Brokers' Take

AsiaPharm
April 13 close: $0.755
CIMB-GK RESEARCH, April 13

April 14, 2007
The Business Times

ASIAPHARM has entered into a conditional share purchase agreement with Singapore-listed WBL Corporation for the acquisition of WBL's 43 per cent interest in WBL Peking University Biotech Co Ltd (WPU). The total consideration is 99.4 million yuan (S$19.5 million), representing an acquisition PE of 8.9 times based on WPU's net profit of 26 million yuan in FY06.

This acquisition is consistent with our view that the group is looking out for more M&A opportunities and could target drug makers with a strong presence in the over-the-counter (OTC) distribution market. We view it positively.

Distribution channel enhanced with wider customer base: AsiaPharm currently controls a distribution network that reaches about 2,500 hospitals. WPU's drugs are sold within the PRC to about 3,500 hospitals, constituting 60 per cent of its total sales. WPU has about 350 sales personnel. With the additional distribution channels and hospital customers, the group would be able to reach a wider customer base, even though there may be some overlapping.

Enlarged drugs portfolio: WPU is principally engaged in the R&D, manufacturing and sale of pharmaceutical products, natural medicine, and modern Chinese medicine. Its core product is Xuezhikang, a natural drug for regulating abnormal blood lipid levels, effectively preventing and treating cardio cerebro-vascular diseases. The enlarged products are expected to add to AsiaPharm's earnings.

Product bundling to improve sales traction of existing products: AsiaPharm can also bundle these new drugs to complement its existing product range, thereby enhancing its sales in the PRC. We estimate that bundling and cross-selling can enhance its pharmaceutical sales by 1.6 per cent in FY07.

OTC market a growth catalyst: The OTC drugs market in China has boomed in the last few years. We think this market represents a good avenue for pharmaceutical companies to establish sales traction in the PRC in the long run. Around 40 per cent of WPU's sales are from the OTC market, which should add to AsiaPharm's existing OTC market presence.

Fast-tracking export sales: WPU's drugs are very established in the market, and have been exported to the US, Europe, Japan, Korea, Singapore, Malaysia, Norway, Hong Kong and Taiwan. This adds wings to the group's intention of developing its export market. Currently, AsiaPharm sells through local distributors in Vietnam and Pakistan. It also has an exclusive agency with KKC Corporation seeking distributors of the CMNa in Korea, and has import and distribution agreements for Maitongna and Nuosen in Pakistan. We expect WPU's export market to add to the group's growing drugs portfolio for export.

Possibility of increased stake going forward: The remaining 57 per cent stake in WPU is held by Peking University Weiming Biotechnology Group (Beida) (30.45 per cent) and Beijing Holding Co Ltd (BeiKung) (26.55 per cent). We believe AsiaPharm would try to enlarge its stake in WPU, in order to fully tap into WPU's future earnings.

Maintain 'outperform' and target price raised to $0.98: We have raised our FY07-09 earnings estimates by 1.1-5 per cent to factor in: fresh contributions from new products and enlarged sales channels; further cost savings in R&D from research platform sharing; and sales growth of existing products that can benefit from product bundling.

Our target price has been raised to $0.98 from $0.96, based on discounted cash flow (WACC of 13 per cent, terminal growth rate of 3 per cent) valuation after our earnings upgrade.

OUTPERFORM

Compiled by Matthew Phan