CSPC Earnings: We Cut Our Fair Value Estimate by 17% on Revenue Miss

We have cut our fair value estimate for narrow-moat CSPC Pharmaceutical to HKD 6.90 from HKD 8.30 following its third-quarter revenue and margin miss. We initially forecast a revenue growth of 6.6% for 2024, based on an assumed 38% contribution from its nervous system drug sales of CNY 10.9 billion. Still, sales fell short in the third quarter as hospitals tightened their budgets. Hence, we think sales are unlikely to rebound in the fourth quarter, given the high inventory levels that distributors are holding. Along with weak performance in its oncology segment, we now expect a revenue decline of 4.6% for 2024 but keep our 2025 low-single-digit growth forecast unchanged. Consequently, we lower our near-term gross margin and increase long-term research and development margin due to operating leverage. We continue to see shares as undervalued.