Founded in 1995, HKG is a leading pharmaceutical company engaged in the research and development, manufacture and sale of pharmaceutical products in China. The company is one of the top 100 pharmaceutical companies in the world and one of the top three industrial enterprises in China in terms of pharmaceutical R&D pipeline. The main sales areas are oncology (68.8% of total sales in 1H24), central nervous system diseases (11.3%), anti-infectives (10.8%) and metabolic and other diseases (9.1%). HKG was listed on the Hong Kong Stock Exchange in June 2019 and currently has the largest market capitalization (HKD101.6bn) among Chinese pharmaceutical companies listed in Hong Kong.

Innovative drug and collaboration to be the core driver for sustainable growth

Over the past decade, Hansoh has successfully transformed itself from a traditional generics manufacturer into a company that produces both generic and innovative drugs, ultimately emerging as an innovative pharmaceutical company. Revenue from innovative medicines now accounts for more than 75% of total revenue, up from just 18% in FY20. This strong growth emphasizes Hansoh's dedication to the development and commercialization of innovative medications. In 1H24, Hansoh reported total revenue of RMB6.5bn, up 44.2% year-over-year (YoY), primarily driven by innovative drugs and collaborative products, which saw strong growth of 80.6% YoY to RMB5.0bn. Looking forward, the company's seven innovative products, including Ameile, Xinyue, Fulaimei, Hengmu, Saint Luolai, Hansoh Xinfu, and Mailingda will remain key drivers of sales growth. The company also has more than 30 innovative medicine programs in various clinical stages, with over 50 clinical trials in progress.

Since 2019, the company has initiated global collaborations through in-licensing partnerships, platform collaborations and out-licensing agreements to expand its pipeline and validate its R&D capabilities. The positive impact of these efforts is now becoming clear. Hansoh has entered into partnerships with domestic and international companies including GSK, AMGEN, OliX Pharmaceuticals, Silence Therapeutics plc, Qyuns Therapeutics, SCYNEXIS, Inc. and Biotheus, KiOmed Pharma and Atomwise, among others. In H12024, revenue from these collaborations amounted to RMB1.4bn (compared to RMB0.3bn in H12023), primarily due to an upfront payment of USD185mn from GSK for the licensing of B7H3 ADC. This agreement also includes potential milestone payments of up to USD1.525bn, in addition to future royalties.

In-house R&D and diversified pipeline to drive future growth

China has continued to make significant stride in reforming its pharmaceutical and healthcare system, leading to the innovative transformation of the entire biopharmaceutical industry. The concept of “new quality productivity” has becoming the engine for the development of biopharmaceuticals. One of the major reforms has been the China’s National Medical Products Administration (NMPA) accelerating the process of review and approval for the innovative and clinically urgently needed drugs. Additionally, health insurance policies are favoring the promotion and application of innovative products. This shift, along with various supportive policies, is encouraging companies to invest more in research and development (R&D) and accelerating the pace of innovation-driven development. HKG being the biggest player in Chinese market, is well positioned to benefit from industry transformation and supportive policies driven by its continued focus on in-house R&D and strong pipeline of innovative drugs.

Hansoh Pharmaceutical's success is driven by substantial R&D investment, which rose from 18.1% (RMB1.8bn) of total sales in FY21 to 20.8% (RMB2.1bn) in FY23. In 1H24, R&D spending increased 28.7% YoY to RMB1.2bn, or 18.4% of total revenue. The company's in-house R&D and partnerships have produced strong assets and complementary products, particularly in the autoimmune area with Business Development (BD) potential, such as ADCs. As of 1H24, Hansoh had over 50 clinical trials for more than 30 innovative drugs. The firm received regulatory approval for clinical trials on four key drugs, including treatments HS-10501 (for the treatment of type 2 diabetes and adult obesity), HS-10398 (for the treatment of immunoglobulin A nephropathy and membranous nephropathy), HS-10504 (for the treatment of advanced non-small cell lung cancer (NSCLC)), and HS-20137 (for the treatment of psoriasis). In 2024, Hansoh plans to start clinical trials for eight new drugs in mainland China, including HS-10241 and HS-10365 for NSCLC.

An attractive valuation offers comfort to investors

HKG’s stock price is up c.20% YTD with attractive valuation, compared to its historical average and global peers, offering comfort to investors. The stock is currently trading at a P/E of 25.4x based on 2024 estimated earnings of RMB0.7 per share, compared to its 5-year average of 42.9x, and the global peers average of 34.8x. Furthermore, it is trading at an EV/EBITDA of 18.3x based on 2024 estimated EBITDA of RMB4.6mn, compared to its 5-year average of 32.7x and its global peer average of 22.0x. Most of the 23 analysts covering the stock have a ‘Buy’ recommendation, with an average target price of CNY 21.61, suggesting an upside potential of approximately 20% from the current market price. HKG also declared an interim dividend of HKD20.1 cents per share for 1H24, with a dividend yield of 1.7%.

Overall, Hansoh Pharma is the biggest market-cap Chinese pharma listed in Hong Kong, presenting a compelling investment case. A significant portion of its revenues are driven by innovative drugs. Additionally, its internal and external R&D spend, along with its strong pipeline, provide future growth opportunities. Furthermore, its current valuation offers comfort to the investors. However, slower-than-expected innovative drug development, weaker-than-expected sales & marketing initiatives, and failure of its drugs to be included in NRDL or VBP are few of the risks that may lead to underperformance compared to expectations.