China Medical System (CMS) is an open platform pharma company linking pharmaceutical innovation and monetization and possesses strong product lifecycle management. Focusing on clinical needs and boasting excellent monetization capability, the Company has obtained exclusive licenses of innovative drugs for China and other authorized countries and regions through equity investment/strategic cooperation/independent customization & R&D. With targeted efforts in the field of specialist indications, CMS seeks large-scale development in the fields of cardiovascular and cerebrovascular, digestive, dermatological and ophthalmic diseases, as well as keeps broadening and deepening its business reach. The Company also expands its business footprints to related fields such as medical aesthetics, ophthalmic instruments and consumables. Rxilient Health (an affiliate to CMS) has become the "bridgehead" for global pharma companies to tap the Southeast Asian markets, for which licenses of many innovative products have been granted. Based on the results of absolute and relative valuation methods, we estimate CMS's fair equity value to be Rmb42,455mn (equivalent to HK$46,283mn), derive a target price of HK$19, and initiate coverage with a "BUY" rating.
　　Company profile: A platform pharma company linking pharmaceutical innovation and monetization.
　　Founded in 1992, CMS is an open platform pharma company linking pharmaceutical innovation and monetization, with strong product lifecycle management. Based on the rapid clinical development, registration, marketing and monetization of innovative drugs, as well as through equity investment, strategic cooperation or independent R&D, the Company has obtained exclusive licenses for the clinical development, production, registration and sales of innovative drugs in China and other authorized countries or regions. It has specialized business subsidiaries such as "CMS Skinhealth" and "CMS Vision", which are independently operated and engaged in dermatology and medical aesthetics, ophthalmology, etc, creating the second growth curve.
　　The Company proactively explores the Southeast Asian markets, rendering targeted support for global pharma companies to gain entry. Thanks to its strong product power, robust monetization capability and refined management system, CMS has maintained rapid earnings growth, achieving a revenue compound annual growth rate (CAGR) of 24.19% (calculated by drug sales revenue only) in 2008-22 and a revenue of Rmb5,537mn (+7.1% YoY, calculated by drug sales revenue only) in 1H23. The Company's attributable net profit (ANP) CAGR came in at 27.74% in 2008-22 and its ANP totaled Rmb1,916mn (+6.7% YoY) in 1H23.
　　Synergy with global innovation forces, and abundant innovative drugs in the R&D pipeline.
　　Focusing on clinical needs and leveraging the core advantages of monetization capability, CMS has obtained exclusive licenses of innovative drugs for China and other authorized countries and regions through equity　investment/strategic cooperation/independent customization & R&D. TheCompany focuses on serious and chronic diseases in the field of specialist indications, and has established a differentiated R&D pipeline of innovative products. Since 2018, CMS's product strategy has changed from original mature drugs to innovative patented products. After five years of investment and R&D, the Company has built presence in 30 differentiated innovative products with first-in-class (FIC) or best-in-class (BIC) potential. In 2023, CMS's Diazepam Nasal Spray, Tildrakizumab Injection and Methotrexate Injection (for psoriasis) were approved for marketing in China. The Companyis now an open platform pharma company linking pharmaceutical innovation and monetization, with strong product lifecycle management. We believe that its earnings will maintain steady growth, given its efficient and rapid clinical development strength, professional academic promotion team as well as innovative products for unsatiated clinical needs.
　　Targeted efforts in the field of specialist indications, and likely high earnings after centralized procurement.
　　With targeted efforts in the field of specialist indications, CMS keeps broadening and deepening its business reach. In the cardiovascular and cerebrovascular business, the Company's core products (Natriuretic Peptide, Felodipine and Deanxit) are competitive on the market, and have achieved a revenue CAGR of 18.41% in 2019-22 and a revenue of Rmb3,096mn (+5.9% YoY) in 1H23. In the gastroenterology pipeline business, the Company's core products include Ursofalk, Salofalk, Bioflor and Combizym, which have achieved a revenue CAGR of 18.23% in 2019-22 and a revenue of Rmb1.78bn (+4.20% YoY) in 1H23. CMS also broadens and deepens its business reach in the fields of dermatology and ophthalmology, as well as expands its business footprints to related fields such as medical aesthetics, ophthalmic instruments and consumables, thus building presence in more businesses. In the dermatology and medical aesthetics business, CMS Skinhealth has been growing rapidly through R&D and acquisition, achieving a revenue CAGR of 37.49% in 2019-22 and a revenue of Rmb246mn (+27.40% YoY) in 1H23. In the ophthalmology business, CMS Vision aims to realize full coverage for ophthalmic devices, achieving a revenue CAGR of 13.67% in 2019-22 and a revenue of Rmb246mn (+29.60% YoY) in 1H23. We believe that as Felodipine and Ursofalk enter the eighth batch of centralized procurement, all the core varieties of CMS will have been included. As a result, the influence of centralized procurement on the Company will gradually dissipate, and its earnings may remain high in the future.
　　Accelerating presence in Southeast Asian markets, and creating a second growth curve with internationalization strategy.
　　Southeast Asian countries are emerging markets (EMs) with great potential.
　　Their healthcare sector has shown booming vitality. Leveraging its first-mover advantages, Rxilient Health has gradually established a systematic business structure integrating "introduction, development, production, contract development and manufacturing organizations (CDMO) for preparations, and monetization" functions. As a result, Rxilient Health has become the "bridgehead" for global pharma companies to tap the Southeast Asian markets, for which licenses of many innovative products have been granted.
　　Meanwhile, CMS cooperates strategically with biotech companies or pharma companies in Europe, the US, Japan and China to develop products. By accelerating the monetization of products, the Company has created a second growth curve.
　　Potential risks: Decline in the Company's product prices; product R&D falling short of expectations; disappointing growth of product sales; slower-than-expected marketing of products; uncertainties in technology upgrade and product iteration; disputes associated with intellectual property rights.
　　Investment recommendation: CMS is an open platform pharma company linking pharmaceutical innovation and monetization, with strong product lifecycle management. Focusing on clinical needs and boasting excellent monetization capability, the Company has obtained exclusive licenses of innovative drugs for China and other authorized countries and regions through equity investment/strategic cooperation/independent customization & R&D. With targeted efforts in the field of specialist indications, CMS seeks large-scale development in the fields of cardiovascular and cerebrovascular, digestive, dermatological and ophthalmic diseases, as well as keeps broadening and deepening its business reach. The Company also expands its business footprints to related fields such as medical aesthetics, ophthalmic instruments and consumables.
　　Rxilient Health has become the "bridgehead" for global pharma companies to tap the Southeast Asian markets, for which licenses of many innovative products have been granted. To sum up, we estimate CMS's revenue to be Rmb9,454mn/10,257mn/11,827mn and EPS to be Rmb1.34/1.40/1.54 in 2023E/24E/25E. Based on the results of absolute and relative valuation methods, we estimate the Company's fair equity value to be Rmb42,455mn (equivalent to HK$46,283mn), derive a target price of HK$19, and initiate coverage with a "BUY" rating.