上海医药(601607)

Solid OCF generation in 3Q17

Shanghai Pharma reported revenue / core profit of RMB33.3bn / 685m in 3Q17,representing YoY growth of 7.9% / 0.5% respectively, moderating from 1H17growth of 10%/11%. Growth in the distribution arm was dragged down by twoinvoice policy and broad reform headwinds, while anemic profit growth was dueto the high base last year from JV contributions. The manufacturing segmentremained the bright spot with 22% growth in 3Q17, or 11% on an organicbasis. Contributions from Vitaco and acquired assets in 3Q17 were approximatelyRMB280m and RMB65m, respectively. We highlight the solid cash generationabilities of SPH, with RMB1.1bn OCF inflow in 3Q17, compared with RMB850minflow in 3Q16. We maintain Buy on SPH-H on its valuation and growth outlook;Hold for SPH-A.

Distribution decelerated, while manufacturing continues to deliver

Pharma distribution registered a growth deceleration in 3Q17, registering YoYgrowth of -9.6%, compared to 10%/16% in 1H17/2016. On the contrary, organicgrowth at the manufacturing arm accelerated to 11% YoY in 3Q17, comparedto 7%/5% in 1H17/2016. Executives expect to capture opportunities arising fromthe outflow of prescription drugs, supported by the derivative business, includingcommercial healthcare insurance and Yiyao e-commerce.Margin expansion driven by higher DS contributionsGM/OPM increased to 12.1% and 3.9% in 3Q17, compared to 11.3%/3.4%in 3Q16. Gross margin expansion was driven by a growth acceleration atDS and a lower contribution from the IDS segment. OPM improvements arelargely attributed to lower selling/marketing expenses and improving operationalefficiency. Going forward, management expects financing costs to trend upwardslightly, on the back of an upward interest rate revision cycle. AR and inventorydays were largely stable, registering 97/51 days in 3Q17, compared with 96/49days in 3Q16. AP days increased from 83 days in 3Q16 to 100 days this quarter,suggesting enhanced operational liquidity despite reform challenges.

Maintaining PT of HKD24.5 for SPH-H and RMB21.3 for SPH-A; risks

We derive our target price from 16.5x 2018E EPS. We believe SPH deserves aslight premium for its high earnings visibility and future acquisition opportunities,compared to peers trading at 15x with 12% growth in 2018E (vs. the 10% we model for SH Pharma). Upside/ downside risks include price cuts, M&A progressand ASP erosion in flagship products.Page