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Sector Research | China
Pharmaceutical
THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON May 4, 2012
May 4, 2012
Pharmaceutical (A shr)
Be selective as performance diverged further
Investment highlights Analyst
He Pingge
Profit growth continued to decelerate, as only 37% of the A-shr 86-0755-82133396
hepg@guosen.com.cn
pharmaceutical co.s had >20% earnings growth in 1Q12 vs 54% in 1Q10 S0980510120026
We expect performance within the pharmaceutical sector to continue to
polarize in the next three years
We suggest to cherry pick the leading/innovative names in the sector Sales Contact
Dan Weil
Global Head of Institutional
1Q revenue growth of the pharmaceutical industry slowed down as Sales and Trading
expected. The pharmaceutical industry saw revenue grow 22.8% and profit Managing Director
+852 2248 3588
increase 14.3% y-o-y over Jan to Mar, compared with 21.3% and 11.5% dan.weil@guosen.com.hk
respectively for the first two months of this year, although the revenue growth Chris Berney
slowed down than a year earlier in 1Q. We expect the profit growth will Managing Director
+852 2248 3568
continue to lag revenue growth going forward. chris.berney@guosen.com.hk
Joe Chan
The performances within the pharmaceutical industry further Director
+852 2248 3578
diversified, and the number of pharmaceutical companies enjoying joe.chan@guosen.com.hk
rapid growth decreased. According to our calculations based on data
Cancy Kong
released by 168 A-shr listed pharmaceutical companies, their revenue growth Vice President
+852 2248 3538
was 19.76% in 2011, but the growth of profit excluding non-recurring items
cancy.kong@guosen.com.hk
significantly declined to only 3.29%, mainly dragged down by the worsening
Jiafeng Li
results of the API (active pharmaceutical ingredients) companies. These
Vice President
companies saw their revenue grow 17.41% in 1Q12, while profit excluding +852 2899 7281
lijf@guosen.com.hk
non-recurring items increased 7.63%. The share of companies enjoying profit
growth of over 20% as a percentage of the total number of A-shr listed Shunei Kin
Vice President
pharmaceutical companies decreased from 54% in 1Q10 and 45% in 1Q11 to +852 2248 3536
shunei.kin@guosen.com.hk
only 37% in 1Q12, as gross profit margin worsened and cash flow became
tight.
Product appeal expected to be the key factor determining the prospect
of pharmaceutical companies. We expect the pharmaceutical industry to
see steady revenue growth but weakening profit growth, with the
performances of pharmaceutical names on course to further diverge in the
next three years. The industry will become more concentrated as more and
more companies exit the market as medicine prices continue to fall despite
surging costs. Under such a scenario, only leading pharmaceutical
companies with popular brand names and strong capability to innovate will be
able to excel, in our view. As a result, we prefer: 1) companies with exclusive
products/resources or brand names; 2) companies focusing on high-end
disease treatment or prevention markets; and 3) leading companies
For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1
Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only.
Pharmaceutical Sector
May 4, 2012 | China
THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON May 4, 2012
integrating manufacturing and sales business or engaged in medical services.
We suggest being selective when picking pharmaceutical stocks. The valuation
of the pharmaceutical sector has fallen to an historic low, but it’s still relatively high
compared with other sectors, in our view. Performances and valuations of difference
pharmaceutical stocks diverge further and fluctuations in stock prices are widening.
Hence, we suggest being selective when picking pharmaceutical stocks by sticking to
the best pharmaceutical names enjoying sound growth momentum in the medium
term, and start to buy second liners when their results improve, and the broad market
consolidation is completed.
Stock recommendations for May based on your risk appetite. For those whose
risk appetite is low, we suggest buying Tianjin Tasly (600535 CH), Dong-E E-Jiao
(000423 CH), Yunnan Baiyao (000538 CH), Huadong Medicine (000963 CH),
Kangmei Pharmaceutical (600518 CH), Hengrui Medicine (600276 CH), SL
Pharmaceutical (002038 CH), Humanwell Healthcare (600079 CH) in May. For
those whose risk appetite is high, we expect China Resources Sanjiu (000999 CH),
Kunming Pharmaceutical (600422 CH), China National Accord (000028 CH) to
outperform market expectations in 1Q, and Zhongheng Group (600252 CH) and
Livzon Pharmaceutical (000513 CH) to outperform in 2Q.
Guosen Securities (HK) Brokerage Co., Ltd. 2
Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only
Pharmaceutical Sector
May 4, 2012 | China
THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON May 4, 2012
Information Disclosures
Stock ratings, sector ratings and related definitions
Stock Ratings:
Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months.
Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the
next six months.
Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the
next six months.
Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months.
Sector Ratings:
Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months.
Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the
next six months.
Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next
six months.
Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months
Disclaimers
This report is based on public data. Guosen does not warrant the accuracy and completeness of the information contained herein. This
report is published solely for reference purposes and shall in no way be construed as a solicitation or an offer to buy or sell securities or
related financial instruments stated herein. Guosen and its employees do not accept responsibility for any direct or indirect losses arising
from the use of this report. Guosen or its affiliates may hold or trade securities issued by the companies mentioned in this report, and
provide or seek to provide investment banking services for these companies. All rights of this report are reserved by Guosen. Without the
prior written consent of Guosen, no one may copy, reproduce or publish part or whole of this report.
Guosen Securities (HK) Brokerage Co., Ltd. 3
Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only
