How Export Tax Rebate Affects the Pharmaceutical Industry and Pharmaceutical Firms

The Ministry of Finance website recently announced a list of commodities for adjusting export tax rebates (see Table 1). We can see that many pharmaceutical and chemical raw material products (mainly concentrated in the tariff code 29 series, involving nearly 70 products in total) are in the adjustment range. Among them, the export tax rebate rate for most of the products has been reduced to 5%.
Since the adjustment list only gives a rough description of the structural features of chemical products, and does not directly give the product name, each raw material drug company does not know whether its products are in the tax rate adjustment, and is now in its own and customs. Checking, therefore, it is also difficult for us to give specific profit adjustments to individual products and companies. However, if nothing else, we will focus on ChinaPharm (1093HK)'s export tax rate of penicillin and vitamin C raw materials is likely to be reduced from the original 13% to 5% (the company is currently and relevant departments inquiries); As for the sea Zhengye Pharmaceutical (600267) and Huahai Pharmaceutical (600521), due to over-division of products, now have the results of specific inquiry by other companies.
Impact on the overall sector:
From a static point of view, a decline in export tax rebates will directly increase the company’s cost of sales (reflected in the financial statements as a rise in production costs). This significant reduction in export tax rebates will reduce the profitability of bulk drug companies that have a large export share. The negative impact is self-evident.
However, from a dynamic point of view, the increase in the company’s general sales cost will further increase barriers to entry in the industry, and it will be more difficult for small companies to return to the market after rising prices, thus extending the cycle of rising overall product prices in the API industry this year. . Therefore, the reduction in export tax rebates may not necessarily have a negative impact on the profitability of the leading companies in the segmentation sector. It may even reduce the volatility of corporate earnings and drive the price increase cycle into 2008.
In the medium and long term, high levels of pollution in pharmaceuticals and chemicals must be resolved. Therefore, the industrial structural adjustment that should be achieved by lowering the export tax rebate rate should be beneficial to the overall sustainable and healthy development of the industry.
Impact on China Pharmaceutical (1093HK):
The company claims that it has not yet confirmed with the relevant government department whether the adjustment of the export tax rebate will affect its products.
Assuming other factors remain unchanged, reducing the export tax rebate from 13% to 5% will reduce the company’s 2007 net profit by 37 million Hong Kong dollars to 257 million Hong Kong dollars (HK$0.17 per share), and the net profit in 2008 will fall by 73 million Hong Kong dollars to 249 million Hong Kong dollars ( HK$0.16 per share).
However, the market is dynamic. Increases in industry barriers will delay price increases and increase the average selling prices of the company's penicillin and vitamin C.
The profitability of the company is very sensitive to the average selling price. The price rose slightly, and profitability can be clearly improved. Therefore, the adjustment of penicillin and vitamin C export tax rebates will not significantly change the company's earnings prospects, and we maintain our strong judgment on the company's 2007-08 growth.
The main assumptions: 40% of penicillin is used for export; 60% of vitamin C is used for export; 5% of export tax rebate rate is effective from July 1, 2007, affecting the profit of the second half of 2007 and the whole year of 2008. The effective tax rate is 18%.