Completed 06 Sep 2016 07:27 PM HKT Disseminated 07 Sep 2016 09:28 PM HKT Asia Pacific Equity Research 07 September 2016
Neutral Previous: Not Rated Sino Biopharmaceutical 1177.HK, 1177 HK Top Pharma Player Yet Near Term Cloudy Outlook; Price: HK$5.36 Neutral Price Target: HK$5.00
We assume coverage of Sino Biopharma (SBP) with a Neutral rating and China Dec17 PT of HK$5.00 (from a Not Rated designation and Dec15 PT of Healthcare HK$9.2). SBP is one of the premier all-around biopharmaceutical Isabella Y. Zhao, CFA AC companies with a balanced portfolio with more than 20 blockbuster drugs, (852) 2800-8534 a strong and aggressive salesforce, and rich R&D pipeline, all of which [email protected] should support sustainable long-term growth. However, we see lower Joanne Cheung sales/net profit CAGR of 14% in 2016 -2018 due to headwinds from price (852) 2800-8596 cuts and reimbursement control on its key products. [email protected] J.P. Morgan Securities (Asia Pacific) Limited
A strong product portfolio and R&D pipeline: SBP operates the No.1 Price Performance hepatitis franchise with 18% market share. It also has the No.1 position 12 for alprostadil, a top-5 drug in China, with 75% market share. While its 10 hepatitis franchise is maturing with low teens growth ahead, we believe HK$ 8 its newly launched oncology & respiratory products will rapidly ramp 6 up. It also has over 400 drugs under R&D. SBP aims to launch 2-5 new 4 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 products each year and 5-10 new medicines for the next 2-3 years, 1177.HK share price (HK$) propelling strong long term top growth, in our view. MSCICNX-HLTH (rebased) YTD 1m 3m 12m Abs -24.1% -0.4% 1.1% -42.6% Near-term price pressure continues: NHFPC recently announced a Rel -29.6% -6.8% -8.7% -58.4% 67% price cut for Tenofovir after a centralized price negotiation with GSK, now a total 18 of provinces have included it in their medical reimbursement plans. Both Tenofovir & SBP’s Runzhong (Entecavir) are first line therapy for HBV. We believe SBP is likely to lose share to GSK's Tenforvir. We see continuous price cut pressure for its key products such as Kaishi and Runzhong (Entecavir) as more results from Tianjing and Beijing tenders are implemented.
Valuation: SBP is currently trading at 18x 2017E P/E, and we forecast 14% top/bottomline growth. Thus, we believe the stock is currently fair valued. Risks: 1) more severe price cut from tenders; 2) delay or failure of product launches; 3) the timing of commercialization of new drugs.
Sino Biopharmaceutical (Reuters: 1177.HK, Bloomberg: 1177 HK) HK$ in mn, year-end Dec FY14A FY15A FY16E FY17E FY18E Company Data Revenue (HK$ mn) 12,378 14,550 16,426 18,705 21,623 Shares O/S (mn) 7,412 Net Profit (HK$ mn) 1,513 1,779 1,942 2,259 2,619 Market Cap (HK$ mn) 39,729 EPS (HK$) 0.31 0.24 0.26 0.30 0.35 Market Cap ($ mn) 5,123 DPS (HK$) Price (HK$) 5.36 Revenue growth (%) 25.0% 17.5% 12.9% 13.9% 15.6% Date Of Price 06 Sep 16 EPS growth (%) 46.0% (21.6%) 9.2% 16.3% 15.9% Free Float(%) ROCE 26.9% 27.2% 26.7% 26.6% 26.3% 3M - Avg daily vol (mn) 16.46 ROE 25.0% 24.8% 22.7% 21.7% 20.8% 3M - Avg daily val (HK$ mn) 86.30 P/E (x) 17.5 22.3 20.5 17.6 15.2 3M - Avg daily val ($ mn) 11.1 P/BV (x) 4.0 5.1 4.2 3.5 2.9 MSCICNX-HLTH 148.74 EV/EBITDA (x) 14.8 12.1 11.3 9.5 8.0 Exchange Rate 7.76 Dividend Yield - - - - - Price Target End Date 31-Dec-17 Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 30 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
www.jpmorganmarkets.com Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: • Launches of new products such as clopidogrel • Much stronger than expected sales ramp up of • Pricing pressure from competition to entecavir and • Major M&A transactions imatinib and dasatinib adefovir • Beijing Tide IPO • Hospital services ramping up earlier than expected • Slower than expected sales ramp-up of newly • Quarterly earnings • Better recovery of Beijing Tide sales and earlier launched products than expected public listing • Anti-bribery crackdown hurting disproportionally more on direct sales models
Key financial metrics FY15 FY16E FY17E FY18E Valuation and price target basis Our Dec-17 PT of HK$5.0 is based on DCF methodology. The nature 14,550,22 16,425,98 of the industry leads us to apply a terminal growth of 4%. Revenues (LC '000) 5 6 18,704,503 21,623,205 Revenue growth (%) 17.5% 12.9% 13.9% 15.6%
EBITDA (LC '000) 3,220,547 3,401,660 3,979,445 4,634,371 EBITDA margin (%) 22.1% 20.7% 21.3% 21.4% Tax rate (%) 15.5% 16.0% 16.0% 16.0%
Net profit (LC '000) 2,911,008 3,178,671 3,697,319 4,286,762
EPS (LC) 0.240 0.262 0.305 0.353 EPS growth (%) -21.6% 9.2% 16.3% 15.9% Product Mix (2016E)
DPS (LC) 0.05 0.04 0.03 0.03 Anorectal Parental Orthopedimedicines Nutritious medicines BVPS (LC) 1.05 1.27 1.54 1.86 Antic - 2% Others 5% medicinesinfectitiou 8% Operating cash flow (LC '000) 2,259,114 2,341,648 3,077,654 3,072,595 6%s medicines Free cash flow (LC '000) 1,523,782 1,532,782 2,187,902 2,093,868 7% Interest cover (x) 40 57 66 77 Respirator Net margin (%) 12.2% 11.8% 12.1% 12.1% y system medicines Hepatitis Sales/assets (X) 0.88 0.86 0.84 0.82 4%Oncology medicines Cardio- 47% Debt/equity (%) 27.0% 25.3% 25.1% 23.5% medicines cerebral Net debt/equity (%) -21.1% -37.8% -65.9% -87.9% 11% medicines ROE (%) 33.7% 32.0% 31.0% 29.9% 10% Key model assumptions FY16E FY17E FY18E FY19E Entecavir growth 10% 12% 15% 12% Gaimei growth 5% 6% 8% 6% GM 78.0% 77.8% 77.5% 75.0% Source: Company and J.P. Morgan estimates. Source: Company and J.P. Morgan estimates. Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity to FY16E FY17E FY16E FY17E EPS (LC) FY16E FY17E 5% chg in sales of hepatitis drugs 1.5% 0.8% 1.5% 0.8% JPMe old 0.410 0.470 5% chg in sales of CCV drugs 1.4% 0.8% 1.3% 0.7% JPMe new 0.262 0.305 1ppt increase in selling expenses -2.2% -1.2% -2.2% -1.1% % chg -36% -35% 1ppt increse in overall GM 5.1% 7.4% 5.0% 7.5% Consensus 0.279 0.311 Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates. Comparative metrics CMP Mkt Cap P/E (x) EV/EBITDA (x) P/BV (x) YTD LC $Mn FY16E FY17E FY16E FY17E FY16E FY16E Stock perf. SINO BIOPHARM 5.01 4,788 18.4 16.0 9.6 8.4 3.8 1.6 (28.6) CHINA MEDICAL SY 12.98 4,162 20.8 17.2 18.8 15.2 4.1 3.3 14.7 CSPC PHARMACEUTI 7.56 5,898 21.8 18.0 14.1 11.9 4.5 (3.1) JIANGSU HENGRU-A 43.51 15,298 37.6 30.2 29.7 23.8 8.1 6.7 6.5 FOSUN PHARMA-H 22.65 7,911 16.7 14.3 25.1 21.1 2.2 10.0 2.6 SHANGHAI PHARM-H 21.2 7,905 15.4 13.9 11.6 10.5 1.5 12.9 29.0 SIHUAN PHARM 1.74 2,247 7.9 7.9 4.8 4.5 1.2 1.4 (58.8) Source: Bloomberg; Price as of 09/02/2016
2 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Sino Biopharmaceutical (SB) Investment summary produces medicines in two core therapeutic categories: cardio cerebral diseases and hepatitis. The Sino Biopharmaceutical is a leading pharmaceutical manufacturing company in company is extending development China. Its flagship products are in the hepatitis and cardio-cerebral medicines efforts to oncology, analgesic and segment and it’s the market leader in both these segments with market share of 18% respiratory medicines, in order to and 43% respectively as of 1H16. Hepatitis and cardio-cerebral medicines accounted meet the increasing demands of medical practitioners and patients. for 11% and 57% of sales as of 2015. China is set to become home to the largest Hepatitis B suffering population in the world with the market forecasted to reach USD 1.4bn by 2024 by IMS. Being the market leader in Hepatitis, with its flagship Revenue breakdown by business products like Runzhong, SBP is well positioned to take advantage of this growth. segment (2015) Analge Others Apart from market growth, SBP also has the unique ability to manage the product sic 12% life-cycle efficiently in order to capture the advantages. It has maintained the Medici nes patented product portfolio for a long time now and it intelligently continues to extend 11% the protection period by changing the product form. This is primarily due to its Cardio Oncol - strong R&D team. SBP's R&D team has rolled out blockbuster products in the past ogy cerebr (Yiren and has a total of around 400 products in its pipeline. Management has an edge when al 9% 57% it comes to identifying M&A targets, which proves beneficial in the long term and Hepatit has helped SB to extend its product offerings. To complement all this, it also has a is 11% strong and effective sales and distribution team comprising 9000 sales personnel.
Source: Company data
Figure 1: Sino Biopharmaceutical – Revenue and growth rate Figure 2: Sino Biopharmaceutical – EBIT over revenue 2012- 2012-2018E 2018E Hkd Mn Hkd Mn Revenue Growth EBIT EBIT Margin 32.1% 20.5% 20.7% 25,000 29.7% 35% 6,000 21% 19.9% 25.0% 30% 19.7% 20,000 5,000 20% 25% 17.5% 4,000 15,000 15.6% 19% 13.9% 20% 18.1% 17.9% 12.9% 3,000 17.6% 21,623 15% 4,849 18% 10,000 18,705 2,000 4,180 16,426 3,192 3,583 12,378 14,550 10% 2,554 5,000 9,901 1,000 1,980 17% 7,497 5% 1,592 0 0% 0 16% 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2012A 2013A 2014A 2015A 2016E 2017E 2018E Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15 Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15
3 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 3: Sino Biopharmaceutical vs MSCI China Healthcare Index, Forward PE
Sino Biopharmaceutical (1177 HK) MSCI China Helathcare Index
50
45
40
35
30
25
20
15
10 1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
Source: MSCI, Company.
Figure 4: Sino Biopharmaceutical - Price Chart
Price (1177.HK) Mean +1 STD -1 STD +2 STD -2 STD
9 8 +2 STD, 6.92 7 6 +1 STD, 5.19 5 4 Mean, 3.47 3 -1 STD, 1.75 2 1 -2 STD, 0.03 0 1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
Source: Bloomberg, J.P. Morgan.
Figure 5: Sino Biopharmaceutical - Forward P/E chart
Forward PE (1177.HK) Mean +1 STD -1 STD +2 STD -2 STD
37 +2 STD, 31.31 32 +1 STD, 27.15 27 Mean, 22.99 22 -1 STD, 18.83
17 -2 STD, 14.66
12 1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16
Source: Bloomberg, J.P. Morgan.
4 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment Positives A leader in hepatitis and cardio-cerebral medicines SBP is the market leader in hepatitis and cardio-cerebral medicines in China with dominant share of 18% and 43%, respectively, as of 1H2016. According to the company, Hepatitis medicines accounted for approximately 47% of the group’s 2015 sales and fall into two categories: one that protects the liver by lowering enzyme levels and the other which combats the Hepatitis virus. Cardio-cerebral medicines contribute 11% of SBP’s 2015 revenue and the key product is Kaishi injections to improve cardio-cerebral micro-circulation blockage.
China is currently the largest market for Hepatitis B treatment in the world with a market share of around 38.8% in 2014. As people are becoming wealthier and more people are trying to seek Hepatitis B treatment than before, Chinese Hepatitis B market is forecasted to reach $1.4 billion by 2024, up from $923 million in 2014, growing at a CAGR of 4.4%, according to IMS. According to a WHO survey, 300- 400 million people worldwide are afflicted with chronic Hepatitis B, with 1/3 residing in China—130 million carriers of the Hepatitis B virus (HBV) and 30 million chronically infected. Viral hepatitis has consistently been ranked as a top infectious disease. About 1.4 million people contracted viral hepatitis in 2008 and 2009, resulting in the death of ~1,000 people in each year. About 300,000 people die from HBV-related illness annually in China, including 180,000 with hepatocellular carcinoma (HCC). Unlike Hepatitis C, which is difficult to treat but can be cured, it is easier to suppress viral breakthrough in patients with Hepatitis B but there is no cure that can completely eradicate HBV. The treatment cycle for Hepatitis B can last for one-to-two years, which creates a very attractive and captive market for drug makers.
SBP’s blockbuster Runzhong (Entecavir) was launched in 2010 as the first to market generic drug in China and listed as the 1st line therapy for Hepatitis B diseases. According to IMS data, SBP’s Runzhong has rapidly gained market share from MNCs’ branded drugs and accounted for more than 30% of total entecavir market in 2015.
Figure 6: SB—Key Hepatitis drugs 2015 Figure 7: SB—Cardio—Cerebral drugs 2015
TianqingganpinGanlixin Others Mingzheng Tianqingfuxin Beiqian Others g enteric injections and 1% (adefovir injections Liesu 3% capsules capsules dipivoxil) (marine) Sodium (diammonium(diammonium 9% 1% glycyrrhizinate) Tablets glycyrrhizinate) 9% 7% 2% Tuotuo Calcium Kaishi Tianqingganmei Tablets injections injections 15% 50% (magnesium isoglycyrrhizinat e) Yilungping 33% Runzhong Tablets tablets 17% Tianding tablets (entecavir) (entecavir 45% Tianqingning maleate) injections 2% 6% Source: Company, J.P. Morgan. Source: Company, J.P. Morgan.
5 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Unique ability to manage product life-cycle fortifying hepatitis franchise SBP produces two types of agents commonly used for Hepatitis B treatment, anti- viral agents and hepatic protecting traditional Chinese medicines. SBP’s liver- protecting TCMs are extracted from licorice, which the company used to have or has patent protection. SBP is one of the few Chinese companies that is able to manage the product lifecycle well. Upon the expiry of the patent for Ganlixin, the company developed an enteric slow-release version of the drug (Tianqingganping) to prolong the patent life of its key products. The company also developed Tianqingganmei as an isomer of Ganlixin, which allowed SBP to claim composition-of-matter chemical patent, which will last for 20 years. For anti-viral products, SBP is mainly engaged in development and sales of first-to-market generics. The company has held the largest market share of adefovir for several years, outselling the originator GSK by a significant margin.
In addition, SBP has filled the approval for the next generation of hepatitis drugs: tenofovir, which was launched by GSK in China with low penetration rate due to its higher price and not reimbursed by insurance, and the patent will expire in 2017.
A solid R&D pipeline for sustainable future growth SBP has strong commitment in new product development and has historically spent 5%-10% of annual sales in R&D, and it has built a strong R&D pipeline. Currently, it has over 400 drugs in various stages of clinical trials or applying for production approval. SBP aims to launch 2-5 new products each year and 5-10 new medicines for the next 2-3 years, propelling strong future revenue growth, in our view. Most recently, SBP received production approval for three products, including esomeprazole sodium for which management expects to achieve Rmb30mn sales in 2016. SBP is continuing strengthening its oncology pipeline, which we believe will be the future growth driver in the long term. The preliminary Phase II data for Anlotinib for the treatment for advanced medullary thyroid carcinoma (MTC), advanced soft tissue sarcomas (STS) and metastatic renal cell carcinoma (mRCC) show encouraging results. It is currently in Phase II and III trials in China and in Phase I in US and management expect to file production application in 2017. Notably, Anlotinib is similar to Pfizer's Sunitinib and Hengrui's Apatinib with US$1.1bn globally and sales of Rmb300mn in China in 2015, respectively, thus we see great topline growth potential.
Large and effective sales team SB has 8,992 sales force delegates (hepatitis: 5.097, cardio-cerebral: 2,768 and others: 1,127) covering more than 30 provinces, municipalities and autonomous regions. SBP is trying to reinforce third tier end market covering village and town hospitals, public health hospitals/centers/clinics and private clinics.
6 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 8: Large distribution network
Source: Company data, JP Morgan
Solid M&A capability SBP has demonstrated a solid record of successful M&A. The capability of identifying candidates and integrating the acquired businesses should position the company for future growth in a consolidating industry. The company acquired Shanghai Tong Yong Pharmaceutical to gain a foothold in the booming dermatology market and it is closing a transaction to acquire an orthopedic specialty hospital in Shaoyang, Hunan, according to management.
Quarterly reporting and dividend provide visibility and reduced risk While many investors dislike SBP’s holding company structure and its involvement in apparently non-core businesses, SBP is a rare HKEX Main Board listed company that reports quarterly results and pays a quarterly dividend, which provides visibility and reduces investment risk.
Investment Risks Risks from changes in drug pricing and other regulations Majority of SB’s sales in 2015 came from prescription antibiotics and other drugs to hospitals, one of the areas where there is a significant degree of government price controls. In addition, the distribution of prescription medicine involves costly distributors with relatively opaque incentive schemes. Any changes to the pricing policy or to the regulations of incentive schemes may impact the sales level of prescription medicines. There is also a trend to regulate the volume and profits from the sale of drugs by hospitals to patients. SBP is indirectly impacted by many of the new rules and regulations in the ongoing healthcare reforms and this is a risk for the company’s operations, in our view.
Competition from domestic and international firms There are a number of existing and potential producers of hepatitis, cardio-cerebral and other drugs that could put pressure on margins for older products. SBP would need to constantly come up with new improved products in order to maintain relatively high gross margins.
7 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Severe price cut pressure for major products SBP is facing increasing price pressure for its major products. For example, in 2015, Runzhong had a 57% price cut in Zhejiang province and Kaishi has faced ~10% price erosion. There could be price cuts for its hepatitis and oncology drugs as well. Any severer-than-expected price cuts could result in the stock’s underperformance, in our view.
Competition from domestic and international firms There are a number of existing and potential producers of hepatitis, cardio-cerebral and other drugs that could put pressure on margins for older products. SBP would need to constantly come up with new improved products in order to maintain relatively high gross margins. MNCs could become more aggressive in defending their anti-viral products, while domestic players could challenge SBP by offering extremely low prices.
Pipeline failure Drug development is inherently risky. A drug can fail during clinical trial, or the clinical trial data could not be strong enough for SFDA to approve the product. As an R&D focused company, SBP’s stock performance may be subject to volatility caused by pipeline progress or failure. Even if a drug enters the market, its commercial success is far from guaranteed.
Valuation and share price analysis
DCF valuation at HK$5.0 (Dec-17) Our Dec-17 price target is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk-free rate of 4.2% (yield on 10-year government notes in China). We assume a beta of 0.85. Accordingly, we assume a WACC of 9.3%. We estimate free cash flow for SBP until 2020 and assume a terminal growth rate of 4.0%.
We also analyze the DCF price sensitivity to WACC, and the terminal multiple.
8 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 1: SBP—Base-case DCF analysis HK$MM 2012 2013 2014 2015 2016E 2017E 2018E 2019E Terminal Cash flow estimates Sales 7,496,888 9,901,196 12,378,350 14,550,225 16,425,986 18,704,503 21,623,205 24,690,731 28,028,384 EBIT 1,353,469 1,742,496 2,217,007 2,867,237 3,268,771 3,834,423 4,476,003 4,765,311 4,932,996 NOPAT 1,113,721 1,453,331 1,868,649 2,423,586 2,745,768 3,220,915 3,759,843 4,002,861 4,143,716 Capex, net (331,885) (500,717) (446,962) (735,332) (1,209,752) (1,990,257) (3,274,327) (5,386,850) (8,862,327) Depreciation 175,862 207,115 248,164 341,751 181,463 298,539 491,149 808,028 1,329,349 Change in working capital 1,357,630 1,575,955 2,300,192 2,259,114 2,401,781 3,243,639 3,420,352 4,344,936 4,570,495 Free Cash Flow 2,315,328 2,735,684 3,970,043 4,289,119 4,119,259 4,772,835 4,397,017 3,768,974 1,181,233
WACC calculation DCF Assumptions: Liabilities as a % of EV 0% Terminal grow th 4.0% WACC 9.3% Risk-free rate 4.2% Market risk 6.0% Enterprise NPV 34,557,217 Beta 0.85 + Net cash (debt), current 985,009 Cost of debt 8.0% - Minorities (Market value) 1,132,316 +/- Other items 0 Implied ex it P/E multiple (x) 17x = Equity value 36,674,542 / Number of shares 7,412,192 = Equity value per share (HK$) 5.0 Source Company data, J.P. Morgan estimates.
Table 2: SBP—Sensitivity analysis based on WACC and perpetual terminal growth rate Terminal growth rate 4.9 2.5% 3% 3.5% 4.0% 4.5% 5.0% 5.5% 7.5% 5.2 5.2 5.9 6.5 7.2 8.2 9.6 8.0% 4.9 4.9 5.5 5.9 6.4 7.1 8.1 8.5% 4.7 4.7 5.2 5.5 5.9 6.4 7.1 9.3% 4.3 4.3 4.7 5.0 5.2 5.6 6.0 WACC 9.8% 4.2 4.2 4.5 4.7 4.9 5.2 5.6 10.3% 4.0 4.0 4.3 4.5 4.7 4.9 5.2 10.8% 3.9 3.9 4.1 4.3 4.5 4.6 4.9 Source: Company data, J.P. Morgan estimates.
9 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Financial Analysis
Near-term sales growth slowdown SBP reported total revenue of HK$14,550 million (+18%Y/Y) for 2015. Net profit grew by 18% Y/Y, even after investing 8.9% of revenue in R&D. For 2015, while gross margin and operating margin were 77.7% and 19.7% up 130bp and 160bp from the previous year’s margins. Net margins also remained stable at 12.2%, same as last year’s. Hence, we are encouraged by management’s efforts to rein in operating expenses. While SBP’s hepatitis and cardio-cerebral medicines saw healthy revenue growth of 20% and 15% respectively, sales from Oncology medicines and Analgesic medicines grew by 31% and 24% respectively. We believe that Oncology medicines and Analgesic medicines will drive revenue growth for SBP in the future, growing at 35% and 22% in 2016. Kaishi injections, one of the flagship products of the group is experiencing a contraction in sales growth, with sales down 4% in 2015 YoY.
In 1H16, SBP’s revenue increased by 8% to HKD8,039mn, gross margin improved to 78.8% as compared to 77.1% the year before. Operating margin also improved to 16.6% as compared to 15% in 1H15, primarily driven by increased gross margin and a slight decrease in R&D and Administrative costs as % of revenue. Net profit increased by 9% to HKD1,009mn and net margin was 12.5%, same as 1H15.
Figure 9: SBP sales growth and gross profit, 2012-2018E
Growth Gross profit 32.1% 35.0% 29.7% 30.0% 25.0% 25.0% 29.7% 30.4% 17.5% 20.0% 23.3% 15.6% 12.9% 13.9% 15.0% 19.5% 15.2% 10.0% 13.4% 13.6% 5.0% 0.0% 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company data, J.P. Morgan estimates.
10 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 3: SBP sales growth breakdown by products, 2012-2018E 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E Cardio-cerebral medicines 37.7% -29.7% -71.5% 484.0% 21.2% 15.0% 13.7% 12.1% 11.7% Kaishi injections 44.4% 23.7% 25.0% -4.8% 1.7% -4.4% -4.4% -4.4% -4.4% Spring PVC-free soft bags & spring injections 2.1% -23.1% -45.0% -20.0% 0.0% 0.0% -2.0% -2.0% -2.0% Yilungping (Irbesartan/Hydrochlorothiazide) Tablets 55.5% 30.6% 48.6% 35.9% 24.3% 13.5% 11.0% 9.0% 8.0% Tianqingganan injections 3.4% 0.5% -8.0% -10.0% 0.0% 0.0% -2.0% -2.0% -2.0% Tianqiingning injections 50.2% 15.0% 24.0% -1.1% -9.6% -6.5% -8.0% -8.0% -8.0% Hepatitis medicines 15.3% 45.6% 45.6% 27.2% 18.7% 20.2% 4.1% 6.2% 10.8% Tainqingganping enteric capsules 10.3% 24.6% 24.4% 20.4% 14.2% 16.1% 5.0% 5.0% 6.0% Tainqingganmei injections 36.1% 87.2% 60.7% 27.9% 10.1% 17.2% 5.0% 6.0% 8.0% Mingzheng 2.2% 9.6% 10.0% -0.3% -3.8% -12.3% -30.0% -5.0% -5.0% Tainqingfuxin injections -19.4% -15.8% -21.4% -30.0% 0.0% 0.0% 0.0% 0.0% 0.0% Oncology medicines 48.5% 52.6% 41.9% 35.0% 35.9% 31.0% 35.0% 32.0% 30.0% Analgesic medicines ( Kaifen) 50.7% 44.7% 52.1% 19.0% 27.6% 23.7% 17.0% 14.0% 12.0% Sales of Products (ex-TIDE) 0.0% 0.0% 0.0% 82.9% 25.0% 17.5% 12.9% 13.9% 15.6% TIDE sales (Kaishi + Kaifen + Kaina) 45.7% 31.1% 33.9% 3.5% 11.7% 8.4% 7.4% 6.8% 6.6% Net Revenue 25.7% 42.2% 29.7% 32.1% 25.0% 17.5% 12.9% 13.9% 15.6% Source: Company data, J.P. Morgan estimates.
Gross margin, operating margin and net margin Gross margins for SBP have remained relatively stable over the last five years, moving between 78.5% in 2011 to 76.4% in 2014. Going forward, we believe that the margins will first increase slightly to 78% and 77.8% in 2016 and 2017 and then slide back to 77.5% and 75% in 2018 and 2019. Operating margins for SBP have increased from 18.1% in 2012 to 19.7% in 2015. Over the next few years, we expect the margins to be 19.9%, 20.5% and 20.7% in 2016, 2017 and 2018 respectively. Net margins have also increased from 8% in 2011 to 12.2% in 2015. In the future, as the group’s SG&A expense decreases, net margin is expected to be 11.8%, 12.1% and 12.1% in 2016, 2017 and 2018 respectively. Gross, operating and net margins in 1H16 were 78.8%, 16.6% and 12.5% respectively. Figure 10: Gross Margin, Operating Margin and Net Margin, 2012-18e
Gross margin Operating margin Net margin
90% 78.5% 77.5% 76.4% 77.7% 78.0% 77.8% 77.5% 80% 70% 60% 50% 40% 30% 20.7% 18.1% 17.6% 17.9% 19.7% 19.9% 20.5% 20% 10% 0% 11.9% 10.5% 12.2% 12.2% 11.8% 12.1% 12.1% 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company data, J.P. Morgan estimates.
11 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Increasing SG&A SBP’s Selling and Distribution expenses have decreased as a % of revenue in 2014 and 2015 to 43.16% and 40.53% from 44.58% in 2013. This has led to an improvement in operating and net margins. Administrative expenses, on the other hand, have been going up from 6.45% in 2013 to 8.48% in 2015. Going forward, we expect the selling and distribution expenses to increase slightly to 41.5% in 2016 and 2017 and come down to 40.5% in 2018. Also, the Administrative expenses are expected to come down from current levels to 7.2%, 6.8% and 6.7% in 2016, 2017 and 2018. In 1H16, the selling and expense ratio increased to 42.6% and administrative expense ratio decreased to 6.1%. Figure 11: SG&A as a % of revenue, 2012-18e
Selling and distribution expenses Administrative expenses
50% 44.3% 44.6% 43.2% 40.5% 41.5% 41.5% 40.5% 40%
30%
20% 8.9% 6.4% 6.7% 8.5% 7.2% 6.8% 6.7% 10%
0% 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company data, J.P. Morgan estimates.
Increased focus on R&D As SBP expands its product offerings, its R&D costs have also climbed up from 7.21% in 2012 to 8.95% in 2015. Further, in 1H16, it was 13.5% of the revenue. SBP has 409 products which have either obtained clinical approval or are under clinical trial or applying for production approval. Also, it made 105 new patent application in 2Q16, adding to its 508 existing patent approvals, 12 utility model patents and 53 apparel design patents. As SBP plans to launch more and more proprietary products in the market in future, we forecast its R&D costs will increase further to 9.4%, 9%, and 9.6% in 2016, 2017 and 2018. Figure 12: R&D Costs as a % of revenue, 2012-18e
Research & development R&D as % of Sales Hkd Mn 2,500 12% 9.4% 9.6% 8.9% 8.7% 8.9% 9.0% 2,000 10% 7.2% 8% 1,500 6% 1,000 2,076 1,544 1,683 4% 1,302 500 878 1,073 2% 540 0 0% 2012A 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company data, J.P. Morgan estimates.
12 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Strong balance sheet and cash flow SBP had total assets worth HKD16,482mn in 2015, up from HKD14,163mn in 2014. The company is also Net Cash, with cash of HKD2,711mn in 2015, which was less than its 2014 value. By 1H16, the total assets were HKD18,344mn and Cash was HKD3,803mn. In the future, we expect the Cash of the company to increase to HKD3,933mn, HKD5,822mn and HKD7,812mn in 2016, 2017 and 2018 respectively. Since the company is cash positive, it can invest in new projects to generate future cash flows.
Company Overview
Sino Biopharmaceutical Ltd. is a leading manufacturer and seller of pharmaceutical products in China. It is the undisputed industry leader for liver disease drugs with more than 20 blockbuster products. Applying modernized Chinese and biomedical technology, the company researches, develops, manufactures and markets a plethora of health enhancing modernized Chinese and chemical medicines. Its primary products can be categorized into two therapeutic areas: hepatitis and cardio-cerebral diseases. Sino Biopharmaceutical is the market leader in both these categories with 20% market share in Hepatitis medicines and 43% market share in cardio cerebral medicines- target and sustained release injections. Apart from this it also manufactures medicines for treating tumors, analgesia, orthopedic diseases, anti- infection, parenteral nutrition, respiratory system diseases, anorectal diseases, diabetes and other diseases.
Sino Biopharmaceutical was founded in Feb. 2012 and is incorporated in Cayman Islands. The company was listed on the Hong Kong Stock Exchange on 8th Dec. 2003, and has since 2013 been selected in MSCI Global Standard Indices’ MSCI China Index. It spent HKD 1,301 million on R&D accounting for 8.9% of the revenue and an increase of 21% YoY. Due to its continuous investment in R&D, the group currently has 508 invention patents, 12 utility patents and 53 apparel design patents.
The group posted revenue of HKD 14,550 million and net profit of HKD 2,911 million for the year ended 2015, witnessing a YoY growth of 15% and 18% respectively. The revenue of 4 of its flagship products exceeded HKD 1,000 million in 2015. Sino Biopharmaceutical has a wide distribution network spanning over 30 provinces, municipalities and autonomous regions and sales force of 9,060 employees. The principal end-customers of the group are hospitals.
Business segments The three segments of Sino Biopharmaceutical are:
1. Modernized Chinese medicines and chemical medicines 2. Investment segment 3. Others
13 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 13: Revenue Breakdown of SBP 2015 Orthopedic Parental medicines Nutritious 6% medicines Others 5% Anorectal 8% medicines 2% Hepatitis Anti-infectitious medicines medicines 47% 7% Respiratory system medicines 4% Oncology medicines Cardio-cerebral 11% medicines 10%
Source: Company data, J.P. Morgan
Chemical Medicines This segment is responsible for researching, developing, manufacturing and selling pharmaceutical products for hepatitis, cardio-cerebral diseases, oncology, analgesic, orthopedic, anti-infectious medicines and some other diseases. The major part of the revenue comes from Hepatitis medicines (47.8%).
Table 4: Major Products
Category Products Tianqingganmei (Magnesium Isoglycyrrhizinate) injections, Runzhong (Entecavir) dispersible tablets, Mingzheng (Adefovir Dipivoxil) Hepatitis capsules, Tianqingganping (Diammonium Glycyrrhizinate) enteric capsules, Ganlixin (Diammonium Glycyrrhizinate) injections and capsules Yilunping (Irbesartan/Hydrochlorothiazide) tablets, Tuotuo (Rosuvastatin Calcium) Cardio-cerebral tablets, Tianqingning (Hydroxyethylstarch 130) injections Zhiruo (Palonosetron Hydrochloride) injections, Saiweijian (Raltitrexed) injections, Oncology Tianqingyitai (Zolebronate Acid) injections Orthopedic New Ossified Triol capsules, Jiuli (Glucosamine Hydrochloride) tablets Anti-Infection Tiance (Biapenem) injections Xinhaineng (Carbohydrate and Electrolyte) injections, Fenghaineng fructose Parenteral nutritious injections Tianqingsule (Tiotropium Bromide) inhalation powder, Respiratory system Chia Tai Suke (Cefaclor and Bromhexine Hydrochloride) tablets Anorectal Getai (Diosmin) tablets Source: Company data, J.P. Morgan
14 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 14: Major product sales
Kaishi injections (alprostadil) Tianqingning injections (hydroxyethyl starch) Yilungping (Irbesartan/Hydrochlorothiazide) Tablets Tuotuo Calcium Tablets Mingzheng (adefovir dipivoxil) Runzhong tablets (entecavir) Tainqingganmei injections (magnesium isoglycyrrhizinate) New Ossified Estriol Capsules Xinhaineng (Carbohydrate and Electrolyte) Injections
3,500,000
3,000,000
2,500,000
2,000,000
HKD '000 HKD 1,500,000
1,000,000
500,000
0 2010A 2011A 2012A 2013A 2014A 2015A
Source: Company data, J.P. Morgan
Hepatitis Medicines Hepatitis medicines are the key revenue driver for the group. Its sales amounted to HKD 6,948 million in 2015, accounting for 47.8% of the overall revenue. In 1H16, the revenue from this segment was HKD3,724mn and accounted for 46.3% of the overall revenue. The major hepatitis products that can protect the liver without lowering enzyme levels and combating hepatitis virus are: Tianqingganping enteric capsules and Mingzheng capsules. Both of these products are blockbusters and have been well received in international markets. Tianqingganping enteric capsules and Mingzheng capsules recorded revenues of HKD 2,256 million & HKD 657 million in 2015 and HKD241mn & HKD287mn in 1H16.
15 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 15: Major Hepatitis Medicines Tianqingfuxin Others injections 1% Ganlixin injections (marine) and capsules 1% Mingzheng (diammonium (adefovir dipivoxil) glycyrrhizinate) 9% 2%
Tianqingganping enteric capsules (diammonium Runzhong tablets glycyrrhizinate) (entecavir) 7% 45%
Tianqingganmei Tianding injections tablets (magnesium (entecavir isoglycyrrhizinate) maleate) 33% 2%
Source: Source: Company data, JP Morgan
The company launched Mingzheng capsules in 2006. As a first-tier synthetic drug, Mingzheng has been well received by the market since its launch. In 2005, SB launched Tianqingganmei injections, which were made with Isoglycyrrhizinate separated from Licorice. Management believes that Tianqingganmei injections have bright prospects and can help the company maintain its leadership position in the hepatitis market.
Other products include: Tianqingganmei injections, Ganxilim injections and capsules and Tianqingfuxin injections and capsules.
Figure 16: Mingzhen capsules
Source: Company
Figure 17: Tiangingganmei injections
Source: Company
Sino Biopharmaceutical’s subsidiary CT Tianging also developed another flagship medicine for hepatitis B, Runzhong (Entecavir) dispersible tablet in 2010. CT
16 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Tianging became the first pharmaceutical manufacturer in China to gain approval for this product. Runzhong recorded sales of HKD 3,120 million in 2015 witnessing an increase of 33.4% YoY and HKD1,798mn in 1H16.
Ganlixin injections and capsules made with ingredients extracted from Licorice are the No. 1 hepatitis medicine brand in China. Their sales amounted to HK$155.7 million, a 3% decrease Y/Y. Since the protection period of Ganlixin expired, many replicas have emerged in the market, resulting in intensified competition. Hence, SB has developed Tianqingganping-enteric capsules which have better therapeutic effect than Ganlixin capsules and have their intellectual property right protected. Sales of Tianqingganping-enteric capsules were worth HK$501 million in FY15, representing a growth of 16% Y/Y.
Cardio-Cerebral Medicines Revenue from cardio-cerebral medicines for was HKD 1,372 million accounting for 9.4% of the overall revenue. In 1H16, the revenue was HKD828mn and accounted for 10.3% of the overall revenue. Kaishi injection is the flagship product of this category. Since its launch it has garnered awards from many countries and was awarded GMP medicine certification in Japan in Feb. 2008. The proprietary pharmaceutical technology used by Sino Biopharmaceutical enhances the product to have more apparent effect than similar products in the market and hence has occupied substantial market share. Revenue from Kaishi injections amounted to HKD 1,556 million in 2015 and HKD773mn in 1H16.
Figure 18: Major Cardio-Cerebral Medicines Beiqian Liesu Others Sodium Tablets 3% 9%
Tuotuo Calcium Tablets Kaishi injections 15% 50%
Yilungping Tablets 17%
Tianqingning injections 6%
Source: Company data, J.P. Morgan
Tiangingning injections, which were manufactured by NJCTT and launched in 2006, is plasma-volume expander for patients with blood volume deficiencies and can be used as plasma for all blood types. It recorded sales of HKD 184.5mn representing a YoY decrease of 7% and HKD97mn in 1H16. Other products in this category are Yilinping tablets and Tuotuo calcium tablets.
17 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 19: Kaishi Injections
Source: Company
Oncology Medicines Oncology medicines are mainly developed and manufactured by CT Tianqing and NJCTT. Revenue from this segment for 2015 was HKD1,473 million, representing 10.1% of overall revenue. In 1H16, the segment recorded revenue of HKD877mn, accounting for 10.9% of SB’s overall revenue. Major products of this category include: Zhiruo injections, Saiweijian injections and Tianqingingyitai injections.
Analgesic Medicines Analgesic medicines recorded HKD 1,421 million of revenue in 2015 accounting for 8% of the group’s revenue. Out of this HKD 1,191 million came from Kaifen injections, representing an increase of 24% YoY. Launched in 2005, the analgesic medicine, Kaifen injection, is developed and manufactured by Beijing Tide. It is a Flurbiprofen Axetil microsphere target sustained release analgesic injection produced based on the DDS theory and enabled by advanced target technology. The product is famous for strong pain relieving effect with minimal side effects and has been well received by medical practitioners and patients since its launch. In 1H16, the sales of Analgesic medicines were HKD826mn and representing 8.4% of overall revenue, and sales of Kaifen injections were HKD667mn.
Orthopedic Medicines This segment earned HKD1,040 million in revenue in 2015 representing 7.2% of the overall revenue. The flagship product of this segment is Ossified triol capsules, which made sales of HKD 748 million in 2015, up by 7.2% YoY. In 1H16, the revenue from this segment was HKD571mn, 7.1% of overall revenue and ossified triol capsules had sales of HKD416mn.
Parenteral Nutritious Medicines Sales from Parenteral Nutritious Medicines amounted to HKD914 million in 2015, representing 6.3% of the group’s revenue. Xinhaineng injections, major product of this segment, had sales of HKD 672 million in 2015. In 1H16, the sales from this segment were HKD438mn, 5.4% of overall revenue and Xinhaineng injections had sales worth HKD312mn during the same period.
Investment Segment This segment is mainly involved in long term investment. The group spent HKD47 million in FY 2015 in investments.
Others This comprises principally: (i) the group’s research and development sector which provides services to third parties; and (ii) related healthcare and hospital business.
18 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 5: Major Products Portfolio Drug name Generic Name 1H16, HKD YoY growth FY 15, HKD YoY growth Manufacturing Mn Mn Subsidiary Cardiocerebral Kaishi Alprostadi 773 -4% 1,567 -4% Beijing Tide Tianqingning Hy droxyethystarch 130 97 3% 185 -7% NJCTT Yilunping Irbesartan Hydrochlorothiazide 311 7% 547 14% NJCTT Beiqian Leisu Beroprost 0 -100% 282 39% Beijing Tide Tuotuo Rosuvastafin 313 31% 479 41% NJCTT Hepatitis Mingzheng Adefov ir Dipiv ox il 288 -25% 657 -12% JCTT Runzhong Entecavir 1,798 12% 3,121 33% JCTT Tianqingganmei Magnesium Isogly cyrrhizinate 1,109 -4% 2,256 17% JCTT Tianqingganping Diammonium glycyrrhizinate 242 -4% 501 16% JCTT Ganlix in Diammonium glycyrrhizinate 66 -22% 156 -3% JCTT Analgesic Kaifen Flubiprofen Ax etil 667 13% 1,191 24% Beijing Tide Zepusi Flubiprofen Cataplasms 0 -100% 189 50% Beijing Tide Oncology Tianqingyitai Zolebronate Acid 123 6% 222 11% JCTT Palonosetron Hy drochloride Zhiruo Injections 193 9% 357 26% NJCTT Respiratory Tiotropium Bromide Inhalation Tianqingsule Pow der 191 27% 297 52% JCTT Cefactor and Bromhex ine Chia Tai Suke Hy drochloride Tablet 98 44% 147 26% JCTT Anti-infectious Tiance Biapenem 407 3% 765 38% JCTT Others Jiangsu Chia Tai Fenghaineng Fructose Fructose Injections 121 3% 230 -1% Ferhai Xinhaineng (Carbohy drate and Carbohy drate and Electroly te Jiangsu Chia Tai Electroly te0 Injections injections 313 12% 672 13% Ferhai New ossified estriol Qindao Chia Tai Capsules Estriol capsule 416 14% 749 8% Haier Qindao Chia Tai Jiuli Tablets Glucosamine Hy drochloride 96 -3% 213 15% Haier Getai Diosmin Tablets 108 16% 184 -5% NJCTT
Source: Company data, J.P. Morgan
Key Management profile Miss Tse, Theresa Y Y, aged 23 was appointed as the Chairman of the Board and the Chairman of the Executive Board Committee and the Nomination Committee, of the Company on 30 June, 2015. Miss Tse is a daughter of Mr. Tse Ping, an Executive Director and a substantial shareholder of the Company, and Ms. Cheng Cheung Ling, a substantial shareholder of the Company. She has experience in working in investment, finance and business development departments of several companies.
19 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Mr. Tse Ping, aged 64, is the founder of the Company and now serves as an Executive Director of the Company. He is responsible for managing the overall operations of the company. He has more than 23 years of experience in investment and management in the pharmaceutical industry. He is also currently a director of CT Tianqing, NJCTT, Jiangsu Fenghai, Jiangsu Qingjiang, Qingdao Haier, Qingdao Chia Tai Haier Medicines Co., Ltd., Qingdao Heng Seng Tang Pharmacy Co., Ltd., and Beijing Tide. In January, 2008, he was awarded “World Outstanding Chinese” in Hong Kong and in June, 2010, he was awarded “The Top Ten Most Leading Innovative Persons of the PRC Enterprises in 2010” by the PRC Productivity Society and the PRC Corporation Press.
Mr. Xu Xiaoyang, aged 53, joined in 2007. He is the Chief Executive Officer (CEO) of the Company and the chairman of Shanghai Tongyong. He also serves as the president, senior engineer and practicing pharmacist of the Group. He is responsible for affairs with government authorities, management of various subsidiaries and certain investment projects of the Group. Mr. Xu is a leader in natural science technology segment in Tianjin and an expert in pricing strategy of the pharmaceutical products assessment centre of the National Development and Reform Commission.
Mr. Tse Hsin, aged 46, is an Executive Director and the vice president of the Company. He is mainly responsible for the M&A activities of the Group. He is also the Group’s spokesman. He joined the Group in 1995 as an assistant to the president of the Company and served as the general manager of Xian C.P. Pharmaceutical Co., Ltd. Mr. Tse Hsin is a council member of the first council and the executive council member of the second council of Chaozhou Natives Chamber of Commerce Beijing.
Mr. Wang Shanchun, aged 48, is the president of CT Tianqing. He joined the company in 1990. Mr. Wang has rich management experience in the PRC pharmaceutical field. His design of the new production plant in CT Tianqing Haizhou obtained the first new edition national GMP certificate.
Mr. Tian Zhoushan, aged 52, joined the company in 1997 and is responsible for the business of NJCTT. Mr.Tian is the vice president of Lianyungang Chia Tai Tianqing Medicines Co., Ltd. (“LYG Tianqing”) and the general manager of NJCTT. Mr. Tian completed MBA coursework in Nanjing University. He was the head of production and the assistant to the president of CT Tianqing, and has 27 years of experience in the pharmaceutical industry.
Mr. Chan Oi Nin Derek, aged 48, was appointed as company secretary of the Company in August, 2015. Mr. Chan has nearly 20 years of experience in accounting and auditing and, before joining the Company, was the company secretary of another company listed on the Stock Exchange. He is a fellow member of the Association of Chartered Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.
20 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 20: Shareholding Structure
Source: Company data, J.P. Morgan
Table 6: Major Shareholders Holding entity % Shares Held Cheung Ling Cheng 25.14% Ping Tse 16.49% JP Morgan Chase & Co. 6.06% Blackrock 4.97% Commonwealth Bank of Australia 2.83% Fidelity Management and Research 1.84% Vanguard Group Inc 1.71% T Rowe Price Associates 1.28% Invesco Ltd 0.98% Norges Bank Investment Management 0.95% Source: Company data
21 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
SWOT Analysis
Strengths Weaknesses • Market leader in hepatitis and cardio-cerebral • Heavy dependence on one category of product i.e. medicines with 18% and 43% market share Hepatitis products (46.8%) respectively in PRC • No significant improvement in gross, operating and • Strong product pipeline with approximately 5-10 net margins over the last 5 years, meaning the product launches in the next 2-3 years productivity of the group is not improving • Wide distribution network with a sales team of • Revenue growth from newly launched products is 8,992 covering more than 30 provinces not as much as expected • 4 flagship products with more than RMB 1 billion revenue • The company is better positioned to resist price cuts because majority of products are for prescribed medicines
Opportunities Threats • Strong financial position for future M&A • Chinese pharmaceutical industry is one of the most opportunities heavily regulated industries with chances of further • R&D licensing to third parties can prove to be an regulation important revenue driver if the company further • Most of the products are patent protected, so upon strengthens R&D team and acquires strategic the expiration of patent the company will see stiff partnerships with companies outside PRC competition from other generic manufacturers • Chinese government’s policy to grant subsidies to • The competition in PRC market might become rural areas should allow Sino Biopharmaceutical to stiffer as more and more international brands enter the capture this huge mass market market. GSK entering the market has already • Primary market is Hospital services, which is increased pressure poised to grow by the highest margin in the coming years • Oncology products should prove to be a great revenue driver as concerns about pollution continue to increase in China
22 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Industry Analysis Hepatitis B Market China is currently the largest market to Hepatitis B treatment in the world with a market share of around 38.8% in 2014, according to IMS As people are becoming wealthier and more people are trying to seek hepatitis B treatment than ever before, Chinese Hepatitis B market is forecasted to reach $1.4 billion by 2024, up from $923 million in 2014, growing at a CAGR of 4.4%, according to IMS.
Figure 21: China Hepatitis B Market Size
1600 1400 1400 CAGR: 4.4 % 1200 923 1000 800 600 400
Market Size ($ ($ Sizemillion) Market 200 0 2014 2024
Source: IMS, J.P. Morgan
Figure 22: China Hepatitis B Market Growth 50% 47.2% 38.8% 40%
30%
20% Market share Market 10%
0% 2014 2024
Source: IMS, J.P. Morgan
Specialty medicines and leading therapy areas Global specialty medicines sales proportion will increase from 26% in 2015 to 28% in 2020, according to IMS. But most of this will be concentrated in developed markets - 36% of the total drug spend in the markets as emerging pharma markets (including China) comprising only 12% according to IMS.. The Oncology sales are forecasted to grow by a CAGR of around 10%, during 2015 – 2020, according to IMS. Oncology will be the major class of specialty medicines with more than $100 billion sales in major developed and emerging pharma market, according to IMS.
In 2015, the number of cancer cases in China was 4.3 million, accounting for 20% of the worldwide population, according to MOH.
23 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 7: Chemical Drugs Spending Growth for Major Therapeutic Areas, 2016-2020
Source: World Health Organization
Traditional Chinese medicines Traditional medicines will account for majority of spending in 2020, according to the World Health Organization. It will be 75% of the overall spending of developed drug sales and 53% in the case of emerging pharma markets.
Table 8: Emerging pharma markets Market for TCM
Source: World Health Organization
Table 9: TCM sales for developed market in 2020
Source: World Health Organization
24 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 10: Sale of different kind of drugs in 2020
Source: World Health Organization
Figure 23: Global Pharmaceutical Sales over the years 1200 12%
10% 1000 8% 800 6%
600 4% $ Billion $ 2% 400 0% 200 -2%
0 -4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Generics Rx excl. Generics Growth
Source: World Health Organization
Table 11: China Drug sales in 2015
Source: MOH, J.P. Morgan
25 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 24: China Pharma Sales to Grow at a CAGR of 9% in 2020
CAGR: 9.1% China Pharma sales
180 167 160 140 120 108 100 80 $ Billion $ 60 40 20 0 2015 2020
Source: MOH, J.P. Morgan Estimates
Figure 25: China Cerebral-Cardiovascular Drugs sales
100 91 90 80 80 69 70 60 50 45 36 40 30 30 23 Sakes in RMB Bn inRMBSakes 20 10 0 2008 2009 2010 2011 2012 2013 2014
Source: MOH, J.P. Morgan Estimates
Figure 26: Global Research and Development expenditure 180 25.0%
160
140 20.0%
120 15.0% 100
$ Billion $ 80 10.0% 60
40 5.0% 20
0 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pharma R&D Spend R&D as % of Rx Sales
Source: MOH, J.P. Morgan Estimates
26 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 27: Chinese Diabetes cases # of people with Diabetes
160 151 140 110 120 102 95 100 90 75 80 60 50
40 22 20 0 2000 2003 2006 2009 2011 2013 2015 2040E
Source: MOH, J.P. Morgan Estimates
27 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment Thesis, Valuation and Risks
Sino Biopharmaceutical (Neutral; Price Target: HK$5.00) Investment Thesis Sino Biopharma is the industry leader for liver disease drugs. The company, with its subsidiaries, has a very competitive existing drug portfolio, with 20+ blockbusters, a strong and aggressive salesforce, and a robust R&D pipeline, all hallmarks of a successful pharmaceutical company. We believe its newly launched products, especially oncology products such as Imatinib, and its emerging respiratory disease drug franchise should benefit from critical illnesses associated with worsening air pollution and sustain the company for future growth.
That said, the company’s hepatitis franchise is maturing, and with GSK’s imminent launch of tenofovir in China and multiple new entrants for entecavir, we believe JCTT will face pressure from growing businesses because oncology is unlikely to pick up the slack in the short term. Many other key drugs are also bound to face pricing pressure from successive tenders in various provinces. Excluding M&A, Sino Biopharma may have difficulty achieving 20%+ growth in net profit over the next couple of years, in our view. Given the current valuation, we rate SBP Neutral.
Valuation Our Dec-17 price target of HK$5.0 is based on a DCF valuation which assumes a market risk premium of 6.0% and a risk-free rate of 4.2% (the yield on 10-year government notes in China). We assume a beta of 0.85 as calculated on Bloomberg through regression analysis. Accordingly, we assume a WACC of 9.3%. We estimate free cash flow for SBP until 2017 and assume a terminal growth rate of 4.0%.
Risks to Rating and Price Target Key upside and downside risks to our rating and price target include the timing of the commercialization of new drugs and pricing pressure from regulators. Specifically,
Pricing pressure from competition to entecavir and adefovir, Slower- or better-than-expected sales ramp-up of newly launched products, Anti-bribery crackdown hurting disproportionately more on direct sales models.
28 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Sino Biopharmaceutical: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY14 FY15 FY16E FY17E FY18E HK$ in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Revenues 12,378 14,550 16,426 18,705 21,623 EBIT 2,217 2,867 3,269 3,834 4,476 % change Y/Y 25.0% 17.5% 12.9% 13.9% 15.6% Depr. & amortization 259 353 133 145 158 Gross Profit 9,458 11,301 12,812 14,552 16,758 Change in working capital 30 (477) (665) (408) (956) % change Y/Y 23.3% 19.5% 13.4% 13.6% 15.2% Taxes (331) (568) (605) (704) (817) EBITDA 2,476 3,221 3,402 3,979 4,634 Cash flow from operations 2,300 2,259 2,342 3,078 3,073 % change Y/Y 25.9% 30.0% 5.6% 17.0% 16.5% EBIT 2,217 2,867 3,269 3,834 4,476 Capex (447) (735) (809) (890) (979) % change Y/Y 27.2% 29.3% 14.0% 17.3% 16.7% Net Interest (43) (80) (60) (60) (60) EBIT Margin 17.9% 19.7% 19.9% 20.5% 20.7% Other (2,291) (1,060) 58 78 111 Net Interest (43) (80) (60) (60) (60) Free cash flow 1,899 1,600 1,583 2,238 2,144 Earnings before tax 2,801 3,444 3,784 4,402 5,103 % change Y/Y 31.1% 22.9% 9.9% 16.3% 15.9% Equity raised/(repaid) 0 0 0 0 0 Tax (440) (533) (605) (704) (817) Debt raised/(repaid) 1,637 2 0 0 0 as % of EBT 15.7% 15.5% 16.0% 16.0% 16.0% Other (35) (36) (60) (60) (60) Net income (reported) 1,513 1,779 1,942 2,259 2,619 Dividends paid (757) (854) (309) (257) (214) % change Y/Y 46.0% 17.5% 9.2% 16.3% 15.9% Beginning cash 2,890 3,258 2,590 3,812 5,761 Shares outstanding 4,941 7,412 7,412 7,412 7,412 Ending cash 4,468 2,711 3,933 5,882 7,812 EPS (reported) 0.31 0.24 0.26 0.30 0.35 DPS % change Y/Y 46.0% (21.6%) 9.2% 16.3% 15.9% Balance sheet Ratio Analysis HK$ in millions, year end Dec FY14 FY15 FY16E FY17E FY18E HK$ in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Cash and cash equivalents 4,468 2,711 3,933 5,882 7,812 Gross margin 76.4% 77.7% 78.0% 77.8% 77.5% Accounts receivable 1,890 1,866 2,348 2,451 3,096 EBITDA margin 20.0% 22.1% 20.7% 21.3% 21.4% Inventories 902 950 1,109 1,257 1,515 Operating margin 17.9% 19.7% 19.9% 20.5% 20.7% Others 921 1,988 2,185 2,425 2,731 Net margin 12.2% 12.2% 11.8% 12.1% 12.1% Current assets 8,181 7,516 9,575 12,015 15,155 Sales per share growth 25.0% (21.6%) 12.9% 13.9% 15.6% LT investments 2,497 1,413 1,413 1,413 1,413 Sales growth 25.0% 17.5% 12.9% 13.9% 15.6% Net fixed assets 2,340 2,656 3,412 4,168 5,000 Net profit growth 46.0% 17.5% 9.2% 16.3% 15.9% Total Assets 14,164 16,483 19,210 22,387 26,341 EPS growth 46.0% (21.6%) 9.2% 16.3% 15.9% Liabilities Interest coverage (x) 57.5 40.4 56.7 66.3 77.2 Short-term loans 435 1,420 1,420 1,420 1,420 Payables 775 768 940 1,022 1,276 Others 2,651 3,336 3,336 3,336 3,336 Net debt to equity (31.1%) (9.4%) (17.0%) (25.8%) (30.8%) Total current liabilities 3,861 5,524 5,696 5,779 6,033 Working Capital to Sales 0.3 0.1 0.2 0.3 0.4 Long-term debt 1,289 306 306 306 306 Sales/assets 1.0 0.9 0.9 0.9 0.9 Other liabilities 196 209 209 209 209 Assets/equity 2.0 2.1 2.1 2.0 1.9 Total Liabilities 5,346 6,040 6,212 6,294 6,548 ROE 25.0% 24.8% 22.7% 21.7% 20.8% Shareholders' equity 6,611 7,756 9,389 11,391 13,796 ROCE 26.9% 27.2% 26.7% 26.6% 26.3% BVPS 1.34 1.05 1.27 1.54 1.86 Source: Company reports and J.P. Morgan estimates.
29 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
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Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities issued by Sino Biopharmaceutical. Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Sino Biopharmaceutical. MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477- 0406 or e-mail [email protected].
Sino Biopharmaceutical (1177.HK, 1177 HK) Price Chart
Date Rating Share Price Price Target 21 (HK$) (HK$) N HK$8.1 21-Sep-10 OW 2.97 4.00 23-May-11 OW 2.79 3.60 OW HK$6 N HK$7.5 NR 15-Oct-11 OW 2.28 3.50 14 02-Apr-12 OW 2.08 3.10 13-Jul-12 OW 2.87 3.60 Price(HK$) OW HK$4OW OWHK$3.6 HK$3.5OWOW HK$3.1OW HK$3.6OW HK$3.8 HK$5.5OW HK$6.6N HK$6.6N HK$9.2 15-Nov-12 OW 3.11 3.80 26-Mar-13 OW 4.91 5.50 7 16-May-13 OW 5.27 6.00 14-Nov-13 OW 5.23 6.60 08-Jul-14 N 6.60 6.60 26-Aug-14 N 7.12 7.50 0 11-Nov-14 N 7.53 8.10 Oct Apr Oct Apr Oct Apr Oct 08-Jun-15 N 9.09 9.20 06 08 09 11 12 14 15 14-Aug-15 NR 8.86 -- Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Sep 21, 2010.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
30 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.
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31 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
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