1H22 results in line with our expectation

China National Medicines (CNMC) announced its 1H22 results: Revenue fell 0.3% YoY and 9.8% HoH to Rmb22.01bn; attributable net profit was Rmb8.62bn, implying EPS of Rmb1.14, up 12.6% YoY but down 12.7% HoH, in line with our expectation.

Trends to watch

In 1H22, operations of parent company remained steady (excluding subsidiaries). In 1H22, revenue grew 0.7% YoY to Rmb9.32bn, and GM edged up 0.1ppt YoY to 7.9%. The firm accelerated the development of specialized retail business, and expanded its diagnosis and treatment services. In addition, the firm has started the marketing campaign for its narcotic drugs, and established preliminary cooperation with academic promotion institutions in multiple provinces across China.

New products approved; both YoY revenue and profit grow for Yichang Humanwell. In 1H22, Guorui Pharmaceutical generated revenue of Rmb634mn, down 13.6% YoY, and a net profit increase of 6.7% YoY to Rmb29mn. Guorui Pharmaceutical's products, e.g., anhydrous ethanol API and injections, nalbuphine hydrochloride API, and nalbuphine hydrochloride injections, have received approval. In 1H22, CNMC core associate, Yichang Humanwell, reported revenue of Rmb3.37bn, up 12.6% YoY, and net profit of Rmb1.03bn, up 14.2% YoY.

Multiple subsidiaries ramp up business diversification and development of new businesses. In 1H22, revenue of Sinopharm Holding Beijing, Beijing Huahong, Beijing Konruns and Tianxingpuxin changed +1.4%, -0.4%, -5.6%, and -0.9% YoY, partially as a result of COVID-19. In addition to consolidating competitive advantages in blood products, the four subsidiaries further accelerated marketing efforts, and expanded into areas such as medical devices, foods for special medical purposes.

Financials and valuation

We maintain our 2022 and 2023 EPS forecasts at Rmb2.56 (up 10% YoY) and Rmb2.86 (up 12.0% YoY). The stock is trading at 10.1x 2022e and 9.0x 2023e P/E. We maintain an OUTPERFORM rating but cut our TP 10%

to Rmb35.28, in view of the falling average valuation of the sector, implying 13.8x 2022e and 12.3x 2023e P/E and offering 36.8% upside.

Risks

Price cuts due to the government’s centralized medicine procurement program; disappointing new business expansion.