KGI: Sinopharm Group Co., Ltd. (1099 HK) – One of the few defensive plays
alanyeo
BUY Entry – 17.2 Target – 19.7 Stop Loss – 16.0
Sinopharm Group Co Ltd is a China-based company principally engaged in pharmaceutical and medical devices distribution business. The Company operates its business through four segments. Pharmaceutical Distribution segment is engaged in the distribution of pharmaceutical products to hospitals, other distributors, retail pharmacy stores and clinics. Medical Devices segment is engaged in the distribution of medical devices, as well as provides installation and maintenance services. Retail Pharmacy segment is engaged in the operation of chain pharmacy stores. Other Business segment is engaged in the distribution of laboratory supplies, manufacture and distribution of chemical reagents, production and sale of pharmaceutical products.
Concerns over an inflationary recession. Commodities prices have rallied to multi-year highs, and some even touching all-time highs. Crude oil (Brent) price topped at near US$140/bbl. Oil prices have surged by more than 50% YTD. Historically, recessions came right after oil prices soared by more than 50%. Meanwhile, basic metals and agricultural products witnessed short squeeze movements. Nickel futures jumped by more than 300% this week. Gold surpassed the US$2,000/oz psychological level. US Treasuries 2 years-10 years spread has narrowed to near 20bps, the lowest since March 2020 when the COVID-19 outbreak shocked the market. Dollar index climbed to near 100, implying funds are leaving emerging markets. The probability of a potential inflationary recession in the near term are high as the above mentioned indicators have already shown red flags.
A defensive stock amidst market sell-off. The Hong Kong market has been hammered by both domestic crackdowns and unfavourable external macro conditions. Growth, value, and cyclical sectors, as well as other thematic stocks, have been sold off indiscriminately. However, this stock is relatively outperforming the rest as its business is largely immune to inflation and policy risks. The business driver is the distribution volume rather than profit margins. The growth in demand for medicines and medical devices is stable with low price sensitivity.
The updated market consensus of the EPS growth in FY22/23 is 10.7%/11.2% YoY respectively, which translates to 5.0x/4.5x forward PE. The current PER is 7.5x. The FY22F/23F dividend yield is 6.0%/5.9%. Bloomberg consensus average 12-month target price is HK$24.14.
