China/HK Healthcare:Pharma contract sales sub-sector

Rising demand for CSO services

    The CSO provides post-R&D pharma product sales and marketing services: 1) CFDA product registration if needed, 2) provincial tenders and hospital procurement, 3) promotions, 4) distribution, and 5) channel management. We expect pharma manufacturers to increasingly value CSO services on 1) rising demand for imported drugs and medical devices, 2) intensifying competition for hospital sales, and 3) necessary need for local know-how for market access. As such, we expect increasing specialization along the pharma value chain, giving rise to an outsourcing trend to CSOs. International manufacturers will have greater need for CSO services as they cope with complex local demand and Chinese regulations amid anti-bribery campaign. China pharma contract sales market is expected to grow 32% revenue CAGR 2013-16, vs. 19% for overall pharma market, according to Frost & Sullivan.

    Best proxy in top-2 largest CSOs: CMS and Pioneer

    Top market leaders CMS and Pioneer will directly benefit from the strong market growth over long-term given their key competitive advantages against competition. We continue to overweight China Healthcare sector.

    Valuationsand risks

    BUY Pioneer with 27% upside to TP HK$9.00. We believe most upside is already in the price for CMS with mere 7% upside to TP HK$14.38. Key risks include government actions, competition, M&A, and pipeline progress.