We are of the view that YSP Southeast Asia (YSP) is well-positioned to capture on new developments in the pharmaceutical sector, i.e. liberalisation in contract procurements and a new health scheme. Meanwhile, we continue to like the YSP for its undemanding valuations (trading at 9.4x P/E, below 5-year mean of 11x), export-driven growth and improving sector prospects. Maintain BUY, with our TP of RM3.70 unchanged (derived based on a 14x target P/E multiple on 2019E EPS).

Liberalisation of MoH Procurement Contracts – a Boon to YSP

Based on YSP’s past track record of securing contracts from the Ministry of Health’s (MoH), its chances have been low, i.e. less than 1% out of the government’s annual spending of RM4bn. However, positively, with the potential liberalisation of MoH’s procurement process, this implies that there is potentially further upside to securing more of these contracts. Based on our estimates, an additional RM10m in revenue from new contracts could potentially raise our FY19 EPS estimate by 5%. YSP’s overall competitiveness, including an operating margin of 11.4% (2nd

Highest Among Listed Peers) Lends Further Credibility to Its Chances.

New Health Scheme Could be a Boost to Generic Producers

Potential implementation of a new health scheme, Peduli Sihat, could prove to be an immediate boon to private pharmaceutical spending. It is expected to drive demand for generic drugs, benefitting generic producers such as YSP. To recap, the scheme involves assistance of RM500 annually to each B40 households nationwide. The pharmaceutical component could amount to ~RM500m or 10% of existing RM5bn of private pharmaceutical spending.

Maintain BUY Rating and TP of RM3.70

Current valuations appear undemanding at a 9.4x FY18E P/E multiple, below both its 5-year historical P/E average of 11.0x (on a forward-basis) and peer average of 13.0x (Figure 9). We believe that our target price of

RM3.70, based on an unchanged target P/E of 14x (+1 std of 5-year average) on 2019E EPS more appropriately captures YSP’s improving underlying value, whereby catalysts will be driven by a potentially increasing export market (41% of total revenue by FY20E) in the foreseeable future. Maintain BUY.

Liberalisation of MoH Procurement Contracts – a Boon to YSP

Based on YSP’s past track record of securing contracts from the Ministry of Health’s (MoH), its chances have been low, i.e. less than 1% out of the government’s annual spending of RM4bn. Based on management’s guidance, the group secures approximately RM20m p.a. in revenue from government contracts, and this make up close to 80% of YSP’s hospital channel revenue or 10% of the group’s revenue. The remainder are the GPs and Pharmacies segment, veterinary and OTC contributing to 65%, 15% and 10% of revenue, respectively.

Every Additional RM10m Revenue Translates Into +5% EPS Impact

However, positively, with the potential liberalisation of MoH’s procurement process, this implies that there is potentially further upside to securing more of these contracts. Based on our estimates, an additional RM10m in revenue from new contracts could potentially raise our FY19 EPS estimate by 5%. Nonetheless, we have not factored-in additional contracts wins from the government while awaiting for more concrete announcements. The review process should conclude prior to the existing concession expiring in Nov 2019.

Existing Competitive Position Suggests Greater Win Rate

Based on pharmaceutical industry report from the Malaysian Competition Commission, pharmaceutical companies are broadly distinguished between licensed importers and local manufacturers (of which includes local listed companies such as YSP, Apex Healthcare, Hovid and Kotra). Within the industry, YSP already commands a respectable 2.9% market share of licensed drug companies in Malaysia (Figure 1) despite competing against the likes of Merck, Pfizer and Bayer. Comparing against its local listed peers, YSP’s operating margins are only second to CCM Duopharma (Figure 2). It would suggest, by sheer competitiveness and merit, YSP could possibly command a greater slice of MoH contracts as opposed to its current <1% win rate. In addition, it does not take into account for government’s inclination for more affordable generic drugs relative to branded drugs. This could further tilt the scales in favour of YSP.

Further Upside to Generic Prescription Drug Application

Malaysia has experienced a gradual shift of pharmaceutical sales towards prescription drugs (Figure 3) and in particular, generic prescription drugs (Figure 4). While total generic sales value making up 56% of prescription drugs, generic drugs is said to account for 70% of market share by volume. This remains relatively undersaturated with generic drugs commanding 89% market share in the US in 2015.

A New Health Scheme Could be a Boost to Generic Producers

The new Pakatan Harapan-led government intends to rollout a new health scheme, Peduli Sihat within its first 100 days in government. However, the health policy remains undetermined given the deliberation over the government’s fiscal position. This scheme involves assistance of RM500 annually to each B40 households nationwide (bottom 40% of Malaysian households by income). It both supplements and enables ease of access to primary healthcare services at private hospitals and clinics. This amount is in the region of RM1.3bn, based on approximately 2.7m B40 households in 2015. Once adjusted for the best case floor price of consultation fees, pharmaceutical component of the RM1.3bn could amount to ~RM500m. It would be an immediate boost to the existing RM5bn of private pharmaceutical spending. This would advertently benefit the smaller generic producers with a larger exposure to the private sector such as YSP.

Undemanding Valuations

In tandem with the group’s burgeoning export licenses (>1,000), it is expected to gradually drive exports sales. These export licenses well position YSP to tap prospective markets with greater population masses (Figure 6) and lower healthcare expenditure/capita (Figure 5), underpinning growth for the foreseeable future. Coupled with export sales as an increasingly significant component of revenue (Figure 7), we imagine for YSP valuations to eventually rerate, reflecting greater diversification and strong export driven growth prospects. Current valuations of 9.4x, trading below both its 5-year historical forward PE mean of 11.0x and its peers 13.0x (Figure 9) unfairly discounts YSP. Instead, we believe our target price of RM3.70 based on an unchanged target PE multiple to 14x 2019E EPS (+1 std of 5-year average) more appropriately captures YSP’s improving underlying value.

Source: Affin Hwang Research - 12 Jul 2018