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SIPI bets big on pharma business

By Zhou Yan (China Daily)
Updated: 2009-02-19 07:53

Shanghai Industrial Pharmaceutical Investment (SIPI) may have sold off its crown jewel, but that has not stopped its share price from rising.

Ever since the drug maker sold its entire stake in Lianhua Supermarket Holdings, the cash cow in its corporate stable, to Brilliance Group on Feb 6, the company's shares have only moved one way: up.

SIPI shares had climbed 3.4 percent on the Shanghai bourse since then to close at 13.21 yuan a share yesterday after hitting a peak of 14.15 yuan last Friday.

SIPI shareholders had earlier approved the sale of its subsidiary that had held a 21.17 percent stake in Hong Kong-listed Lianhua to retail conglomerate Brilliance for about 1.06 billion yuan. On Feb 7, SIPI told the Shanghai Stock Exchange that the sale would help the company to focus on its core pharmaceuticals business.

In the statement, SIPI said it expected to gain a pre-tax profit of about 548 million yuan from the asset sale.

Analysts said SIPI is likely to invest the proceeds from the sale in drug production and marketing, as that can yield a higher profit margin than supermarket operations.

The sale of Lianhua "will bring abundant cash into the company, helping it accelerate the development of its core business. That can provide more stable and sustainable income growth," said Hong Lu, an analyst with Essences Securities. "The sale of Lianhua is an aggressive move by the company," he said.

However, the company's performance is expected to take a short-term hit due to the loss of income from Lianhua, which accounted for more than 50 percent of SIPI's total revenues of 13.9 billion yuan in 2007.

"The company has no new income-generating asset to offset the loss," said Jiang Weina, an analyst with Industrial Securities.

Analysts said the loss in income from Lianhua can be offset by SIPI's move to concentrate on its core business of making drugs.

"This move signals a pickup in the long-awaited asset reconstruction effort of SIPI even though Lianhua was a major profit contributor to the company," said Li Jinlei, an analyst with Guojin Securities.

Analysts also noted the company's core business has seen a strong upswing in recent years. They said SIPI is expected to do well this year as well.

An analyst from Orient Securities, Xu Jun, said even without its asset injection plan, SIPI would earn 0.45 yuan per share in 2008 and 0.54 yuan per share in 2009.

"The long-awaited asset injection will help lift valuation premium for the company this year," Xu said in a report, which maintained an "outperform" rating on the company.

The company was actually scheduled to inject the assets of the Hangzhou-based Chiatai Qingchunbao into the listed company. That move was put on hold in September last year as the approval procedures were not completed in time.

It holds a 55-percent stake in Chiatai Qingchunbao, which is the third largest producer of pharmaceuticals, and famous for its anti-aging tablets.

SIPI's core operations include the development, production, and sale of medicines and medical instruments. The medicine-related business contributed to 82 percent of its revenue.

SIPI has three major pharmaceutical companies under it, Changzhou Pharmaceutical, Guangdong Techpool Bio-Pharma Co and Shanghai Medical Instrument Co.

Changzhou Pharma, which specializes in producing chemicals, raw material for Chinese medicines and formulated products, is estimated to show a net profit growth of 20 percent year on year for 2008, according to the investment consulting firm Investoday. Changzhou's net profit in 2007 was 73.75 million yuan.