德银-中国-医疗健康行业（个股-上海制药）-制造企业主导的生产线-20171101-Deutsche_Bank-Shanghai_Pharma，In~line_quarter_led_by_manufacturing_business_13页_884kb

Summary of Shanghai Pharmaceuticals (3Q17 Performance and Outlook)

Core Content

Shanghai Pharmaceuticals (SPH) reported its third-quarter 2017 results, highlighting performance across its distribution and manufacturing segments. The company also provided insights into its financial metrics, valuation, and future outlook.

Key Financial Highlights

• Revenue and Core Profit: SPH reported revenue of RMB33.3bn and core profit of RMB685m in 3Q17, representing YoY growth of 7.9% and 0.5% respectively, which is a moderation from the 10% and 11% growth in 1H17.
• Distribution Segment: The distribution arm saw a significant deceleration in growth, with YoY growth of -9.6% in 3Q17, down from 10% and 16% in 1H17 and 2016 respectively. This was attributed to the impact of the two-invoice policy and broader reform challenges.
• Manufacturing Segment: The manufacturing business remained a strong performer, growing by 22% in 3Q17 (11% on an organic basis), driven by contributions from Vitaco and other acquisitions. This segment was the primary growth driver for the company.
• OCF (Operating Cash Flow): SPH generated RMB1.1bn in OCF in 3Q17, up from RMB850m in 3Q16, indicating strong cash generation capabilities.
• Margins: Gross margin and OPM (Operating Profit Margin) increased to 12.1% and 3.9% in 3Q17, respectively, compared to 11.3% and 3.4% in 3Q16. This was primarily due to higher contributions from DS (Direct Sales) and reduced costs in the IDS (Indirect Sales) segment.
• Working Capital and Liquidity: AR and inventory days remained largely stable at 97 and 51 days in 3Q17, compared to 96 and 49 days in 3Q16. AP days increased to 100 from 83, suggesting improved liquidity.

Valuation and Recommendations

• Target Price:
  • For SPH-H (Hong Kong): HKD24.50
  • For SPH-A (Shanghai): RMB21.30
• Valuation Metrics:
  • P/E (DB): 16.5x for 2018E EPS
  • EV/EBITDA: 6.8x for 2018E
• Recommendations:
  • Buy for SPH-H due to its valuation and growth outlook
  • Hold for SPH-A due to its current market position and outlook

M&A and Strategic Outlook

• M&A Strategy: SPH is actively reviewing potential acquisition targets, focusing on expanding into previously non-covered regions and companies with a competitive edge in specific disease areas.
• Overseas Acquisitions: SPH plans to focus on specialty pharma, patented drugs, and products with high entry barriers.
• Reform Impact: Executives expect the negative impact of the two-invoice policy and price cuts to be largely reflected in the first few months. They anticipate stable growth from the Beijing region going forward.

Risk Factors

• Upside/Downside Risks:
  • Price cuts
  • M&A progress
  • ASP (Average Selling Price) erosion in flagship products

Analyst Information

• Analyst: Jack Hu, PhD (Research Analyst)
• Contact: +852-2203 6208, jack.hu@db.com
• Megan Xu (Research Associate), +852-2203 5928

Key Company Metrics

• Sales Growth: 18.1% in 2016, 14.2% in 2017E, 14.5% in 2018E, 7.5% in 2017E, 3.6% in 2018E, and 8.5% in 2019E.
• DB EPS Growth: 4.5% in 2016, 17.1% in 2017E, 26.7% in 2018E, -10.9% in 2017E, 9.5% in 2018E, and 10.5% in 2019E.
• EBITDA Margin: 4.1% in 2016, 4.1% in 2017E, 3.8% in 2018E, 4.6% in 2017E, 5.0% in 2018E, and 5.0% in 2019E.
• EBIT Margin: 3.3% in 2016, 3.4% in 2017E, 3.1% in 2018E, 3.9% in 2017E, 4.2% in 2018E, and 4.3% in 2019E.
• ROE (Return on Equity): 9.6% in 2016, 10.0% in 2017E, 11.3% in 2018E, 9.8% in 2017E, 10.0% in 2018E, and 10.3% in 2019E.
• Payout Ratio: 39.5% in 2016, 35.8% in 2017E, 33.3% in 2018E, 35.0% in 2017E, 35.0% in 2018E, and 35.0% in 2019E.
• Capex/Sales Ratio: 1.4% in 2016, 1.6% in 2017E, 1.8% in 2018E, 1.0% in 2017E, 0.8% in 2018E, and 0.6% in 2019E.
• Net Debt/Equity: -11.4% in 2016, -4.6% in 2017E, 1.4% in 2018E, 0.0% in 2017E, -3.3% in 2018E, and -5.2% in 2019E.

Conclusion

Shanghai Pharmaceuticals is navigating a challenging environment due to regulatory reforms, particularly the two-invoice policy. Despite this, the manufacturing segment continues to perform well, driving growth and margin expansion. The company's strong cash generation and strategic M&A focus provide a solid foundation for future growth, supporting the Buy recommendation for SPH-H and Hold for SPH-A. Investors should be aware of the potential risks, including price cuts and ASP erosion, which could impact the company's performance.