area has been further strengthened. In 2018, four products made by the company was included in the top ten OTC market sales products in China. In addition, as of 1H2019, the company focused on more than 40 consistent evaluation projects, and five products passed the consistency evaluation. In 1H2019, R&D expenditure was HKD 660 million, an increase of 7.9% YoY (in terms of RMB). The revenue of retail business was HKD 2.946 billion, an increase of 19.2% YoY (increased 26.9% in terms of RMB). Gross profit margin was 12.7%, down 3.6 ppts from 1H2018, mainly due to the rapid growth of DTP with relatively low gross profit margin. In addition, the company acquired a 25% shares in the Tycoon Group in 1Q 2019, which will further enrich and optimize the existing retail product portfolio and strengthen the competitive advantage of the distribution and retail business in Hong Kong market.

Maintain "BUY" Rating

We adjusted our forecast for FY19/FY20/FY21 incomes to HKD 206.6/225.6/246.5 billion, showing increases of 8.92%/9.21%/9.23% YoY; net profit attributable to shareholders were HKD 4.7/5.2/6.2 billion, with increase of 16.84%/10.69%/18.70% YoY; the corresponding EPS was HKD 0.75/0.83/0.90. The target price was adjusted to HKD 11.22, corresponding to FY19/FY20/FY21 14.95x/13.51x/12.48x PE, which was +52.27% higher than the current price (HKD 7.37 as of September 27, 2019), maintaining a ¡§BUY¡¨ rating.

Risk

1. Industry policy risk;

2. M&A fails expectations.

Financials

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