CSPC’s 1Q results beat thanks to strong sales momentum in CNS drugs and anti-infective drugs. While new products made sales contribution, sales of oncology was still dragged by province-level procurement on Jinyouli and Duomeisu, missing our expectation. Overall, the management saw favourable policies toward innovative drugs and hospital entry in 1Q24 and maintained the guidance of double-digit topline growth and at least RMB3bn sales from new/sub- new products. Post results, we lifted our topline on strong finished drugs growth in 1Q, improved GPM on mix shift while increasing selling expense ratio on resumed marketing activities, and revise up TP to HK$10.2.
　　Key Factors for Rating
　　1Q24 results beat: CSPC delivered strong sales growth in finished drugs segment with sales up by 17.7% YoY to RMB7.56bn in 1Q24, beating our expectation, mainly attributed to mycoplasma pneumonia outbreak in China boosting sales of anti-infective drugs, strong sales momentum of new products, and dedicated sales team management, per management. Nervous system/ oncology/ anti-infective/ cardiovascular/ respiratory system/ digestion and metabolisim/ others drugs delivered YoY changes of 27%/ 12%/ 10%/ 22%/ - 6%/ 60%/ 29% (or QoQ changes of 25%/ 6%/ 24%/ 19%/ 17%/ 38%/ 32%), respectively. API segment remained soft with sales of Vitamin C/ antibiotics/ functional food declining by 11.7%/ 3.6%/ 21.0% YoY. Overall, CSPC delivered 11.5% YoY growth (or 18.4% QoQ growth) in total revenue. Due to higher contribution from finished drugs, GPM improved by 3.8ppts YoY to 72.3%. Selling expenses ratio increased by 2.1ppts YoY and 5.1ppts QoQ to 32.9% due to resumption of selling and marketing activities post-industry rectification campaign and launch of new products. R&D expenses increased by 16.0% YoY or +1.5% QoQ. Net profit increased by 12.9% YoY to RMB1.6bn and core profit increased by 11.6% YoY.
　　Updates of key products from the conference call: (i) NBP: CSPC has built a county-level sales team for NBP injection, and it also saw NBP capsule deliver even faster sales growth in retail (out-of-pocket) market. (ii) Duomeisu: Duomeisu has already been included in JJJ 3+N province alliance procurement, and the management expects relatively low risk for Duomeisu to be included in national level centralised procurement. Even if it happens, considering the delay in the 10th batch national GPO, it will have limited impacts on this year’s sales. (iii) Mingfule: Mingfule was approved as a treatment of acute ischemic stroke (AIS) on 5 February 2024 and 60% of the sales of Mingfule in 1Q24 was prescribed to AIS, correspondingly recorded in sales of CNS products. The management was optimistic about price-cut on Mingfule in 2024 NRDL negotiation given tenecteplase is not approved in China and the high ASP of tenecteplase in overseas market (as a reference). (iv) Amphotericin B liposome and irinotecan liposome: ANDA of amphotericin B liposome and irinotecan liposome are expected to be approved in the US by YE24.
　　Key Risks for Rating
　　(i) Slower-than-expected ramp-up of newly launched drugs; (ii) failure of R&D; and (iii) price cut on core drugs.
　　Valuation
　　Post results, we lifted our topline on strong finished drugs growth seen in 1Q24, improved GPM on mix shift while increasing selling expense ratio on resumed marketing activities and launch of new products. Overall, we revised our 12- month TP to HK$10.2 and maintain BUY (unchanged WACC: 10.2% and terminal growth: 2.5%).