Recent retracement provides good opportunity to accumulate CCMDBIO in view of its steady 7% FY17-20 EPS CAGR and decent FY18-20 3.1-3.5% DY, supported by capacity and markets expansions, strong collaborations with reputable partners and bullish sector outlook. We anticipate a bullish flag breakout to spur prices towards RM1.38-1.55 levels in the mid to long term.

The largest generic manufacturer in Malaysia. Currently, CCM Duopharma (CCMDBIO) is the first and third pharmaceutical company in Malaysia in terms of volume and value (QuintilesIMS Report 2017), respectively. CCMDBIO’s businesses are structured as follows: (i) Over-the-Counter (OTC), (ii) Ethical classic business, (iii) Ethical specialty business and (iv) International business. In FY17, approximately 92% of its revenue was derived from domestic market whilst the rest was from export (more than 20 countries). In Feb 2017, JAKIM awarded CCMDBIO the world’s first halal certification for prescriptive medicine, reinforcing its strength in the Halal sector.

Positive outlook. The Malaysian pharmaceutical market grew by 7.2% in 2017 to RM7bn (QuintilesIMS). A larger portion of this market is supplied by Innovator companies, which presents opportunities for generic companies such as CCM Duopharma to seize market share when patents expire. Besides, the new PH government has promised to increase the financial allocation to the MOH to 4% of GDP from 2% currently (c.RM27bn) within its first term. Thus on the above notion, we are positive as we can expect the volumes of drugs demanded by the market to be higher as the government is the biggest procurer in Malaysia.

Strong collaboration with reputable partners. Against this backdrop, CCMDBIO leveraged on rising collaboration in trade as well as technology transfers between pharmaceutical and biotech companies globally to make strong strides forward. In 2017, it has entered into a strategic partnership with India’s Natco Pharma Limited to offer affordable cancer products in Malaysia. The group also continued its ongoing collaboration and strategic partnerships with key biotech and pharmaceutical players such as PanGen Biotech Inc. of Korea, Biocon Ltd and Dr. Reddy’s Laboratories of India, as well as Mylan and Becton Dickinson of the USA.

Steady 7% EPS GAGR from FY17-20. Although CCMDBIO is spending a hefty capex, about c.RM320m over 2017-2019 and margins are likely to be affected by start-up costs as well as higher depreciation and interest expenses, the company is still expected to grow at 7% EPS CAGR for FY17-20, driven by its capacity expansion (increase gradually by 50% in stages by 2020) as well as expanding in high value niche therapeutic products, sustained increase in demand for pharmaceuticals from both the government and private sector as well as export markets.

Major shareholders supports to cushion downside. Following the completion of 6sen final dividend (ex-date 13 June) and 4:3 bonus issue (14 June), CCMDBIO’s prices slid 13.4% on profit taking from historical high of RM1.49 (21 Jun) to end at RM1.29 yesterday. We remain positive on the stock as share prices continue to trend above the long term uptrend, we see limited downside risks for CCMDBIO amid its earnings resilience and institutional supports from major shareholders such as PNB (46.9%) and EPF (7.3%). We see an imminent bullish flag breakout, which bodes well for further advance towards RM1.38 (23.6% FR) and RM1.49 before reaching our LT objective at RM1.55 (upper channel). Supports are located at RM1.25 (lower Bollinger band) and RM1.21 (LT support trendline). Cut loss at RM1.18.

Source: Hong Leong Investment Bank Research - 10 Jul 2018