Most Loved China Drug Stock Sells Hormones to Make Kids Taller

(Bloomberg) --

The most favored Chinese pharmaceutical producer among domestic fund managers is a northeastern-based company that makes hormone products used to help children increase height.
 
Changchun High & New Technology Industry (Group) Inc. -- which makes vaccines and products used to treat growth-hormone deficiency -- has seen a 77 percent rally in its share prices this year, far outperforming a 28 percent gain in a benchmark index tracking major health-care and pharmaceutical stocks listed on Shanghai and Shenzhen exchanges. It was also the best-performing stock of all the constituents of health-care index this year.

A total of 291 mutual stock funds held 10.3 billion yuan in Changchun Technology as of the end of March, making it the most favored health-care stock in the A-share market among institutional investors, according to data compiled by CICC. At the end of last year, 204 funds owned a combined 6.1 billion yuan of shares.

Bulls such as Soochow Securities analyst Quan Ming say the stock remains attractive due to the low penetration of height growth hormone products in the world’s most populous country and increasing spending power of Chinese consumers.

Growing competition in the growth hormone industry is cited as a major risk by analysts including GuoSen Securities analyst Changyan Xie. The domestic market share of Changchun Technology’s human growth hormone-making subsidiary, GeneScience Pharmaceuticals Co., stood at 67 percent in 2017, according to Soochow Securities.

Key Insights:

• Changchun Technology will not be affected by the Chinese government’s ongoing move to drive down generic drug prices through a centralized bulk procurement program as its products are not on the list of the national medical insurance reimbursement list, analysts say.
• The stock is trading at blended forward price/earnings ratio of 35 times, roughly the same as its 10-year average and above industry average of 24 times, Bloomberg-compiled data show.
• After earnings rose 52 percent in 2018 and 74 percent in the first quarter, the company is still forecast to roughly double its annual profits in three years, Bloomberg-compiled data show. It beats 87 percent of its domestic peers in term of profit growth for the trailing 12 months, while its gross margin of 83 percent is above nearly 90 percent of its local peers.
• Quan of Soochow Securities said she expects the company’s profits to grow 50 percent this year, partly due to its plan to increase its stake in GeneScience Pharmaceuticals to 100 percent from 70 percent. GeneScience saw earnings soar 65 percent to 1.13 billion yuan in 2018, making it a major source of profit growth for Changchun Technology. GeneScience says on its website that its growth hormone products are supplied to more than 1,200 hospital in 30 provinces and exported to countries such as Mexico and Singapore. The drugs are mainly used for children and teenagers.
• Quan also said Changchun Technology’s vaccine business is growing at the expense of major rival Changsheng Bio-Technology Co., which was hit hard last year by a headline-grabbing vaccine scandal. Changsheng was found to have produced and sold low-quality vaccines for infants and fabricated production and inspection data on a rabies vaccine.

Market Performance

• Shares of Changchun Technology advanced 54 percent in the past 52 weeks, while the Shanghai Composite Index lost 0.2 percent. The analyst consensus one-year price target for the company is 313.36 yuan, for a potential return of 1.1 percent, according to Bloomberg-compiled data.
• The shares are up 3.3 percent in the past five days and fell 2.3 percent in the past 30 days, Bloomberg-compiled data show.

To contact Bloomberg News staff for this story: Amy Li in Shanghai at yli677@bloomberg.net

To contact the editors responsible for this story: Jessica Zhou at jzhou75@bloomberg.net, Charlie Zhu, Jeff Sutherland

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With assistance from Bloomberg