Morningstar | Sinopharm Posts Solid Full-Year Results, FVE Raised to HKD 38.0
Narrow-moat Sinopharm (HK 1099) reported 2018’s full-year earnings that demonstrated in line results for existing businesses, and strong growth and margins for its newly acquired medical devices distribution business. We raise our fair value estimate to HKD 38.0 from HKD 36.0, primarily as a result of incorporating the medical devices distribution segment.Margins and growth excluding device distribution were mostly in line with our expectations. Drug distribution enjoyed 9.3% revenue growth, while retail pharmacy revenue grew 20%, which continues their respective growth rates in recent years. While financing costs from debt servicing and receivables factoring remain elevated at 1.3% of total revenue, as long as operating margins continue to remain stable these costs should be manageable.
Now that Sinopharm has closed its purchase of CSIMC, it consolidates CSIMC’s medical devices distribution business. This segment was 14% of 2018’s pro forma revenue, and exhibited strong revenue growth of 30%. Despite a weak first half in 2018, second-half revenue was good enough to continue the segment’s high annual growth rate of 30%-35%. Operating margins improved from 3.9% to 4.6%, which is in line with the firm’s overall operating margins of 4.5%. We believe these strong results are an early validation of management’s strategy to focus on this high-growth business.
We raise our fair value estimate to HKD 38.0, which implies a 17.0 adjusted P/E ratio. The primary reason is the incorporation of devices distribution into our assumptions, which adds to operating profit. This is partially offset by a reduction in our 2019-2021 revenue projections for the drug distribution segment.
The stock currently trades at approximately a 15% discount to our fair value. As with the other Chinese drug distributors, we view Sinopharm as a defensive stock that is relatively insulated from China’s recent cost-cutting policies, especially when compared with drugmakers.
Sinopharm Group is a distributor of pharmaceutical and healthcare products, and a supply chain services provider in the People's Republic of China. Through its subsidiaries, Co. is engaged in the distribution of medicines and pharmaceutical products to customers including hospitals, other distributors, retail drug stores and clinics; operation of pharmaceutical chain stores; and distribution of laboratory supplies, manufacture and distribution of chemical reagents, and production and sale of pharmaceutical products and distribution of medical device.
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