1H22 revenue up 10% yoy and adj. NP grew 24% yoy, in line with CMS estimates
The strong 1H22 results reflects Co. remains on uptrend trajectory, which should continue to drive stock re-rate
We maintain SOTP-based TP at HKD9.7. Valuation attractive with positive FY22E outlook & potential M&A deals. Maintain BUY
　　1H22 results revealed growth recovery on pace
　　Despite Omicron disruption in 2Q22, 1H22 manufacturing grew 18% yoy to ~HKD22bn, mainly driven by CR Boya’s consolidation and CR Jiangzhong’s high growth (+50% yoy, fuelled by Haisi consolidation).
　　Distribution grew at 8.4% to ~HKD104bn. Co. highlighted medical device distribution (up 39% yoy to HKD14.3bn) is one of the key growth drivers in this segment. Retail grew 13% yoy to ~HKD4bn thanks to rapid DTP growth (+15% yoy). Overall GPM up 0.5ppt to 15.8% mainly due to sales mix shifting towards higher GPM manufacturing. Of note, finance cost down 22% yoy to RMB932mn, thanks to lower effective interest rate (from 3.1% to 3.0%) despite higher net gearing ratio (up to 61% from 52%). We expect Co. to continue benefiting from eased monetary environment in China. Negative OCF increased to RMB3.2bn from RMB1.3bn due to longer AR cycle for hospital due to Omicron impacts in 2Q. But we noticed A/R days remained stable at 101d. As a result, adj.　NP grew 24% yoy to RMB3bn, reflecting strong recovery momentum.
　　Remain in M&A mode, COVID business is a plus
　　Co. continued to deliver 1-2 M&A deals each year in the past few years, including Aonuo acquired by CR Sanjiu in 2020, Haisi Pharma acquired by CR Jiangzhong and CR Boya acquisition in 2021. We reckon Co. is still well positioned to pursue M&A opportunities, backed by its SOE background and healthy balance sheet. In addition, Co.’s major subsidiary, CR Double-Crane has entered a 10-yr Strategic Cooperation Agreement with Genuine Biotech for CMO service of Azvudine. We think the CMO order should serve as another growth driver for Co.
　　Valuation remains attractive, maintain BUY
　　We maintained FY22E/23E earnings estimates unchanged. SOTP-based TP is unchanged at HKD9.7. Co. now trades at ~5x 23E PER, at the lowest quantile in its historical PER band. We expect positive FY22E outlook and potential M&A deals should continue to drive a re-rate.
　　Investment risks: clinical failure, lower-than-expected sales.