SOE Reform To Boost Sinopharm's Long-term Outlook

BMI View: The 'mixed ownership' reform in Sinopharm will offer private investors more opportunities to capitalise on China's robust pharmaceutical market growth. Sinopharm's more modern, market-orientated ownership structure will attract more foreign investment and enhance its collaborations with multinationals. However, central government control and corruption associated with state-owned enterprises will hinder these entities to maximise their full commercial potential.

Sinopharm has been chosen by the ruling Communist Party of China  to restructure its ownership to include more participation from private investors. This promotion of the 'mixed ownership' reform is part of the government's pilot economic reform plans to privatise at least six state-owned enterprises (SOEs) to attract capital and improve corporate governance. However, the precise nature of the reorganisation model has not been disclosed yet. Sinopharm is the only life science company out of the six SOEs.

We note that Sinopharm is ahead of many SOEs with regards to integrating the 'private element' into its strategic development, such as decision-making mechanisms, market awareness and management incentive mechanisms. In January 2003, Sinopharm and Shanghai Fosun Pharmaceutical Group jointly established Sinopharm Holdings, which is now listed on the Hong Kong market. Between 2012 and 2013, Sinopharm also acquired private Chinese drugmakers Winteam  Pharmaceutical and Guizhou  Tongjitang  Pharmaceutical.

Strong Growth
The Pharmaceutical Market Outlook In China

BMI View: The 'mixed ownership' reform in Sinopharm will offer private investors more opportunities to capitalise on China's robust pharmaceutical market growth. Sinopharm's more modern, market-orientated ownership structure will attract more foreign investment and enhance its collaborations with multinationals. However, central government control and corruption associated with state-owned enterprises will hinder these entities to maximise their full commercial potential.

Sinopharm has been chosen by the ruling Communist Party of China  to restructure its ownership to include more participation from private investors. This promotion of the 'mixed ownership' reform is part of the government's pilot economic reform plans to privatise at least six state-owned enterprises (SOEs) to attract capital and improve corporate governance. However, the precise nature of the reorganisation model has not been disclosed yet. Sinopharm is the only life science company out of the six SOEs.

We note that Sinopharm is ahead of many SOEs with regards to integrating the 'private element' into its strategic development, such as decision-making mechanisms, market awareness and management incentive mechanisms. In January 2003, Sinopharm and Shanghai Fosun Pharmaceutical Group jointly established Sinopharm Holdings, which is now listed on the Hong Kong market. Between 2012 and 2013, Sinopharm also acquired private Chinese drugmakers Winteam  Pharmaceutical and Guizhou  Tongjitang  Pharmaceutical.

According to the local media, as of the end of 2013, Sinopharm group owns 648 companies, of which 543 already have a mixed capital structure consisting of private sector, local state and foreign investment. The total assets from Sinopharm's mixed ownership companies was CNY139bn (USD22.4bn), accounting for 82.6% of the group's total assets. Sales from the group's mixed ownership entities reached CNY188.1bn (USD33bn), accounting for 92% of the group's total revenue.

We believe that the 'mixed ownership' reform in Sinopharm will offer private investors increased opportunities to capitalise on China's robust pharmaceutical market growth. It has been our long-held view that the healthcare reform will benefit commercial players (i.e. pharmaceutical firms, healthcare providers, medical device manufacturers and other related firms) - particularly domestic companies, given the widening healthcare access. In 2013, all of the top 10 domestic pharmaceutical players (by market capitalisation) reported robust growth due to the ongoing healthcare reforms and Sinopharm was the top revenue earner.

Strong Growth
The Pharmaceutical Market Outlook In China

The shift from centralised, government-dominated organisations into modern, market-orientated enterprises will make China's SOEs, such as Sinopharm, more attractive to foreign investment and will enhance their collaborations with multinationals in terms of technology transfer and co-development of innovative products. In addition, the reform will also accelerate Sinopharm's pace for external expansion, especially in emerging countries. As China's social-economic profile is very similar to that of many emerging markets, Sinopharm can apply its successful business model developed in China to many other countries.

However, such transition will take time to complete. We note that the journey of China's SOEs reform began about three decades ago. The government has decentralised the decision making power of SOEs through corporatisation, enabled SOEs to be financially self-sufficient and tried to regulate state assets with modern management structure. However, the government will not cease control over SOEs that are essential to the nation's economy, as the Chinese SOEs also serve as an important arm for the Chinese government to exercise its political and economic influence both at home and abroad. This will sometimes be contradictory to investors' interest.

In addition, how the central government will crackdown on corruption associated with SOEs will also determine how successful the SOE reforms are in China. We note that on January 10 2014, Sinopharm's former vice president Shi Jinming was detained by Shanghai authorities as part of an investigation into a corruption claim. Jinming relinquished his post on January 7, after which he was detained by the People's Procuratorate of Shanghai Pudong New District. Xu Yizhong, former general manager of a Sinopharm distribution unit, is also involved in the investigation on similar charges. Both have been accused of misappropriating company funds and setting up illegal personal accounts.

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