What's new
　　China Resources Pharmaceutical (CR Pharma) announced that: 1) On May 6, CR Pharma, China Resources Sanjiu and Holley Pharmaceutical signed a strategic cooperation agreement and a share transfer agreement respectively. 2) On May 8, China Resources Double-Crane Pharmaceutical Co Ltd. (CR Double-Crane) announced that it had signed a strategic cooperation agreement and an entrusted manufacturing agreement with Henan Genuine Biotech to process and produce Azvudine tablets for Henan Genuine Biotech. According to the agreements, the two parties will expand cooperation in product R&D, production and distribution.
　　Comments
　　Cementing leading position in TCM industry chain. China Resources Sanjiu has conditionally agreed to purchase about 212mn shares or 28% of Kunming Pharmaceutical Group (600422.SH) held by Holley Pharmaceutical Group and Holley Group for a proposed cash consideration of Rmb2,902mn. We believe the cooperation will enhance the brand awareness and brand value of Kunming Chinese Medicine and accelerate the development of the whole traditional Chinese medicine (TCM) value chain as represented by panax notoginseng.
　　Advancing the transformation of chemical pharmaceutical segment. CR Double-Crane is the platform of chronic disease drugs, specialty drugs and infusion business under CR Pharma. Henan Genuine Biotech’s Azvudine tablet is an anti-AIDS drug approved by the National Medical Products Administration (NMPA) in 2021. New clinical trials are underway for the treatment of the COVID-19. CR Double-Crane has the production capacity and quality assurance capabilities to conduct the entrusted processing of Azvudine tablets. In the future, CR Double Cranes plans to continue to improve its production and operating capacity and leverage its advantages in the integration of APIs and preparations to strengthen innovative R&D and cooperation.
　　Investing in high growth businesses and improving value chain presence. Driven by R&D, investment and M&A, CR Pharma continues to improve its presence in the whole industrial chain by optimizing resource allocation and focusing on strengthening and complementing its value chain activities. In the future, we believe that CR Pharma will continue to consolidate its competitive advantages in the fields of TCM, over-the-counter (OTC) medicine and health food, and increase its investment and acquisition efforts in the fields of innovative drugs, plasma products, vaccines and other biological drugs.
　　Financials and valuation
　　We maintain our EPS forecasts of HK$0.66 for 2022 (+9.8% YoY) and HK$0.73 for 2023 (+11.4% YoY). The stock is trading at 6.2x 2022e and 5.6x 2023e P/E. We maintain OUTPERFORM and our TP of HK$5.42 (8.2x 2022e and 7.4x 2023e P/E), offering 32.2% upside.
　　Risks
　　Pressure from centralized drug procurement; disappointing growth in retail pharmacy and medical device distribution businesses.