HAITONG INT'L: Maintains "Outperform" rating on Shanghai Pharmaceuticals Holding (02607) with target price raised to 14.39 Hong Kong dollars.

HAITONG INT'L released a research report stating that it slightly lowered the revenue forecast for Shanghai Pharmaceuticals Holding (02607) in 2024 to 277.3 billion yuan, while slightly raising the revenue forecast for 2025/26 to 300.8/324 billion yuan, to reflect the impact of acquisitions and Huangyao after the acquisition; the forecast for the net profit attributable to shareholders in 2024/25/26 was slightly lowered to 4.8/5.4/5.7 billion yuan. The company used a cash flow discounted model and cash flows from FY25-FY33 for valuation. Based on a WACC of 6.2%, a perpetual growth rate of 3%, and a 60% discount on A shares compared to Hong Kong shares (all unchanged), the target price was raised by 4.1% to 14.39 Hong Kong dollars, maintaining a "outperform" rating on the company. Key points from HAITONG INT'L: Performance outlook for Shanghai Pharmaceuticals Holding in 2024: steady growth in pharmaceutical commerce, slight decline in pharmaceutical industry; continuous cost reduction and efficiency enhancement Revenue: The company expects Shanghai Pharmaceuticals Holding to achieve revenue of 277.3 billion yuan in 2024, a year-on-year increase of 6.5%. By segment: Pharmaceutical commerce segment (distribution+retail): The company expects pharmaceutical commerce to achieve revenue of 252.7 billion yuan in 2024, a year-on-year increase of 8.0%. The expected revenue from pharmaceutical distribution is 252.9 billion yuan (including inter-departmental transactions), a year-on-year increase of 8.2%, mainly benefiting from CSO business, import general agent business, and SPD (pharmaceutical logistics management) business revenue growth. Pharmaceutical industry segment: The company expects pharmaceutical industry to achieve revenue of 24.6 billion yuan in 2024, a year-on-year decrease of 6.5%, mainly due to 1) the impact of the price reduction of Poly-myxin B; 2) the growth rate of traditional Chinese medicine products slightly lower than expected. The company expects R&D expenses to be 2.2 billion yuan, flat year-on-year. Gross profit margin and operating expense rate: The company expects Shanghai Pharmaceuticals Holding's gross profit margin to decline by 0.9 percentage points to 11.1% in 2024, mainly due to the impact of price reductions in centralized procurement and an increase in the proportion of low-margin distribution business. In terms of expense rates, the company expects the sales expense rate to decrease by 0.7 percentage points to 4.6% year-on-year in 2024, and the management expense rate to decrease by 0.1 percentage points to 2.1% year-on-year, mainly benefiting from 1) Shanghai Pharmaceuticals Holding's continued cost reduction and efficiency enhancement strategy, integration of the north and south of the commercial sector, and adjustment of the sales pipeline in the industrial sector; 2) reduced selling expenses for centrally procured products. The company expects the financial expense rate to remain basically unchanged at 0.6% in 2024, with operating profit increasing by 5.9% year-on-year to 8.1 billion yuan. Profit: The company expects to achieve a net profit attributable to shareholders of 4.8 billion yuan in 2024, a year-on-year increase of 28.1%, mainly due to the low base of net profit in 2023 affected by one-time losses. Acquisition of 10% equity of Shanghai and Huang Pharmaceuticals: In January 2024, Shanghai Pharmaceuticals Holding announced the signing of a share transfer agreement with HUTCHMED, with Shanghai Pharmaceuticals Holding acquiring a 10% stake in Shanghai and Huang Pharmaceuticals. Upon completion of the transaction, Shanghai Pharmaceuticals Holding will hold a total of 60% of the shares of Shanghai and Huang Pharmaceuticals, becoming the actual controlling party. Shanghai and Huang Pharmaceuticals achieved revenue/net profit of 2.7/0.66 billion yuan in 2023; and 2.5/0.63 billion yuan in revenue/net profit in the first 10 months of 2024.