· Brief background. Hovid’s roots date back to early 1940s via its specialty herbal tea better known as Ho Yan Hor, concocted by its founder, Dr Ho Kai Cheong. With the intention of helping people, Dr Ho Kai Cheong formulated a unique concoction of 24 specially chosen herbs and developed Ho Yan Hor Herbal Tea. Fast forward, Hovid now manufactures and markets more than 350 different types of generic drugs, OTCs and dietary supplements to more than 50 countries globally including Hong Kong, Singapore, Nigeria, Cambodia, Philippines, Ghana and Myanmar. Generally, export sales constituted approximately 55% of Hovid's revenue. The remaining balance of approximately 45% is derived from Malaysia. It has two manufacturing facilities in Chemor and Ipoh, Perak.

· 2Q15/1H15 results. 2Q15 revenue and pre-tax profit came in at RM48.1m (+8.4% YoY) and RM6m (+35% YoY), respectively, mainly driven by higher sales and foreign exchange gain arising from the favourable USD against the RM. Correspondingly, this brings YTD 1H15 revenue and pre-tax profit to RM97.1m (+14.4%) and RM13.7m (+30% YoY), respectively.

· Positive outlook. Hovid’s prospects are predicated on new product launches, rising demand for pharmaceutical products and the increased registrations of new products in its export markets. Amplifying the positive outlook and prospects for Hovid are: (1) the growing world pharmaceutical market, underlying demographic trends and age coupled with a rise in chronic diseases, which is supportive of long-term industry growth, and (2) next several years, which will be an exciting period for generic drug makers as patented drugs worth US$133bn in annual sales currently will expire, commonly referred to as the “patent cliff”. This enables Hovid to launch the generic versions of these drugs and expand sales. Additionally, growing healthcare spending in key markets – Malaysia and other lower-middle income economies – will also provide further growth prospects as healthcare bills in these countries are low by international standards and the rising affluence and improved access to healthcare services will fuel greater demand for drugs.

· Expansion plans to drive growth going forward. Due to higherthan- expected demand for its products, Hovid is building a new plant to ease capacity constraints for its tablets and capsules. The first phase of the new plant is expected to be ready and operational by mid-CY2015 to produce tablets and capsules and boost capacity by 30%. Note that capsules and tablets make up approximately 65% of Hovid’s revenue, while syrups and softgels make up 15%, and the balance is contributed by other products. Meanwhile, the second phase is slated for commercial production in the first half of CY2016. The total capex incurred in RM40m to be spread over FY15 until FY17 and would only be a small dent to Hovid’s net cash of RM15.6m as at 31 Dec 2014. For illustrative purposes, the first phase of expansion is expected to increase Hovid’s capacity and revenue by 30% or approximately RM30.0m.

· Valuation appears rich, Not Rated with FV of RM0.46. The stock is trading at 21.3x fully diluted FY15E and 18.5x FY16E EPS which appears fair-to-rich because: (i) it offers an average 18% net profit growth in both FY15 and FY16, and (ii) compared to other closest comparable listed peers, its PER valuation appears rich. Note that closest listed peers, including YSP Southeast Asia, CCM Duopharma Biotech and Pharmaniaga are trading at between 13x-19x PERs. We value the stock at 46.0 sen based on 16x FD FY16E EPS, inline with peers’ average. (Note that fully-diluted assumed the conversion of warrants.)

Source: Kenanga Research - 26 May 2015