1Q22: Earnings Up 17.4% yoy; COVID-19 Outbreak Clouds 2022 Growth Outlook
Sinopharm’s 1Q22 revenue and net profit attributable to shareholders grew 6.1% yoy
and 17.4% yoy respectively. The revenue growth was lower than our full-year estimate
of 7.4% yoy but net earnings beat on effective cost control efforts. We expect weakened
cash flow and stringent COVID-19-combating measures to negatively impact its
earnings outlook for 2022. Maintain SELL with a lower target price of HK$15.00.
RESULTS
• 1Q22 revenue growth missed but earnings growth above full-year estimate. Sinopharm
Group (Sinopharm) reported a 6.1% yoy increase in revenue to Rmb127.6b in 1Q22. Net
profit attributable to shareholders increased 17.4% yoy to Rmb1.4b in 1Q22. The revenue
growth was lower than our full-year estimate of 7.4% yoy but net earnings beat on effective
cost control efforts.
STOCK IMPACT
• Revenue grew 6.1% yoy in 1Q22. Sinopharm’s total revenue increased by 6.1% yoy,
reaching Rmb120.3b in 1Q22. We believe the slower-than-expected revenue growth is
mainly due to: a) the impact of the Group Purchasing Organisation (GPO) programme on
drugs and medical devices, and b) the impact of COVID-19 outbreaks in certain areas in
China.
• Net margin improved in 1Q22. Sinopharm saw its gross margin increasing by 0.18ppt from
7.67% in 1Q21 to 7.85% in 1Q22. Management reduced the selling-expenses-to-sales ratio
by 0.15ppt to 2.98% in 1Q22 from 3.12% in 1Q21, and the administration-expenses-to-sales
ratio by 0.01ppt yoy to 1.27% in 1Q22, indicating effective cost control efforts. Financial
costs rose significantly by 8.6% yoy in 1Q22, due to the expansion of bank borrowings. The
overall net margin stood at 1.12% in 1Q22, representing an increase of 0.11ppt from a year
ago. We believe management has made continued efforts to enhance product structure and
stabilise profit margins amid continued gross margin pressure from GPO programmes.
• Expects revenue growth to further weaken in 2Q22. Looking forward, we anticipate that
revenue will likely further weaken or experience a significant decline in 2Q22 due to the
possible significant impact from the lockdown in Shanghai. The Zero-COVID policy could still
bring uncertainties to the logistic and medical services in other regions/cities in the short
term as we see COVID-19-positive cases on the rise in an increasing number of cities in
China. The outlook of revenue growth for Sinopharm remains cloudy.
• Expects increasing financial costs and tightening cash flow. Sinopharm’s cash
amounted to Rmb35.9b at the end of Mar 22, declining by 32.5% from Rmb53.2b as at end21. The company has bank borrowings amounting to Rmb63.9b at 31 Mar 22, representing
a significant increase of 29.0% from three months ago. The AR days increased further by
8.5 days from 120.1 in 2021 to 128.6 in 1Q22. Moreover, operating cash flow decreased
further to -Rmb34.8b in 1Q21 to -Rmb36.5b in 1Q22. We believe the company may face
increasing financial costs and tightening cash flow in the next few quarters.
EARNINGS REVISION/RISKS
• We further lower our earnings growth estimates from 7.0% yoy to 5.5% yoy for 2022, to
reflect weaker growth potential due to the impact from the new COVID-19 outbreak in China.
• Risks: a) Worse-than-expected impact from the COVID-19 outbreak in China, b) increasing
AR days and weakened operating cash flow, and c) worse-than-expected impact from GPO
programmes.
VALUATION/RECOMMENDATION
• Maintain SELL with a lower target price of HK$15.00, based on 4.8x 2022F PE, or 0.7x
PEG.