Stock research on global mid-cap companies

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Evaluate Research provides institutional quality stock research on small-cap and  mid-cap companies on a global basis, thus helping connect investors with the company.

At Evaluate Research, we provide free of cost to all investors a 20-25 page Initiation Report which evaluates in great detail all aspects of the company:  growth opportunities, catalysts, business description, competitive positioning, SWOT analysis, risks, etc.  In addition, we determine specific price targets for the company based on detailed 5-year complete forecasts of financial statements including IS, BS, CF, ratios, etc.  Finally, whereas many sell-side brokers offer sketchy and irregular ongoing maintenance research of companies, if not outright dropped or termination of coverage, at Evaluate Research we systematically monitor and regularly publish Update Notes covering quarterly earnings, major corporate events, etc.

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Stock research on global mid-cap companies, Evaluate Research

Equity Bottom-Up

PuraPharm [1498_HK; HK$328 million/ US$42 million market cap; HK$0.15 million total average daily value traded] reported a temporary decline in revenues and a drastic fall in earnings for the FY2019 ended December.&nbsp; The company’s revenues declined by 6.7% YoY for the FY2019 to HK$696 mn compared to HK$746 mn in the last year, impacted by economic headwinds in China and social unrest in HK.&nbsp; The decline in revenues was primarily attributable to the decrease in sales quantity, especially in the distributorship channel. &nbsp;The structural revamp in pricing and strategy of the China CCMG business carried out in 2019 has resulted in losing some of the unprofitable distributors and caused a temporary loss of sales. &nbsp;The performance of the Group’s China CCMG business has improved in the second half of FY2019, but overall sales were lower as compared to FY2018. &nbsp;Even though the company has reported a 6.7% dip in revenues for the year 2019, we believe that this is only a temporary phase. &nbsp;The company is in fact consolidating and restructuring its operations in China only to emerge stronger and deliver healthy growth in revenues and profitability going forward.&nbsp; Also, as detailed below, PuraPharm has received government approval to produce certain medicines which are specifically mentioned in the therapy prescription listed in the Novel Coronavirus Pneumonia Diagnosis and Treatment Plan published by National Health Commission of China. (More details below)
The company reported a loss for the FY2019 to -HK$227 mn, as compared to a profit of HK$21 mn in the same period last year. The profit declined substantially mainly on account of one time provisions and write-offs pertaining to loss on impairment of tangible and intangible assets to the tune of HK$114 mn. &nbsp;However, the company reported a substantial increase of 141% in the free cash flow to HK$65 mn (HK$0.25 per share) in FY2019 as compared to HK$27 mn (HK$0.10 per share) in FY2018 which is highly encouraging. (More details below)
Secondarily, the decrease in the profit contribution was on account of a substantial reduction in the number of patients visiting the clinics due to social unrest in Hong Kong. The Chinese healthcare products business segment of the company experienced a decline in sales and profitability due to a slowdown in the retail market sales amidst sluggish consumption sentiment in Hong Kong.
Third, the company received only HK$12 mn in government grants during FY2019 as compared to a grant of HK$17 mn in FY2018. &nbsp;The grant was received in Guizhou, in China, to reward the company’s investments in poverty area.
Our conversation with the senior management of the company suggests that the company has a long runway for future growth. &nbsp;The company’s strategy for FY2020 aims to focus on CCMG segment of its China and Hong Kong business for profitable growth.
Most of the operating expenses would not tend to increase significantly going forward as the company is committed to spend certain amount to promote their products amidst intense competition in China’s market. &nbsp;And with only a 50% utilization of the existing production capacity the company does not plan to add further capacity. &nbsp;This eliminates the need to borrow further which allows the financial costs to remain stable in the next few years and improve the operating profit margin. &nbsp;Therefore any recovery in the sales going forward, would significantly improve the financial performance of the company as costs as a percentage of sales are not expected to escalate higher.
Free Cash Flow Registers Stellar Growth
The company has made certain one-off accounting provisions and write-offs to the tune of HK$114 million with respect to impairment loss in respect of property, plant and equipment and right-of-use assets for the loss-making clinics in Hong Kong and China. &nbsp;Also, the company has de-recognized deferred tax assets in respect of the tax losses arising from the company’s clinic and Chinese healthcare products business in Hong Kong and goodwill impairment with respect to the group’s plantation segment.
These accounting provisions are however one time and non-cash in nature, and would have no impact on the company’s cash flow or business operations. &nbsp;The adjusted net loss for FY2019 was -HK$85.8 mn as compared to an adjusted net loss of -HK$3.5 mn for FY2018 gives a better measure of the financial performance of the company as compared to the unadjusted numbers as they exclude the impact of non-cash and non-recurring numbers.
The net cashflow from operations increased by a stellar 81% to HK$131.2 mn and the free cashflow increased by a stellar 141% in FY2019 to HK$65 mn. &nbsp;This when compared to HK$72.4 mn in net cashflow from operations and free cashflow of HK$27 mn in FY2018 represents a sizeable leap in numbers. &nbsp;The increase was primarily on account of efficient management of working capital, enhanced procurement and inventory management along with optimization of the production process and faster collection in trade receivables.&nbsp; Also, with deployment of cash in investing activities and repayment of loans in the year 2019 the company is well equipped to generate higher amount of operating cashflows in 2021 and beyond, considering most of the investment has been done to garner increasing amount of revenues in future.
The current ratio declined to 0.9 in 2019 as compared to 1.2 in 2018 as a result of increased collection in trade receivables along with lower sales during the year. &nbsp;The gearing ratio also increased to 1.3 in 2019 as compared to 1.0 in 2018 despite a decline in borrowing as a result of erosion in the net worth due to the drastic loss reported in 2019.&nbsp; &nbsp;Further, PuraPharm will consider to leverage on equity financing and during the year completed the capitalization of the loan from the controlling shareholder of HK$30 mn from the outstanding principal amount of HK$45 mn, by way of issuing 15.5 mn new shares at the issue price of HK$1.93 per share.
PuraPharm Authorized Medicinal Supplier for Coronavirus
The outbreak of Novel Coronavirus (COVID-19) has grown into a large-scale, multi-country pandemic during the first quarter of 2020, producing a challenging situation for all industries in most of the countries. &nbsp;In February 2020, PuraPharm (Nanning) Pharmaceuticals Co. Limited, a wholly owned subsidiary of the Group was authorized by Guangxi Zhuang Autonomous Region Food and Drug Administration (“GXFDA”) of China through the contingency application procedure to prepare and manufacture the Qing Fei Pai Du Tang, Kang Fu Yi Hao Fang and Qi Wei Tang granules for Ruikang Hospital Affiliated to Guangxi University of Chinese Medicine. QFPDT is a therapy prescription listed in the Novel Coronavirus Pneumonia Diagnosis and Treatment Plan published by National Health Commission of the PRC. According to the clinical treatment result, QFPDT was recommended by the National Administration of Traditional Chinese Medicine to use nationally for the clinical treatment of COVID-19 pandemic. &nbsp;QFPDT granule manufactured by PPNN will be used for treatment of patients who contacted the NCP Epidemic.
2021 Will Prove to Be a Transition Year
The FY2019 results for PuraPharm have been soft, but we are hopeful that results will recover marginally in the FY2020 and accelerate faster in FY2021.&nbsp; &nbsp;Given the ongoing economic lockdown due to the coronavirus pandemic and the resulting global economic slowdown, 2020 is expected to witness subdued growth for many companies, sectors and even countries.&nbsp;&nbsp; PuraPharm is not immune to this, but we are hopeful of better performance in the second half of FY2020 and a resumption of growth from 2021 and beyond.
Expect Recovery in Revenues and Profits from 2H2020 and Beyond
As per our estimates, revenues are expected to grow at a robust 14% CAGR over the next 3 years to HK$1.10 bn in FY2023 from FY2020, while EPS is expected to grow at a 42% CAGR over the next 3 years after FY2020. &nbsp;The stock is down -86% since it’s IPO in July 2015 and down -55% since the last one year and provides an attractive investment opportunity to benefit from the growing CCMG market in China and Hong Kong. &nbsp;The stock trades at 0.55x Price/Book on our FY2021 estimates and 0.68x EV/Sales on our FY2021 estimates.
We have a 12-month price target of HK$1.50 implying 81% potential upside from the current stock price. &nbsp;On a P/E ratio basis, our price target of HK$1.50 implies a P/E of 18x on our FY2021 EPS estimate of HK$0.08. &nbsp;We believe that given the company’s strong future growth prospects, PuraPharm deserves a higher valuation multiple than its peers.&nbsp;
For further details and financial model, please see our attached Earnings Update Report.

PuraPharm [1498_HK; HK$328 million/ US$42 million market cap; HK$0.15 million total average daily value traded] reported a temporary decline in revenues and a drastic fall in earnings for the FY2019 ended December.&nbsp; The company’s revenues declined by 6.7% YoY for the FY2019 to HK$696 mn compared to HK$746 mn in the last year, impacted by economic headwinds in China and social unrest in HK.&nbsp; The decline in revenues was primarily attributable to the decrease in sales quantity, especially in the distributorship channel. &nbsp;The structural revamp in pricing and strategy of the China CCMG business carried out in 2019 has resulted in losing some of the unprofitable distributors and caused a temporary loss of sales. &nbsp;The performance of the Group’s China CCMG business has improved in the second half of FY2019, but overall sales were lower as compared to FY2018. &nbsp;Even though the company has reported a 6.7% dip in revenues for the year 2019, we believe that this is only a temporary phase. &nbsp;The company is in fact consolidating and restructuring its operations in China only to emerge stronger and deliver healthy growth in revenues and profitability going forward.&nbsp; Also, as detailed below, PuraPharm has received government approval to produce certain medicines which are specifically mentioned in the therapy prescription listed in the Novel Coronavirus Pneumonia Diagnosis and Treatment Plan published by National Health Commission of China. (More details below)
The company reported a loss for the FY2019 to -HK$227 mn, as compared to a profit of HK$21 mn in the same period last year. The profit declined substantially mainly on account of one time provisions and write-offs pertaining to loss on impairment of tangible and intangible assets to the tune of HK$114 mn. &nbsp;However, the company reported a substantial increase of 141% in the free cash flow to HK$65 mn (HK$0.25 per share) in FY2019 as compared to HK$27 mn (HK$0.10 per share) in FY2018 which is highly encouraging. (More details below)
Secondarily, the decrease in the profit contribution was on account of a substantial reduction in the number of patients visiting the clinics due to social unrest in Hong Kong. The Chinese healthcare products business segment of the company experienced a decline in sales and profitability due to a slowdown in the retail market sales amidst sluggish consumption sentiment in Hong Kong.
Third, the company received only HK$12 mn in government grants during FY2019 as compared to a grant of HK$17 mn in FY2018. &nbsp;The grant was received in Guizhou, in China, to reward the company’s investments in poverty area.
Our conversation with the senior management of the company suggests that the company has a long runway for future growth. &nbsp;The company’s strategy for FY2020 aims to focus on CCMG segment of its China and Hong Kong business for profitable growth.
Most of the operating expenses would not tend to increase significantly going forward as the company is committed to spend certain amount to promote their products amidst intense competition in China’s market. &nbsp;And with only a 50% utilization of the existing production capacity the company does not plan to add further capacity. &nbsp;This eliminates the need to borrow further which allows the financial costs to remain stable in the next few years and improve the operating profit margin. &nbsp;Therefore any recovery in the sales going forward, would significantly improve the financial performance of the company as costs as a percentage of sales are not expected to escalate higher.
Free Cash Flow Registers Stellar Growth
The company has made certain one-off accounting provisions and write-offs to the tune of HK$114 million with respect to impairment loss in respect of property, plant and equipment and right-of-use assets for the loss-making clinics in Hong Kong and China. &nbsp;Also, the company has de-recognized deferred tax assets in respect of the tax losses arising from the company’s clinic and Chinese healthcare products business in Hong Kong and goodwill impairment with respect to the group’s plantation segment.
These accounting provisions are however one time and non-cash in nature, and would have no impact on the company’s cash flow or business operations. &nbsp;The adjusted net loss for FY2019 was -HK$85.8 mn as compared to an adjusted net loss of -HK$3.5 mn for FY2018 gives a better measure of the financial performance of the company as compared to the unadjusted numbers as they exclude the impact of non-cash and non-recurring numbers.
The net cashflow from operations increased by a stellar 81% to HK$131.2 mn and the free cashflow increased by a stellar 141% in FY2019 to HK$65 mn. &nbsp;This when compared to HK$72.4 mn in net cashflow from operations and free cashflow of HK$27 mn in FY2018 represents a sizeable leap in numbers. &nbsp;The increase was primarily on account of efficient management of working capital, enhanced procurement and inventory management along with optimization of the production process and faster collection in trade receivables.&nbsp; Also, with deployment of cash in investing activities and repayment of loans in the year 2019 the company is well equipped to generate higher amount of operating cashflows in 2021 and beyond, considering most of the investment has been done to garner increasing amount of revenues in future.
The current ratio declined to 0.9 in 2019 as compared to 1.2 in 2018 as a result of increased collection in trade receivables along with lower sales during the year. &nbsp;The gearing ratio also increased to 1.3 in 2019 as compared to 1.0 in 2018 despite a decline in borrowing as a result of erosion in the net worth due to the drastic loss reported in 2019.&nbsp; &nbsp;Further, PuraPharm will consider to leverage on equity financing and during the year completed the capitalization of the loan from the controlling shareholder of HK$30 mn from the outstanding principal amount of HK$45 mn, by way of issuing 15.5 mn new shares at the issue price of HK$1.93 per share.
PuraPharm Authorized Medicinal Supplier for Coronavirus
The outbreak of Novel Coronavirus (COVID-19) has grown into a large-scale, multi-country pandemic during the first quarter of 2020, producing a challenging situation for all industries in most of the countries. &nbsp;In February 2020, PuraPharm (Nanning) Pharmaceuticals Co. Limited, a wholly owned subsidiary of the Group was authorized by Guangxi Zhuang Autonomous Region Food and Drug Administration (“GXFDA”) of China through the contingency application procedure to prepare and manufacture the Qing Fei Pai Du Tang, Kang Fu Yi Hao Fang and Qi Wei Tang granules for Ruikang Hospital Affiliated to Guangxi University of Chinese Medicine. QFPDT is a therapy prescription listed in the Novel Coronavirus Pneumonia Diagnosis and Treatment Plan published by National Health Commission of the PRC. According to the clinical treatment result, QFPDT was recommended by the National Administration of Traditional Chinese Medicine to use nationally for the clinical treatment of COVID-19 pandemic. &nbsp;QFPDT granule manufactured by PPNN will be used for treatment of patients who contacted the NCP Epidemic.
2021 Will Prove to Be a Transition Year
The FY2019 results for PuraPharm have been soft, but we are hopeful that results will recover marginally in the FY2020 and accelerate faster in FY2021.&nbsp; &nbsp;Given the ongoing economic lockdown due to the coronavirus pandemic and the resulting global economic slowdown, 2020 is expected to witness subdued growth for many companies, sectors and even countries.&nbsp;&nbsp; PuraPharm is not immune to this, but we are hopeful of better performance in the second half of FY2020 and a resumption of growth from 2021 and beyond.
Expect Recovery in Revenues and Profits from 2H2020 and Beyond
As per our estimates, revenues are expected to grow at a robust 14% CAGR over the next 3 years to HK$1.10 bn in FY2023 from FY2020, while EPS is expected to grow at a 42% CAGR over the next 3 years after FY2020. &nbsp;The stock is down -86% since it’s IPO in July 2015 and down -55% since the last one year and provides an attractive investment opportunity to benefit from the growing CCMG market in China and Hong Kong. &nbsp;The stock trades at 0.55x Price/Book on our FY2021 estimates and 0.68x EV/Sales on our FY2021 estimates.
We have a 12-month price target of HK$1.50 implying 81% potential upside from the current stock price. &nbsp;On a P/E ratio basis, our price target of HK$1.50 implies a P/E of 18x on our FY2021 EPS estimate of HK$0.08. &nbsp;We believe that given the company’s strong future growth prospects, PuraPharm deserves a higher valuation multiple than its peers.&nbsp;
For further details and financial model, please see our attached Earnings Update Report.

PuraPharm [1498]: Soft Revenues, FCF Surges, Growth From 2021 - Earnings Update Report

PuraPharm Corp Ltd

PuraPharm [1498]: Soft Revenues, FCF Surges, Growth From 2021 - Earnings Update Report