Company Profile

China National Medicines Corporation Ltd. is a China-based company principally engaged in the distribution of pharmaceutical products. The Company's primary products include proprietary Chinese medicines, chemical medicine preparations, chemical raw materials, antibiotics, biochemical drugs, biological products, narcotic drugs, psychotropic drugs, vaccines and health foods, among others. The Company is also involved in the production of pharmaceuticals and the provision of warehousing services through its subsidiaries. （Source: MarketScreener）

Investment Highlights

China National Medicines Corporation Ltd. （the company） is only distribution platform of pharmaceuticals in Beijing controlled by SINOPHARM GROUP and the first-tier distributor of China’s narcotic and psychotropic drugs.

The company aims to grow into an industrial cluster with one core, four major businesses, six product features.

In 2022, the company has achieved net margin of 4.68%, up 0.53 percentage points from a year ago.

As the growth of psychotropic and narcotic drugs is expected to r rebound in 2023, the company’s will promote its business rollouts in the entire industrial chain with its market share of psychotropic and narcotic drugs taking the lead.

The growth of psychotropic and narcotic drugs in 2023 is expected to back to high-speed growth trajectory, and the company covers more than 50,000 clients engaging in psychotropic and narcotic drugs nationwide and has kept over 70% market share in three nationwide wholesale enterprises.

The company achieved 15.59% higher revenue from its psychotropic and narcotic business from a year ago.

Yichang Humanwell Pharmaceutical Co., Ltd., the company’s designated producer, contributed more than 20% to the company’s net income attributable to shareholders in 2022.

The lift in the proportion of profits from its psychotropic and narcotic business will help drive up the company’s profitability.

With the huge circulation market of pharmaceuticals in Beijing, the company’s competitive edges as a leading player have stood out.

The pharmaceuticals circulation in Beijing in 2021 accounted for 7.64% of the nationwide market, and the demand within hospitals will rebound in 2023. The company has 100% covered hospitals in Beijing and the scale of its direct sales has been at the top position for multiple years.

It will benefit from the rebound in demand and improvements in penetration rate.

The transformation and upgrading of the company’s industrial arm emerge and its unique business has achieved innovative development.

The marketing of absolute ethanol and nabuphine hydrochloride in 2022 has bridged the gap in China and Anhui Province, further bettering the company’s product mix.

With the buildup of its marketing team and multiple measures to expand markets, the company’s new products are expected to see a gradual rise in its sales volume.

And its six businesses are also developing in an innovative manner.

Earnings forecast and investment recommendation

We estimate its net income attributable to shareholders at CNY 2.273 billion in 2023, CNY 2.629 billion in 2024, and CNY 3.027 billion in 2025, up 15.8%, 15.6%, and 15.1% from a year earlier, implying a P/E ratio to 13.0x, 11.2x, and 9.7x, based on the closing price on June 7, 2023. We give it an “Outperform” rating with the first coverage.

Potential risks

more-than-expected price reductions in bulk purchase; expense controls over psychotropic and narcotic products; accounts receivable