With the recent surprise Trump win, it is widely believed that negotiations on the Trans-Pacific Partnership Agreement (TPPA) will be scrapped given Donald Trump’s stance on trade protectionism. This notion may, in fact, be a plus for generic drug makers such as CCMDBIO, as the likelihood for expiring drug patents to be extended is diminished. On-going restructuring exercise and near-term earnings pressure underpin our “NOT RATED” call and FV of RM1.96 (based on 16.5x FY17E EPS). However, over the medium to longer term, investors may expect stronger earnings growth on initiatives such as: (i) strategic partnership with PANGEN and NATCO to develop high growth areas of EPO, oncology, insulin products, and (ii) RM300m capex plans over a 5-year period to take advantage of the global “patent cliff” and enabling deeper penetration into SEA markets.

FY15 revenue jumped 52.5%, underpinned by increased demand from government hospitals via the tender business as well as 6-month contributions from the newly acquired businesses from the parent company, CCM (June-2015). Nevertheless, NP grew by a lesser extent of +3.2%, weighed by restructuring related costs. While higher distribution cost and a l gross margin are expected to remain as dampeners on earnings this year, we see efforts being made to drive medium-to-longer-term earnings growth.

Strategic partnership to develop niche bio-therapeutics. We expect prior years’ strategic partnerships with regional pharmaceutical companies to gradually come to fruition. We understand from management that CCMDBIO is focusing on areas of bio-therapeutics and Oncology, having engaged in strategic partnerships with PanGen (South Korea) to develop Erythropoietin (EPO) biosimilar treatment and Natco (India) to expand in the area of Oncology.

Transitioning into higher margin products. Although these are fast growing segments, CCMDBIO is already engaged in trading of these products which entail low margins. However, commercial production of EPO biosimilar treatment (expected end-2017) and the on-going expansion of its manufacturing assets (including Oncology products) would enable CCMDBIO to reap higher margins down the line (We estimate gross margins for manufacturing of c.50% compared to c.15% for trading).

Penetrating deeper into SEA markets. Concurrently, CCMDBIO has capex plans of RM300m over a 5-year period, which will pave the way for longer term growth. Gestation period is long, although we believe the expansion is a necessary step which will enable the Group to renew its ageing factories to achieve FDA standards, thus enabling the Group to penetrate more geographical markets. This, along with the “patent cliff” currently faced by US and European pharmaceutical companies (USD100b worth of branded drugs) places CCMDBIO in good stead to benefit from generic drugs available for manufacture.

NOT RATED with a FV of RM1.96. We have forecasted FY16 earning to come down by 31.1%. However, we are expecting a recovery of 32.6%/14.5% for FY17/FY18. We estimate dividend payments of 6.5 sen/8.7 sen/10.0 sen, in line with historical pay-out ratio of c.75% - translating to 3.1%/4.3%/4.8% dividend yield. We ascribe a fair value of RM1.96, based on 16.5x FY17E PER which is in-line with our targeted PER for Pharmaniaga. While market cap is notably smaller, we believe this valuation is justified given the stronger margins (NPM c.7.8-9.1% vs. Pharmaniaga’s 3.3%-3.4%) and higher dividend yields (4.3%-4.8% vs. 3.4%-3.7%)

Source: Kenanga Research - 15 Nov 2016