EUR 850.00 For Business Accounts Only

Morningstar | SPH Company report, 2019-03-08

SPH is a vertically integrated drug distributor that also operates a large drug manufacturer and retail pharmacy chain. Chinese healthcare industries have grown faster than gross domestic product, or GDP, and will continue to grow due to aging demographics, increased urbanization, a larger middle class, and rising disease rates.Distribution is 65% of operating profit as of 2017. After SPH's acquisition of Cardinal’s China operations, it will be the second-largest distributor in China. Over 65% of its distribution revenue comes from Eastern China, which is relatively affluent compared with inland regions. It is also the largest agent for foreign imported drugs, with approximately 18% of distribution revenue derived from this business. The developed nature of these businesses means that while they are relatively stable and reliable, SPH will also have lower growth and margin expansion opportunities in the future compared with its peers. Nonetheless, its established scale gives it substantial competitive advantages and secures its position as a top three market player.Manufacturing contributes 36% of operating profit as of 2017. SPH's drug portfolio mostly comprises low-cost generic drugs. While its revenue rivals some of the largest drugmakers in China, we view it as having much weaker competitive strengths relative to its peers. Its growth has underperformed other drugmakers for many years, and only started to catch up in 2017, mainly due to the company recalibrating its product mix. At this time, it has no Class 1 drugs in stage 3 clinical trials and has been slow to pass GCEs. While most other large manufacturers enjoy operating margins well above 20%, SPH’s segment margins have averaged 11% over the past five years.Finally, SPH has a large pharmacy retail chain. This segment constitutes just 2% of operating income but has long-term strategic significance, since pharmacies will eventually replace hospitals as the main seller of drugs. Additionally, with the acquisition of Cardinal’s China operations, SPH now operates the largest direct-to-patient, or DTP, pharmacy chain in China, which may eventually provide long-term opportunities for margin expansion.