We initiate coverage on CCM Duopharma Biotech Bhd, a leading generic drug manufacturer in Malaysia, with a BUY recommendation and TP of RM2.45/share. Key highlights include:

Leading Generic Drug Player in Malaysia. The pharmaceutical industry thrives on a growing and ageing population, growing affluence and the rising prevalence of non-communicable diseases. In Malaysia, the group ranks 1st in terms of sales volume and 3rd both in terms of market share and sales value.

Opportunities from Emerging ‘Patent Cliff’. For the years to come, the expiry of patents of many blockbuster drugs developed by foreign companies will present opportunities for local generic drug manufacturers. As it is, Malaysia is still heavily reliant on imports with ~70% of its pharmaceutical needs imported.

Evolving Product Portfolio. Looking to stay ahead of the curve, in recent years, the group has been focusing on high value products in niche therapeutic areas such as cardiology, diabetes, oncology and renal. This includes biosimilars, a fast-growing segment within the pharmaceutical industry. Today, the group has two of the largest biosimilars in Malaysia, erythropoietin and insulin, under its belt.

Preparing for the Future. To facilitate future growth and expansion into specialty products, the group is rationalising and upgrading its manufacturing facilities into state-of-the-art facilities with enhanced current Good Manufacturing Practices under its Manufacturing Optimisation Strategy which is expected to complete by 2020.

Earnings Growth and Decent Dividend Yield. For FY17/FY18/FY19, we project earnings growth of 31.6%/7.4%/8.0% on the back of sustained growth in demand for pharmaceuticals from the government and private sector as well as export markets. Besides, dividend yields are decent, estimated at 3.9%/4.2%/4.4%.

Deserves a Premium. We opine that our target PE of 18.0x versus domestic peers of 15.0x is reasonable, notably with the encouraging development the group has been making with its foray into high value niche therapeutic areas.

Source: TA Research - 6 Nov 2017