CSPC’s 1H results failed to meet the guidance of double-digit growth in topline and bottom set in the beginning of the year, with revenue up 1.3% YoY and net profit up 1.7% YoY. Considering the continued impact of GPO on Jinyouli and Duomeisu, we expect the growth of CSPC will decrease from previously expected double digits to low single digits in 2024-25. Although we appreciate CSPC’s innovative capability, we believe its short-term performance will be impacted by the soft results. Revised down TP to HK$6.5 and downgrade to HOLD.
　　Key Factors for Rating
　　2Q results missed: revenue was down 9.0% YoY (or 18.7% QoQ) to RMB7.3bn in 2Q24 (vs. +12% YoY growth in 1Q24), significantly below market expectation, with sales of finished drugs decreasing by 8.1% YoY (or 20.8% QoQ) to RMB6.0bn. The sales of Jinyouli and Duomeisu were significantly impacted by the GPO of 3+N Alliance, dragging sales of oncology drugs down by 30.6% YoY. Xuanning also declined due to the impact of the national GPO, pulling sales of cardiovascular drugs down by 27.0% YoY. Nervous system/ anti- infective/ respiratory system/ digestion and metabolism /others recorded changes of +4.2%/ +4.8%/ -23.1%/ +51.4%/ -10.5% YoY, respectively. Sales from APIs also remained soft. Vitamin C grew 1.8% YoY, while antibiotic and caffeine declined by 9.2% and 29.8% YoY, respectively. Gross margin declined 0.6ppt YoY to 70.7%. Distribution and selling expenses ratio dropped 5.2ppts to 24.9%, partially offset by increased R&D expenses ratio (+2.7ppts to 18.8%). Net profit declined 8.5% YoY (or 12.7% QoQ) to RMB1.4bn, below consensus expectation.
　　Significant impact from GPO in short-term: The management guided down the revenue from new/sub-new products in 2024 from RMB3bn to RMB2bn (in- hospital sales), and maintained guidance of double-digit growth in sales of finished drugs in 2024. Besides, due to the continued rollout of 3+N Alliance centralised procurement of Jinyouli and Duomeisu, especially in Beijing, Shanghai, Shandong, and Jiangsu, and the potential inclusion of Duomeisu in the 10th batch national GPO, the management expects RMB1bn sales decrease in Jinyouli and RMB1bn-1.3bn sales drop in Duomeisu, summing up to RMB2bn- 2.5bn in 2025, which might be offset by the sales increase of TNK (+RMB500m- 600m), irinotecan (+RMB200-300m), other drugs (eg, EGFR-TKI, omalizumab, PD-1i, etc), totaling to RMB2bn.
　　Change of industry dynamic: the management also mentioned the change of the industry dynamic, including (i) longer payment cycles from hospitals to distribution companies/ pharmaceutical companies, leading to increasing account receivables; (ii) academic conference being more often held by associations instead of companies amid the industry rectification; (iii) less usage from off-label/ or drugs that were not in the NDRL, etc. 2024 NRDL negotiation included RANKLi and PD-1i (first-time negotiation), TNK and NBP (renewal), and palbociclib and irinotecan (bidding).
　　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 cut 2024-26E topline by 12%-18% to factor in the expected negative impact of GPO on Duomeisu and Jinyouli in 2024-25. We also decreased GPM considering the price cut on Duomeisu and Jinyouli. We lifted WACC from 10.3% to 10.5% and lowered terminal growth rate from 2.5% to 2.0%, and cut 12-month TP to HK$6.5. Downgrade to HOLD rating as we believe its short- term performance will be limited by the soft results. We still appreciate CSPC’s innovative capability, especially in ADC (expected data readout and license-out opportunities of EGFR ADC), mRNA vaccines (expected IND of monkeypox vaccine in the US in the beginning of 2025), and cell therapies (phase I study of BCMA-CART (SYS6020)), etc.