SUNHERE PHARMA(300452)：ANTICIPATING RAPID EARNINGS GROWTH ON STRONG DEMAND FOR PHARMA EXCIPIENTS

　　Sunhere preannounced its unaudited 2022 results, which is slightly beyond expectations. Thanks to strong demand for pharmaceutical excipients after the relaxation of the Covid curbs in 4Q22, the Company’s earnings have been growing rapidly. Its subsidiary, Qufu Tianli, may have turned a profit in full-year 2022. Sunhere’s new production base in Huainan will be put into production soon, and the huge capacity increments will help the Company consolidate and expand its market share. Given accelerated import substitution and localization and the registration of the first excipient for injectables, Sunhere may embrace an upward inflection point for its earnings.
　　 Sunhere’s preliminary earnings in 2022 slightly exceeded expectations.
　　Recently, the Company released its preliminary earnings for 2022, anticipating attributable net profit （ANP） of Rmb120mn-141mn （up 34.45%-57.98% YoY）， recurring ANP of Rmb110mn-131mn （up 38.61%-65.07% YoY）。 The rapid earnings growth was mainly thanks to conformance evaluation, the Company’s growing import substitution capacity under the centralized procurement policy, increasing downstream demand during the pandemic, the earnings improvement of Qufu Tianli, a subsidiary, and the absence of goodwill impairment （Rmb6,128,700 was accrued in 2021）。 We reckon that the contribution of non-recurring profits and losses to the Company’s net profit was about Rmb10mn, mainly government subsidies and wealth management income.
Thanks to strong demand for pharmaceutical excipients after the relaxation of pandemic curbs, Sunhere’s earnings have been growing rapidly in 4Q22, while the subsidiary Qufu Tianli may have turned a profit.
　　Based on Sunhere’s earnings guidance, we estimate the Company’s 4Q22 ANP at Rmb25mn-46mn （up 49.61%-175.28% YoY） and 4Q22 recurring ANP to be Rmb25mn-46mn （up 62.34%-198.70% YoY）。 On Dec 7, 2022, the Joint Prevention and Control Mechanism of the State Council issued “10 new rules” on pandemic prevention and control, which marked the substantial lifting of curbs related to Covid-19 across China. Omicron-infected cases are mostly of mild symptoms or asymptomatic, so those without underlying diseases can be treated at home. Since the number of infected cases across China is still increasing rapidly, strong demands for antipyretic drugs lead to surging demand for upstream pharmaceutical excipients. Sunhere’s pharmaceutical excipients （e.g., microcrystalline cellulose, hydroxypropyl methylcellulose and starch） are in short supply. The Company’s subsidiary, Qufu Tianli, is a supplier of starch （the main excipient of Lianhua Qingwen Capsule） to Yiling Pharmaceutical, and its production is basically in full swing at present. Thanks to growing product outputs, continuous improvement of internal management and value-added tax （VAT） rebate in 4Q22, Qufu Tianli may have turned a profit in full-year 2022.
Sunhere’s new production base in Huainan will be inaugurated soon, and capacity increments will help the Company consolidate and expand its market share in the field of pharmaceutical excipients.
　　The Company’s application for issuance of convertible bonds （up to Rmb320mn） has been accepted by the Shenzhen Stock Exchange; of which, Rmb210mn will be used for the Phase I project of the new-type pharmaceutical excipients series production base. The said project will add annual production capacity of 2.8kt of hydroxypropyl methylcellulose （HPMC）， 5kt of microcrystalline cellulose （MCC）， 0.5kt of polyvinylpolypyrrolidone （PVPP）， 0.5kt of croscarmellose and 0.2kt of sodium stearyl fumarate. We expect that the MCC and HPMC lines can be put into production in 2Q23, and about 30% of the pharmaceutical excipients production capacity of the Phase I project can be inaugurated by the end of 2023. The above-mentioned products are all high-value-added pharmaceutical excipients. We estimate that after reaching full production capacity, they may contribute operating revenue increment of Rmb418mn and net profit increment of Rmb106mn to Sunhere every year. The commissioning of the new production base will mitigate the Company’s situation of fully booked production capacity, actively promote import substitution and exports, and tap new development opportunities in plant capsules and high-end pharmaceutical excipients, thus helping consolidate and expand Sunhere’s market share in the field of pharmaceutical excipients.
Given accelerating import substitution and the registration of first excipient for injectables, Sunhere may embrace an upward inflection point for its earnings.
　　The drug-related evaluation and approval system puts forward high requirements for the quality of pharmaceutical excipients. We expect that small- and medium-sized players will gradually withdraw from the market due to substandard quality, and the industry concentration will gradually increase.
　　As a leader of pharmaceutical excipients, the Company may benefit continuously from the trend. In 1-3Q22, key accounts （KAs） each with an aggregate order amount of at least Rmb1mn have contribute more than 60% of Sunhere’s revenue. Given normalized volume-based drug procurement policy, the prices paid by downstream enterprises for centralized procurement varieties have dropped significantly, and the sensitivity to the prices of pharmaceutical excipients has increased. With its obvious cost-effective advantages （prices at about half of those of imported pharmaceutical excipients）， coupled with pandemic-induced disruptions on shipping and the energy crisis in Europe, the Company may accelerate its seizing of market shares from suppliers of imported pharmaceutical excipients and continue to grow its earnings. In 1-3Q22, Sunhere substituted for 22 suppliers of imported pharmaceutical excipients in 26 related projects, adding Rmb16mn to its revenue. We expect that the Company will replace about 30 suppliers of imported pharmaceutical excipients in full-year 2022, which will have more positive influence on its earnings. Import substitution will be the core theme of Sunhere’s development in the next 3-5 years. The Company plans to invest more in import substitution projects, striving to realize the comprehensive substitution for imported pharmaceutical excipients as soon as possible.
　　Gentisic acid, Sunhere’s first excipient for injectables, has been registered with the Center for Drug Evaluation （CDE）。 Going forward, the Company will further increase the R&D of new excipients for injectables, functional excipients and premixed excipients, thus optimizing its product structure. Amid continuous import substitution and the launching of new products, Sunhere may embrace an upward inflection point, and double its earnings YoY at the end of the 14th Five-Year Plan （FYP） period （2021-25）。
　　Potential risks: Intensified market competition; rising raw material prices; slower than expected integration of Qufu Tianli; and disappointing progress in the construction of new production bases and inauguration of incremental production capacity.
Investment recommendation: Sunhere is a Chinese leader in the field of pharmaceutical excipients.
　　Considering the industry’s integration trend, the acceleration of import substitution, and the upcoming inauguration of production capacity, we expect the Company’s earnings to enter an accelerating upcycle. Based on the Company’s guidance of 2022 earnings, taking into account strong demand for pharmaceutical excipients, the upcoming inauguration of new production capacity and the earnings improvement of Qufu Tianli, we upgrade our 2022-24E EPS forecasts for Sunhere to Rmb0.56/0.72/0.89 （from Rmb0.51/ 0.65/0.81）。 Referring to the valuations of comparable companies （Wind consensus forecasts show 23x 2023E PE for Jiudian Pharma （300705.SZ）， 19x 2023E PE for Well Pharma （603351.SH）， 20x 2023E PE for Chase Sun Pharma （300026.SZ）， with an average of 21x PE）， and considering that the Company, as an industry leader, may maintain high earnings growth amid accelerated import substitution and commencement of incremental production capacity in its new production base, we give Sunhere 32x 2023E PE to arrive at a target price of Rmb23, and reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。