Drugs company makes the most of health crisis

The price of vitamin C has shot up recently and China Pharmaceutical is struggling to meet the high demand

The fallout of the Sars outbreak is emerging as a universal excuse for firms suffering poor performance. For a few, however, the acute focus on public and personal health is offering opportunity.

Red chip China Pharmaceutical Enterprise and Investment Corp manufactures vitamin C tablets at a time when demand for vitamins is outstripping supply. Although vitamin C made up just 23 per cent of the company's turnover last year, compared to a 63 per cent contribution from antibiotics - it looks likely to be the main growth driver in the medium term.

'The vitamin C industry has been undergoing a major consolidation. Some major players have downsized,' said Herbert Lau Chung-kwan, the head of research at Celestial Asia Securities.

As a consequence, the price of vitamin C has more than doubled in recent months.

The past couple of years have seen China Pharmaceutical's share price move steadily upwards, from just over 50 cents in September 2001 to $2.425 after a 4.3 per cent gain yesterday. The company has gained further momentum from the Sars crisis, which has increased demand for medicinal products.

Deutsche Bank analyst Christine Pu expects Sars to boost the company's first-quarter results, which are due out today. According to Ms Pu, net profit should reach $140 million, or 60 per cent of the $228 million the company made last year.

Another potential earnings enhancer for the company is a possible deal to manufacture vitamin C for the Swiss pharmaceutical giant Roche, which closed down a major production line in 2001 and sold it to DSM of the Netherlands.

'China Pharmaceutical is in discussions with Roche to manufacture vitamin C for them in China,' Ms Pu said.

Although the deal has been hampered by the Sars outbreak, she said that it was 'very likely' the Roche production line would be moved to the mainland in due course.

Anticipating robust first-quarter results today, Ms Pu has revised her full-year earnings per share estimates by 7 per cent and raised her target price by 1.9 per cent to $2.75, based on 8.5 times forward earnings for next year.

'The vitamin C shortage will continue for this year, and probably next year, unless the global giants reopen the production lines,' she said.

Ms Pu expects full-year turnover to increase by 38 per cent from $1.62 billion last year to $2.64 billion this year, and net profit to rise by 56 per cent from $228.14 million to $521.13 million.

Ms Pu said her estimates factored in softer vitamin C prices. 'When we projected the earnings we did project a very conservative selling price for vitamin C, because the price will go down in the next two years or so,' she said.

Mr Lau was also optimistic about China Pharmaceutical's prospects. He admitted the company had benefited from the Sars crisis but maintained that even before the outbreak its earnings were 'looking pretty strong'.

He said that based on fundamentals China Pharmaceutical was 'not a bad stock for the long term'.

Thomson First Call has a 'buy' recommendation on the stock based on consensus estimations of 10 brokerages. China Pharmaceutical is trading at a reasonable 11 to 12 times forward earnings.

However, some analysts believe vitamin C prices could soften by the fourth quarter as a number of mainland producers plan to increase their capacity to catch up with demand.

Mabel Wong, an analyst with CLSA, said she expected China Pharmaceutical's earnings to peak this year and fall next, citing 'limited share price upside and deterioration in the company's fundamentals' as a result of intensified competition.

Ms Wong has downgraded the stock from outperform to under perform. CLSA's target price for the stock is $2.50, which is 3.09 per cent higher than yesterday's closing.