Brokers' Take

AsiaPharm Group, Sept 20 close : 63 cents

21 September 2004
The Business Times

GK Goh Research, Sept 20

Fast speed forward. AsiaPharm is a young and progressive company targeting rapid earnings growth. Listed six months ago, it has raised its coverage to 1,500 hospitals, and is preparing to launch several new products after securing governmental approval.

Strong topline growth. Flagship product Maitongna provides a solid platform for growth given its dominant market share of 77 per cent in China. Two other core products, Lutingnuo and Nuosen, have the potential to replicate Maitongna's success. Together with an exciting pipeline of new products, we are expecting a sales CAGR of 32 per cent for FY03-FY06.

Gross margins are expected to rise with its strategic shift to higher value-add businesses, ie the production of in-house developed drugs. These drugs yield gross margins of 60-80 per cent versus 3 per cent for the export of active ingredients. Given the scalability of its business, we expect greater economies of scale to lift operating margins to 26 per cent by FY06 from 10 per cent in FY01.

Strong research and development (R&D) key to product differentiation. AsiaPharm has 100 R&D staff and tie-ups with several prominent universities in China and Singapore, putting it at the forefront of competition. Successful R&D results are either translated into commercial production or sold to other producers in China for a profit.

The group's niche in natural drugs (drugs with new formulations in its fields of expertise) differentiates it from generic competitors.

BUY with target price of 78 cents. AsiaPharm is trading in line with peers in the US and Europe but at a discount to peers in China.

However, it has the highest EPS (earnings per share) CAGR of 48 per cent and a PEG (price-earnings to growth) of only 0.3 times. P/BV (price-to-book value) is 4.9 times, justified by its high ROE (return on equity) of 24 per cent.

Dividend yield is estimated at 1.7 per cent for FY04, acceptable for a stock with rapid earnings growth. Our target price of 78 cents translates into 16.5 times FY05 earnings on a PEG of 0.4 times.

Compiled by KENNETH LIM