Investment Highlights

• We maintain BUY on Apex Healthcare (Apex) with an unchanged fair value (FV) of RM3.73/share, based on FY23F PE of 22x. This is at 0.5 standard deviation above its 4-year average of 20x, with a neutral 3-star rating.

• Apex’s wholly-owned Singapore-based First SGC (FSGC) entered into a subscription and shareholder agreement (SSA) with Shanghai Pharmaceuticals Holding (SPH) to incorporate a Singapore joint venture company (JV). Apex holds a 40% equity stake in this JV.

• Dual-listed in Shanghai and Hong Kong stock exchanges, SPH is a Chinese vertically-integrated and diversified pharmaceutical group with a current market cap of HK$62bil (or RM36bil), 23x vs Apex’s RM1.6bil. SPH is involved in research & development (R&D), manufacturing, distribution and retailing (mainly pharmacies and drug stores).

• The proficiency and reputability of SPH in the pharmaceutical sector are reflected in its 437th rank within the Fortune Global 500 and 42nd position within the Top 50 Global Pharmaceuticals rankings. In 2016- 2021, SPH registered a 5-year CAGR of 12.3% for revenue and 7.3% for net profit (Exhibit 1). As at 2021, SPH’s net gearing has risen to 42% from 34% in FY19 (Exhibit 2).

• SPH is well-supported by a sophisticated research & development (R&D) team of >1K staffs, focusing on both innovative and generic drugs. SPH’s product portfolio includes innovative medicines, active pharmaceutical ingredients, modern traditional Chinese medicines, fine chemical reagents, and nutrition & supplements products (Exhibit 3 & 4). To date, SPH owns a total of 652 patents.

• The purpose of this JV is to manufacture and distribute pharmaceuticals, consumer healthcare products and medical devices in selective ASEAN and international markets under the brand name of the JV.

• We positively view this proposed JV as a win-win situation for both parties. Apex gets to tap on SPH’s deep pipeline of innovative pharmaceutical products and manufacturing expertise while SPH leverages on Apex’s established European Union Good Manufacturing Practice (EU-GMP) certified manufacturing facilities as well as its established market access in ASEAN market, especially in Malaysia and Singapore.

• For its 40% stake in the JV, Apex’s total investment of SG$1.2mil (or RM3.9mil) accounts for a mere 0.3% of Apex’s current market cap. We estimate that this investment would not have any significant near-term earnings impact given the relatively small scale of investment. Hence, we maintain our earnings forecasts at this juncture.

• Pending the approval of China’s regulatory authorities on the investment and remittance of funds as well as other usual procedures, the SSA is expected to be completed within 6 months. Further information on the JV may be provided in the upcoming analyst briefing in Nov 2022.

• At this juncture, Apex currently trades at a FY23F PE of 19.2x, slightly below to its 4-year average of 20x. However, we believe the valuation, below the over 25x PE range during the Covid 19 pandemic, remains compelling. Additionally, Apex is poised to benefit from current rising flu cases as well and growing public awareness of wellness and healthcare.

Source: AmInvest Research - 22 Sept 2022