Action
　　We note that China Resources Pharmaceutical (CR Pharma) has optimized its business mechanism and operations since its IPO in 2016. We expect the leading comprehensive pharmaceutical firm to become more competitive and continue to expand business over the next 3-5 years thanks to its operational and management strengths. We are upbeat on the diversification of its businesses.
　　Reasoning
　　Operating mechanism to improve further. In 4Q21, CR Pharma subsidiaries Jiangzhong Pharmaceutical, CR Sanjiu, and CR Double-Crane launched equity incentive programs, which we think will motivate core employees and help the firm optimize its management mechanism and operations.
　　Pharmaceutical manufacturing businesses: Strengthening brand power; expanding businesses via R&D, innovation, and M&As. In 2021, the firm’s revenue from pharmaceutical manufacturing grew 19.9% YoY to HK$38.61bn, with gross margin (GM) at 57.6%. Revenue from the consumer healthcare (CHC) business increased 31.5% YoY to HK$16.73bn. We think that CR Pharma is maintain its leading position in the CHC segment and has brand, product, and channel advantages. The firm acquired Jiangzhong and Boya Bio-pharmaceutical after its IPO in 2016 to increase its competitive advantages; penetrate into emerging markets for anticoagulation for the treatment of cardiovascular disease, biologic medical products, and plasma products; and bolster business transformation. In 2021, R&D expenses rose 38.2% YoY to HK$2.07bn. We think that the firm is accelerating the enrichment of its product portfolio by R&D and innovation.
　　Commerce businesses: Distribution and retail businesses on track. In 2021, revenue from CR Pharma’s distribution and retail businesses rose 17.9% and 17.6% YoY to HK$199.13bn and HK$7.61bn with GMs of 6.2% and 9.2%. The firm is consolidating its leading position in the medicine distribution industry by distributing medical devices and developing new online business, including “Internet+.”[1] The firm is providing expensive but necessary drugs directly to patients (DTP), and we think its resources in the retail segment will be further integrated.
　　Financials and valuation
　　We maintain our 2022 and 2023 EPS forecasts of HK$0.66 (up 9.8% YoY) and HK$0.73 (up 11.4% YoY). The stock is trading at 7.4x 2022e and 6.7x 2023e P/E. Given that the company has optimized its business mechanism and operations, and that it has expanded to new businesses such as plasma products, we maintain OUTPERFORM and raise our TP 21.8% to HK$6.60 (10.0x 2022e and 9.0x 2023e P/E), offering 35.0% upside.
　　Risks
　　Pressure from centralized drug procurement; disappointing commercialization for new products and/or M&As.