Shimadzu’s 3Q results were good enough to reassure long-term investors, but not good enough to be called a buy signal. Sales and operating profit were up 4.5% and 4.6% year-on-year, respectively, in the three months to December, an improvement over 2Q but well below the double-digit increases recorded in 1Q and last fiscal year. Forex losses and other factors led to a 2.2% decline in net profit.
Sales were up in Japan, Europe and Asia ex-Japan and ex-China, but down in America, China and Other Regions. Sales of core Analytical & Measuring Instruments were up 2.4%, operating profit on those sales was up 4.1% and the operating margin rose to +15.4% from +15.1% the previous year.
Sales of Industrial Machinery were down 5.7%, but operating profit on those sales was up 2.7% and the division generated a +9.7% operating margin vs. +9.0% the previous year. Sales of turbo-molecular pumps, primarily to semiconductor equipment makers, were down 14.3%.
Medical System sales were up 10.6% and the division generated a +1.5% operating margin vs. + 0.1% the previous year. Aircraft Equipment sales were up 12.1% but the division made a -0.5% operating loss vs. +1.2% profit the previous year.
At ¥2,659 (Friday, February 8 closing price), the shares are selling at 24x our EPS estimate for FY Mar-19 and 12x EV/EBITDA. The five-year historical P/E range is 13x – 30x, the EV/EBITDA range is 6x – 16x. Over the next several quarters, we expect continued weakness in Industrial Machinery to offset single-digit growth in Instruments, keeping overall growth low.
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Shimadzu’s 3Q results were good enough to reassure long-term investors, but not good enough to be called a buy signal. Sales and operating profit were up 4.5% and 4.6% year-on-year, respectively, in the three months to December, an improvement over 2Q but well below the double-digit increases recorded in 1Q and last fiscal year. Forex losses and other factors led to a 2.2% decline in net profit.
Sales were up in Japan, Europe and Asia ex-Japan and ex-China, but down in America, China and Other Regions. Sales of core Analytical & Measuring Instruments were up 2.4%, operating profit on those sales was up 4.1% and the operating margin rose to +15.4% from +15.1% the previous year.
Sales of Industrial Machinery were down 5.7%, but operating profit on those sales was up 2.7% and the division generated a +9.7% operating margin vs. +9.0% the previous year. Sales of turbo-molecular pumps, primarily to semiconductor equipment makers, were down 14.3%.
Medical System sales were up 10.6% and the division generated a +1.5% operating margin vs. + 0.1% the previous year. Aircraft Equipment sales were up 12.1% but the division made a -0.5% operating loss vs. +1.2% profit the previous year.
At ¥2,659 (Friday, February 8 closing price), the shares are selling at 24x our EPS estimate for FY Mar-19 and 12x EV/EBITDA. The five-year historical P/E range is 13x – 30x, the EV/EBITDA range is 6x – 16x. Over the next several quarters, we expect continued weakness in Industrial Machinery to offset single-digit growth in Instruments, keeping overall growth low.
Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.
Revenue and Operating Profit Fell Below Consensus Estimates for 3QFY03/19
JPY (bn)
3QFY03/18
3QFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
202.6
199.2
-1.7%
201.6
-1.2%
Operating Profit
22.4
17.6
-21.5%
20.0
-12.0%
OPM
11.1%
8.8%
Source: Company Disclosures, Capital IQ
The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.
Operating Profit for 9MFY03/19 Declined by More than Half Compared to a Year Ago
JPY (bn)
9MFY03/18
9MFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
572.1
581.0
1.6%
583.4
-0.4%
Operating Profit
59.8
20.6
-65.6%
23.0
-10.4%
OPM
10.5%
3.5%
Source: Company Disclosures, Capital IQ
The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.
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We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:
Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.
In my first insight on this potential deal situation in December API Tilts at Sigma Healthcare: Expect More, I noted that despite the 69% premium and very large jump on Day1 there was still room below the cash and scrip terms of Australian Pharma Industries (API AU)‘s (“API”) non-binding offer (of 0.31 shares of API and A$0.23 in cash for each share of Sigma Healthcare (SIG AU) held), which were arguably light (i.e. ascribed too much value to API shareholders for the shares portion). Also, given the nature of “opportunistic bids” made when a recently bombed out former growth stock and the “sunk cost” model of investor and executive mentality, there was every possibility that Sigma would come out saying they were worth more.
My concluding recommendation was to expect that API would have to bid more, and to think about trading this from a “long gamma” perspective and said I would be long Sigma vs API in the interim (either long-short or against terms). So far that has worked, but mostly because Australian Pharma Industries (API AU) has fallen in price. What had been a 24.9% spread to terms when I wrote was down to 13.6% last Friday and to 7.6% after the move Monday after the New News.
data source: capitalIQ
The New News
Friday morning, Sigma Healthcare released a 2-page Market Update saying the four month Business Review, assisted by Accenture, had identified A$100mm of annual cost savings, confirmed the FY19 EBIT guidance of A$75 million, and confirmed the FY20 EBITDA guidance of $55-60mm (strictly speaking, the conversion from EBIT to EBITDA had been pinpointed to be $54-64mm, so the range has shrunk and the top end has come down).
The business review sees 10% underlying EBITDA growth from FY20 to FY23 so that after cost savings are included, FY23 sees the same EBITDA as FY19 [i.e. almost A$90mm].
The last bullet point suggests to expect “minimal net debt by FY20” despite an “extensive capital reinvestment program” and “retention of a high dividend payout.” This suggests some use of the capital release from withdrawing from the MC/CW deal to pay down debt.
There is a fair bit one can do to read between the lines. It is worthwhile doing so.
Hansoh Pharmaceutical (HANSOH HK) claims to be one of the few R&D driven Chinese pharmaceutical companies. According to press reports, Hansoh aims to launch its Hong Kong IPO to raise $1 billion this month. Over the track record period, Hansoh’s financial performance shows accelerating revenue growth, relatively stable margins and solid cash generation.
Hansoh has the elements of a decent growth story, but our optimism is tempered due to mixed prospects for its drugs. Also, the huge pre-IPO dividend of RMB4.0 billion ($0.6 billion) will likely raise questions on the timing and size of the IPO.
Today, Sigma Healthcare (SIG AU) announced the results of its four-month-long strategic review. As a reminder, on 14 December, Australian Pharma Industries (API AU) lobbed an indicative cash-scrip proposal for Sigma. Under the proposal, Sigma’s shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share.
Sigma said that reciprocal due diligence with API has commenced but the merger “needs to be assessed in the context of what is in the best interests of Sigma shareholders.” We believe that should API continue to pursue the merger; the strategic review strengthens Sigma’s hand to improve the terms of API’s bid.
CStone Pharma, a Wuxi Apptec related biotech company, plans to raise USD 300m to list on the Hong Kong Stock Exchange. In our previous insight (link here), we have discussed CStone’s drug candidate pipeline, founders, management team and investors.
In this insight, we will provide a detailed valuation breakdown for its key products. Our base case post-money valuation for CStone is USD 1.4 bn, which is 30% above its pre-IPO valuation of USD 1.05 bn but at the low end of the guided valuation range.
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CStone Pharma, a Wuxi Apptec related biotech company, plans to raise USD 300m to list on the Hong Kong Stock Exchange. In our previous insight (link here), we have discussed CStone’s drug candidate pipeline, founders, management team and investors.
In this insight, we will provide a detailed valuation breakdown for its key products. Our base case post-money valuation for CStone is USD 1.4 bn, which is 30% above its pre-IPO valuation of USD 1.05 bn but at the low end of the guided valuation range.
Shimadzu’s 3Q results were good enough to reassure long-term investors, but not good enough to be called a buy signal. Sales and operating profit were up 4.5% and 4.6% year-on-year, respectively, in the three months to December, an improvement over 2Q but well below the double-digit increases recorded in 1Q and last fiscal year. Forex losses and other factors led to a 2.2% decline in net profit.
Sales were up in Japan, Europe and Asia ex-Japan and ex-China, but down in America, China and Other Regions. Sales of core Analytical & Measuring Instruments were up 2.4%, operating profit on those sales was up 4.1% and the operating margin rose to +15.4% from +15.1% the previous year.
Sales of Industrial Machinery were down 5.7%, but operating profit on those sales was up 2.7% and the division generated a +9.7% operating margin vs. +9.0% the previous year. Sales of turbo-molecular pumps, primarily to semiconductor equipment makers, were down 14.3%.
Medical System sales were up 10.6% and the division generated a +1.5% operating margin vs. + 0.1% the previous year. Aircraft Equipment sales were up 12.1% but the division made a -0.5% operating loss vs. +1.2% profit the previous year.
At ¥2,659 (Friday, February 8 closing price), the shares are selling at 24x our EPS estimate for FY Mar-19 and 12x EV/EBITDA. The five-year historical P/E range is 13x – 30x, the EV/EBITDA range is 6x – 16x. Over the next several quarters, we expect continued weakness in Industrial Machinery to offset single-digit growth in Instruments, keeping overall growth low.
Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.
Revenue and Operating Profit Fell Below Consensus Estimates for 3QFY03/19
JPY (bn)
3QFY03/18
3QFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
202.6
199.2
-1.7%
201.6
-1.2%
Operating Profit
22.4
17.6
-21.5%
20.0
-12.0%
OPM
11.1%
8.8%
Source: Company Disclosures, Capital IQ
The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.
Operating Profit for 9MFY03/19 Declined by More than Half Compared to a Year Ago
JPY (bn)
9MFY03/18
9MFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
572.1
581.0
1.6%
583.4
-0.4%
Operating Profit
59.8
20.6
-65.6%
23.0
-10.4%
OPM
10.5%
3.5%
Source: Company Disclosures, Capital IQ
The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.
TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months. The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.
Source: CyberAgent Way 2018
SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly, while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index.
This Insight will review: –
CyberAgent’s growth strategy
The company’s track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins
The three main business segments – Internet Advertising, Game Software, and Media
Cash Flow and Valuation
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market’s current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago.
Source: CyberAgent Way 2018
VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’. In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may.
Exile on Main Street/Tumbling Dice – Jagger/Richards 1972
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Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.
Revenue and Operating Profit Fell Below Consensus Estimates for 3QFY03/19
JPY (bn)
3QFY03/18
3QFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
202.6
199.2
-1.7%
201.6
-1.2%
Operating Profit
22.4
17.6
-21.5%
20.0
-12.0%
OPM
11.1%
8.8%
Source: Company Disclosures, Capital IQ
The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.
Operating Profit for 9MFY03/19 Declined by More than Half Compared to a Year Ago
JPY (bn)
9MFY03/18
9MFY03/19
YoY Change
Consensus
Company Vs. Consensus
Revenue
572.1
581.0
1.6%
583.4
-0.4%
Operating Profit
59.8
20.6
-65.6%
23.0
-10.4%
OPM
10.5%
3.5%
Source: Company Disclosures, Capital IQ
The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.
TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months. The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.
Source: CyberAgent Way 2018
SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly, while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index.
This Insight will review: –
CyberAgent’s growth strategy
The company’s track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins
The three main business segments – Internet Advertising, Game Software, and Media
Cash Flow and Valuation
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market’s current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago.
Source: CyberAgent Way 2018
VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’. In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may.
Exile on Main Street/Tumbling Dice – Jagger/Richards 1972
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TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months. The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.
Source: CyberAgent Way 2018
SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly, while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index.
This Insight will review: –
CyberAgent’s growth strategy
The company’s track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins
The three main business segments – Internet Advertising, Game Software, and Media
Cash Flow and Valuation
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market’s current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago.
Source: CyberAgent Way 2018
VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’. In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may.
Exile on Main Street/Tumbling Dice – Jagger/Richards 1972
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Today, ND Software (3794 JP) announced a Management Buy Out (MBO) sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be roughly 7.2x trailing 12-month EV/EBITDA.
The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this.
J-Will Partners was founded about 15 years ago and has since done 170 deals for more than ¥350 billion. The fund manager specializes in “small-mid-sized companies” (which means small companies like this one) in 2nd-4th tier cities in Japan. The specialty is helping revive or grow small regional Japanese companies to better serve a larger customer base, compete with their urban and overseas rivals, and grow their local economy. For that, the deals are often funded by regional financial institutions and businesses.
data source: capitalIQ
Terms & Schedule
Terms & Schedule of J-Will Partners MBO on ND Software
Tender Offer Price
JPY 1,700
Tender Offer Start Date
8 February 2019
Tender Offer Close Date
25 March 2019
Tender Offer Settlement Date
29 March 2019
Tender Agent
SMBC Securities
Maximum Shares To Buy
17,632,501 shares (100%)
MINIMUM Shares To Buy
11,755,000 shares (66.67%)
Irrevocable Undertakings
5,512,800 shares (31.26%)
With irrevocables of 31% and shareholders I would deem friendly to management holding another 20+% at a minimum, on the surface this looks like it shouldn’t be overly difficult to get done…
BUT…
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2019 marks an inflection point for Korean biosimilar companies Celltrion Healthcare (091990 KS), Celltrion Inc (068270 KS), and Samsung Biologics Co., (207940 KS). Several new product launches are on tap, but competition will be more intense from here. More to the point, our updated estimates of end market revenue in the EU for Celltrion’s Inflectra/Remsima show that revenue is declining: consistent with commentary regarding pricing pressure as new competitors enter the market. This development suggests that biosimilar launch curves won’t be as steep as in the past and that product maturity will come sooner.
Expectations for these companies remain high, so we remain wary of these stocks.
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2019 marks an inflection point for Korean biosimilar companies Celltrion Healthcare (091990 KS), Celltrion Inc (068270 KS), and Samsung Biologics Co., (207940 KS). Several new product launches are on tap, but competition will be more intense from here. More to the point, our updated estimates of end market revenue in the EU for Celltrion’s Inflectra/Remsima show that revenue is declining: consistent with commentary regarding pricing pressure as new competitors enter the market. This development suggests that biosimilar launch curves won’t be as steep as in the past and that product maturity will come sooner.
Expectations for these companies remain high, so we remain wary of these stocks.
Consolidated sales were up 4.1% year-on-year in the three months to December, supported by demand from the medical, semiconductor and factory automation sectors, to which sales were up 8.7%, 11.0% and 8.2%, respectively. Gross profit was up 4.5%, but higher S,G&A expenses resulted in a 1.8% decline in operating profit (the operating margin was, however, up from the previous quarter). Net profit was up 4.9% after a decline in extraordinary losses. It was a relatively good performance in view of the cyclical downturns in the semiconductor and factory automation markets, and medical sales growth of only 3.2% in FY Sep-18.
Management’s three-year plan calls for 4.2% growth in sales and 0.9% growth in operating profit this fiscal year, followed by acceleration in FY Sep-20 and FY Sep-21. This is predicated on investment in new production capacity, which should be largely completed over the coming year, sufficient demand to absorb that capacity, and depreciation leveling off in FY Sep-21. Sales growth was on target in 1Q while operating profit fell short, but management has a record of cutting R&D and other expenses in order to achieve profit guidance.
At ¥3,985, the shares are selling at 29x management’s implied EPS estimate for this fiscal year (net profit guidance/ current shares outstanding), 26x next year’s estimate and 22x the estimate for FY Sep-21.
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In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
With Brookfield’s binding proposal providing a floor, the shares are viewed as attractive as BGH-AustralianSuper, a rival bidder could start a bidding war. However, we maintain our view that in the event AustralianSuper decides to stick with the consortium, BGH-AustralianSuper’s improved offer is unlikely to provide material upside.
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