Zhejiang Huahai Pharmaceutical Co. Ltd._ Risk Reward Update

Company and Industry Overview * Company: Zhejiang Huahai Pharmaceutical Co. Ltd. (600521.SS) * Industry: China Healthcare * Research Firm: Morgan Stanley Research * Analyst: Laurence Tam Key Points Investment Drivers * API Pricing: Monthly API pricing data released by China Customs. * Drug Launches: Drug launches in China and the US, particularly in the formulation segment. * Margin Expansion: Expansion of margins through pricing, capacity utilization, and operating leverage. Risks to PT/Rating * Upside Risks: * New multinational API manufacturing contracts. * Rise in API pricing in multiple drug categories. * Approval of formulations in China and the US. * Renewal of management incentive scheme. * Downside Risks: * Dipping export demand due to geopolitical factors. * Export bans by overseas regulators. * Price cuts on generic drugs. Financial Projections * Sales/Revenue: 9,707.4 million RMB (Note: Insufficient consensus data available) * EBIT: 2,018 million RMB (Note: Insufficient consensus data available) * Ownership Positioning: 94.1% institutional owners * MS Alpha Models: 3/5 for 3-month horizon Risk/Reward Update * Price Target: Rmb23.00 (Up from Rmb22.00) * Bull Case: Rmb27.00 - Rmb28.00 * Base Case: Rmb22.00 - Rmb23.00 * Bear Case: Rmb12.00 - Rmb13.00 * 52-Week Range: Rmb21.55 - Rmb10.71 * Fiscal Year Ending: 12/23 - 12/26e Investment Thesis * Top Five Chinese Formulations by Sales: Drug Master Files (2023) * Top Ten Most Supplier - Formulations with more stable margins * Return of API export supply chains: Resumption of API export supply chains, lifted by global and export bans. * Acceleration of formulation sales growth: Expected acceleration of formulation sales growth, launches per year, mainly in 2023-2026. * Forward PE multiple: Projected forward PE multiple of multiple for A-share listed API stocks with high level of forward integration. Risk/Reward Themes * Pricing Power: Secular Growth: View descriptions of Risk Rewards Themes here Key Earnings Inputs * Net Sales: 8,308,720,000 RMB (2023) * Gross Margin: 60.4% (2023) * Operating Margin: 14.9% (2023) * Net Margin: 10.0% (2023) * Net Income: 830,466,000 RMB (2023) Additional Information * Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research. * Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated, or Underweight. * Analyst certification and other important disclosures are available in the Disclosure Section.