China's pharmaceutical distributors continue to be hindered by weak domestic recovery, with profitability recovery failing to offset the slowdown in profit growth. Maintain the \"Hold\" rating on Shanghai Pharmaceutical A/H and Sinopharm Group.

EquitiesHealth Care Providers &Srvcs Industry-level recovery yet to come China ◆Growthcontinues to be impededby weak domestic recovery Linda Shu*, PhD (Reg. No. S1700522120001)Head of China Healthcare ResearchHSBC Qianhai Securities Limitedlinda.y.l.shu@hsbcqh.com.cn+86 755 88983246 ◆Margin recoveryisa good sign,butitishard to offset the Andre Sun* (Reg. No. S1700526040001)Analyst, China HealthcareHSBC Qianhai Securities Limitedandre.h.j.sun@hsbcqh.com.cn ◆Maintain Hold on Shanghai Pharma A/H and Sinopharm Margin pressure stablised;revenue growth requiresfurther innovative * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and isnot registered/ qualified pursuant to FINRA regulations transition:Our covered pharma distributors reported 2025 results, with ShanghaiPharma (SPH)largely inline and Sinopharm slightlymissingdue to weaker salesgrowth. Marginimprovement is a goodsignat first glance, with SPH’s 4Q25 GPMup30bp y-o-y to 11.7%, andSinopharmreporting7.25% GPMin 2025, 10bp better thanour previous estimatedespite a further margin decline. We attribute theexpectedmarginimprovementto weaker VBP impact in4Q25, thanks to a low base in 4Q24whenVBP-related disruption was already severe. Looking ahead, we think the growthoutlook is still vague for major distributors under the circumstances ofweak domestic Market share gain,payablepain:Market consolidation continued inthepharmadistribution industry following therun-down of small distributorsthatemerged duringthepandemic,while the negative arrived before scale:1)The consolidation trend isaccelerating, but merely aggregating low-margin assets;2)we continued to see >100 HSBC Global Investment Summit 14 to 16 April 2026 Maintain Hold on Shanghai Pharma A/H withlowerTPsofRMB18.00/HKD11.60(fromRMB18.70/HKD11.80); maintain Hold onSinopharm with unchanged TPofHKD19.50:Seedetailed valuation and risks inthecompany update section. Issuer of report:HSBC Qianhai Securities LimitedView HSBCQianhai Securitiesat: Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications intheDisclosure appendix, and with the Disclaimer, which forms part of it. Source: Company reports, HSBC Qianhai Securities Source:Company reports, HSBC Qianhai Securities Shanghai Pharma A/H (601607 CH/2607 HK, CMP RMB17.28/HKD11.94,Hold/Hold,TP RMB18.00/HKD11.60) Businessupdateand earningsestimatechanges Shanghai Pharma’s (SPH)reported 2025 revenue of RMB283.6bn,up3.03% y-o-y, which islargely inline with our previously estimates. Net profit increased by 25.74% y-o-y due tothe Hutchison acquisition(3 April 2025), which is also inline, despite a higher-than-expected sellingexpense in 4Q25 (+20.2% y-o-y). We attribute theriseinselling expensesto heavier input withinthepharmaceutical business,whoserevenue increased by 17% y-o-y.Distribution business We cut our revenue estimates for 2026-27e by1% toreflect a weakened distribution business.While we decrease administration expensesby 4-6%due togood cost control over 2025-27.Therefore, our 2026-28net profit estimates areincreasedby2-3%.With thisreport, we Our 2026-28e revenueand net profitestimates are-2% to 2% different vsWind consensus, aswe aremoreconservativeon near-term marginimprovement, while positive on industry-level Equities●Health Care Providers & Srvcs8 April 2026 Maintain Hold/Hold rating on SPH A/H; decrease A-share target pricetoRMB18.00 (fromRMB18.70) and H-share target price to HKD11.60 (from HKD11.80) We continue to use the PEG method to value SPH’s A/H-shares. Based on 2022-24 averagePEG of1.07x (unchanged) and2023-28e ofEPS CAGR of11.82%(from2022-26e adj. EPSCAGR of 11.00%), we derive our PE multiple of 12.7x (previously 11.7x). Applying this targetPE to our 2026e EPS estimate of RMB1.42(previously2025e EPS estimate of RMB1.60), we Similarly, we derive our H-share target price of HKD11.60 (from HKD11.80) based on a targetPE multiple of7.0x (previously 6.6x), which is derived from 2022-24 average H-share PEG of0.6x (unchanged) and2023-28e EPS CAGR of 11.82% (from2022-26e adj. EPS CAGR of11.00%). We apply this PE multiple to our 2026EPS estimate of RMB1.42(previously2025EPS estimate of RMB1.60), and adopt HSBC Global Investment Research FX team’s end-2026 Our A-and H-share target prices imply c4.2%upsideand2.8%downside, respectively, fromtheir current share prices. We maintain Hold/Hold ratingsonSPH’sA/H shares.We think short- Key upside risks: Softer 11th VBP that leads to lower price cut ◆Widerimplementationof commercial insurance that helps to reduce payment pressure ◆Better corporate governance,including improving operational efficiency andastock Key downside risks: Slower-than-expected R&D process and delivery of new drugs ◆◆Worse-than-expected corporate governance,which may lead to unachievable stock optionplans and affect net profit◆Unexpected centralised procurement of main products that leads to a sharp decline inselling prices Sinopharm (1099 HK,CMP H