Date of Report: October 29, 2024
Broker Name: UOB Kay Hian

Company Overview

Sinopharm Group (1099 HK) is the largest pharmaceutical distributor in China, operating primarily in healthcare distribution with an extensive network. It has a dominant market position with approximately a 25% market share. The company’s stock is listed under the ticker 1099 HK on the Hong Kong Stock Exchange.

Stock Performance and Price Targets

• Current Share Price: HK$20.30
• Target Price: HK$18.00 (Downgraded from HK$20.00)
• Upside: -11.3%
• 52-Week High/Low: HK$23.65 / HK$16.02
• Market Capitalization: HK$63,349.3 million (US$8,152.3 million)
• 3-Month Average Daily Turnover: US$20.9 million

Major Shareholders

• CNPGC: Holds a 57% ownership in Sinopharm Group.

9M24 Financial Results Summary

Sinopharm’s 9M24 results fell below expectations, reflecting a challenging economic and policy environment:

• Revenue: Decreased by 0.8% year-on-year to RMB 442.4 billion.
• Net Profit: Dropped by 13.4% year-on-year to RMB 5.3 billion.
• Earnings Per Share (EPS): Decreased by 20.7% year-on-year to RMB 0.505 in Q3 and RMB 1.692 for the first nine months of 2024.
• Gross Profit Margin: Declined by 0.68 percentage points to 7.55%.
• Operating Profit Margin: Declined by 0.99 percentage points to 2.80%.
• Net Profit Margin: Declined by 0.31 percentage points to 1.07%.

Stock Impact and Analysis

The report highlights key challenges Sinopharm faces, including policy shifts and broader economic issues:

• Revenue Decline: Revenue for the first nine months of 2024 decreased by 0.8% year-on-year, with 3Q24 seeing a slight year-on-year revenue increase of 1.9% attributed to a low base in 3Q23 due to heightened anti-corruption measures.
• Profit Margins: The company’s profit margins have been significantly impacted, with net profit margin weakening due to policy changes and economic pressures.

Key Policy and Economic Challenges

Several policy changes are affecting Sinopharm’s performance:

• Policy Uncertainties: The report underscores the impact of policy changes on revenue growth, including Group Purchasing Organization (GPO) price pressures, anti-corruption measures, and reforms in medical insurance.
• Healthcare Reform Impact: The expansion of programs like Diagnosis Related Groups (DRG) and Diagnosis-Intervention Packet (DIP) is reshaping the industry. Sinopharm expects new business opportunities within these reforms but anticipates ongoing uncertainties impacting sales and earnings.

Earnings Revision and Risks

Given the challenging environment, UOB Kay Hian has revised its expectations:

• Earnings Growth Outlook for 2024: Revised downward from -7.3% to -13.0% due to depressed margins and policy-related challenges.
• Risks: Include potential further revenue growth slowdown and further margin compression due to policy shifts. Additionally, there is a risk of weakened operating cash flow resulting from broader economic conditions.

Valuation and Recommendation

UOB Kay Hian has downgraded Sinopharm Group to a “SELL” recommendation, citing an uncertain earnings growth outlook and revised target price:

• New Target Price: HK$18.00, based on a 2025 forecasted price-to-earnings (PE) ratio of 6.6x.