Aug. 25 (Bloomberg) -- Sinopharm Group Co., China’s largest drug distributor, posted a 23 percent increase in first-half profit after it bought companies to expand its sales network. The stock rose the most in almost two years.
Net income was 785 million yuan ($123 million) in the six months ended June 30, compared with restated profit of 638 million yuan a year earlier, the Shanghai-based company said in a statement late yesterday. Earnings beat the 745 million yuan average estimate of three analysts surveyed by Bloomberg News.
Sinopharm said it’s almost finished establishing networks in all of China’s provinces after spending 2.5 billion yuan on acquisitions in the first six months of 2011. That added 6 billion yuan to revenue, Nomura Holdings Inc. said. First-half sales jumped 48 percent to 48 billion yuan, compared with 20-to-25 percent growth for the industry, according to Nomura.
“This is mainly because of more contribution from acquisitions than expected,” Gideon Lo, a health-care analyst with Nomura in Hong Kong, said in a report today.
Sinopharm’s share of the Chinese market was boosted by the acquisitions, Lo said, which included three companies in Shanghai and a 60 percent stake in a northern China distributor.
Sinopharm rose 16 percent, the most since Sept. 23, 2009, to HK$19.40 at the 4 p.m. close in Hong Kong. The stock has dropped 28 percent this year, compared with a 14 percent decline in the benchmark Hang Seng index.
‘Good Entry Point’
“After the recent major share price decline, we believe the current share price represents a very good entry point,” said Jinsong Du, a health-care analyst with Credit Suisse AG in Hong Kong, said in a note today. It rates the stock “outperform.”
China’s government wants its biggest drug distributors, including Sinopharm, Shanghai Pharmaceuticals Holding Co. and Jointown Pharmaceutical Group Co., to purchase smaller competitors to expand their delivery networks under a plan aimed at improving access to essential medicines.
Sinopharm “may make further acquisitions” of Chinese companies in the second half of this year, Sinopharm Chief Financial Officer Jiang Xiuchang told reporters in a press conference held in Hong Kong. The company does not intend to make acquisitions overseas, and “currently has no immediate need of new funds,” he added.
Nomura’s Lo recommends investors buy the stock and expects it to reach HK$29 in the next 12 months. The earnings announcement may stem declines, he said.
“We believe it is unlikely to see any major earnings downgrade after the results, which in our view was the key concern overshadowing the stock’s share price performance over the past few weeks,” Lo said.
The amount of net income Sinopharm made from each yuan of revenue -- its net profit margin -- fell to 1.63 percent in the first half, compared with 1.97 percent a year earlier, according to Nomura.
“The negative impact from government’s policies of lowering drug prices pushed down the gross profit margin slightly,” Lo said.
Finance costs more than tripled to 344 million yuan in the first half from 105 million yuan a year earlier, Sinopharm said. The company’s sale of fixed-rate notes should enable it to control borrowing costs if China’s government increases rates more, according to Lo.
Sinopharm, which raised $745 million in May through a shares placement and bond sale, will use most of the funds to buy retail and distribution businesses in 100 smaller Chinese cities, Vice President Wu Aimin said in an interview on June 1. The company sold a further 3 billion yuan of three-year bonds on Aug. 19.
Daryl Loo, Natasha Khan. Editors: Jason Gale, Nicholas Wadhams
To contact the editor responsible for this story: Jason Gale at email@example.com