Initiation: Extra Dose of Growth From Overseas

YSP Southeast Asia is one of the top-5 listed local generic manufacturers in Malaysia. We expect increasing healthcare expenditure and growing demand for generic drugs to drive YSP’s domestic sales. At the same time, its expansion into the ASEAN region has been progressing well given the much larger population sizes of other countries compared to Malaysia. We forecast a 2016-19E EPS CAGR of 16%. We initiate coverage on YSP Southeast Asia with a BUY rating and TP of RM2.76, based on a 2017E PER of 12x.

Likely to Benefit From Growing Use of Generic Drugs in Malaysia

Driven by an average 5% annual growth in the +65-year-old population and improving healthcare coverage, Malaysia’s pharmaceutical industry has been growing at 9% annually since 2012 and is expected to register a 5-year CAGR of 9.5% for 2015-2020. As a result of escalating healthcare expenditure, we foresee a greater use of generic drugs, which in turn will benefit generic pharmaceutical companies such as YSP.

Aiming for a Bigger Pie Overseas

Currently YSP has market presence Southeast Asia countries, such as Singapore, Vietnam, Philippines, Cambodia, Myanmar, Brunei and Indonesia. The aggregate revenue contribution of overseas sales is still relatively small at 29% of total revenue, but it has been showing doubledigit growth due to: i) sales teams set up in those countries, ii) the low base, and iii) less competitive and relatively underdeveloped pharmaceutical markets. We expect these positive factors to lift its overseas growth by 20% annually in the next 3 years. Stronger-thanexpected veterinary production from its Vietnam plant and earlier-thanexpected commissioning of its Indonesia operation that produces pharmaceutical products could be earnings catalysts.

Initiating With a BUY Rating

We initiate coverage on YSP with a BUY call based on: i) a 2016-19E EPS CAGR of 16% on the back of generic pharmaceutical growth in Malaysia and YSP’s overseas operations, ii) technical and operational support from its major shareholder, YSP Taiwan, which provides it with a competitive edge in developing new generic drugs, iii) solid management execution with a net cash position and iv) better profitability and more attractive valuation than its local peers. We value YSP at a 12-month TP of RM2.76, based on a 2017E PER of 12x, at +2SD above its past-5-year average. Key risks: Competition, product recall, and pharmaceutical regulatory risk.

Source: Affin Hwang Research - 25 May 2017