COVID-19 Lockdowns Could Distort Revenue And Earnings Growth In 1H22
We expect China’s Zero-COVID policy to disrupt the sales and earnings growth of CSPC
in 1H22, but the company’s long-term outlook remains intact. In the meantime, the
clinical trial of its mRNA vaccine for COVID-19 and other pipelines are well on track.
CSPC is also embracing tremendous BD/M&A opportunities to further enhance its
innovative pipeline. Maintain BUY but lower target price to HK$12.50.
WHAT’S NEW
• CSPC Pharmaceutical Group (CSPC) will report its 1Q22 results on 25 May 22.
• Shanghai declared that 15 of its 16 districts had eliminated COVID-19 cases, and targets to
end the lockdown by 1 Jun 22. The opening will be rolled out in phases.
• We expect the Zero-COVID policy to have significant impact on CSPC’s sales revenue in
1H22, but the reopening of Shanghai city will boost sales growth from 3Q22.
STOCK IMPACT
• Strict COVID-19 measures may have caused slower sales growth in 1H22. We believe
CSPC’s revenue and net earnings growth in 1Q22 will likely to be slower than our and
market’s previous 2022 full-year estimates, as the new COVID-19 outbreaks in various cities
and regions resulted in strict lockdowns. 2Q22 sales revenue could be even more
significantly impacted as Shanghai has been under lockdown for nearly two months, and
Beijing has also seen tightening COVID-19-combating measures in recent weeks.
• Expects sales to regain momentum in 2H22. There have been media reports that
Shanghai aims to reopen gradually and return to normal life from 1 June. Although there are
considerable uncertainties in revenue growth in the short term, we believe the reopening of
major cities in China will help to boost demand for healthcare services and products, and
cause a resumption in sales and marketing activities. The long-term outlook of CSPC’s
revenue and earnings growth remains intact given the stiff demand for medical products and
services.
• Smooth progress in R&D. Based in Hebei, CSPC has experienced smooth progress in
manufacturing and R&D. With strong preclinical results demonstrating high neutralising
activity against prevalent variants (including Omicron and Delta strains), its COVID-19
mRNA vaccine (SYS6006) has obtained clinical trial approval and is under phase I clinical
trial in China with full speed. The company plans to conduct the phase II study in China and
launch an international multi-centre phase III study in Malaysia, the United Arab Emirates,
and some other countries that have used Chinese inactivated vaccines. CSPC expects to
receive market approval for the mRNA vaccine for COVID-19 in 2022. Moreover, it has
recently filed a biologics licence application (BLA) for recombinant fully human anti-RANKL
monoclonal antibody for injection for treating giant cell tumor of bone to the CDE in China.
The company targets to launch four innovative products in 2022, seven in 2023 and seven in 2024. We are highly confident that CSPC will achieve its target of launching >30 innovative
drugs in the next five years, supported by its extensive pipeline and strong R&D capabilities.
• Sees tremendous opportunities in BD. CSPC has continued to seek business
development (BD) opportunities to further enrich its innovative R&D pipeline and enhance its
global reach by collaborating with international partners. Seeing a significant increase in
product approval requirement by US FDA, CSPC has global ambitions by focusing on
globally exclusive new preparation and first-in-class drug candidates. As the market expects
biotech sector to experience market consolidation in the next 1-2 years, the company
believes there will be vast BD opportunities for the company to further enhance its product
and R&D of oncology, cardio-cerebral vascular (CCV), immunity, respiratory and metabolism
portfolios. The company’s cash and cash equivalent amounted to Rmb10.7b as at end-Dec
2021, which is sufficient for potential BD and acquisition deals.
EARNINGS REVISION
• We lower our revenue forecasts from 11.1% yoy to 8.1% yoy for 2022 and from 12.5% yoy
to 13.1% yoy for 2023 to reflect the possible short-term revenue disruption of the COVID-19
outbreak in China.
RISKS
• Policy risks, and intensifying competition – products such as NBP injection may face
significant market competition after the patents expire in Jun 22.
VALUATION/RECOMMENDATION
• Maintain BUY and lower target price to HK$12.50, based on SOTP valuation, comprising
of: a) HK$6.40/share or 11x 2022F PE for existing drugs; and b) NAV-derived pipeline value
of HK$6.10/share (WACC: 10.5%, perpetual growth rate: 4%).
STOCK PRICE CATALYSTS
• a) Smooth R&D and BD progress.
• b) Attractive valuation which offers buying opportunities.