20150813-DBS_Group-IVD_business_to_drive_strong_growth_ahead_11页_282kb

DBS Group Equity Research Summary: Yestar International

Core Content

Yestar International is a company primarily engaged in the healthcare sector, with a focus on the in-vitro diagnostic (IVD) business. The research report from DBS Group dated 13 August 2015 outlines a BUY recommendation with a price target of HK$4.27, which represents a 37% upside from the last traded price of HK$3.11. The report highlights the potential for strong earnings growth driven by the IVD business and ongoing M&A opportunities.

Main Points

1. Earnings Growth

• Yestar's 1H15 results show a 49% year-over-year increase in revenue to Rmb999.5m and a 64% increase in gross profit to Rmb179.5m.
• The IVD business has become a key growth driver, contributing approximately 30% of earnings in 1H15.
• The IVD business is expected to drive a 47% CAGR in EPS from 2014 to 2017.
• Starting from 2016, the IVD distribution business is projected to account for over 50% of earnings.

2. M&A Opportunities

• Yestar has acquired a distributor of Roche's IVD devices in Jiangsu and Anhui provinces in November 2014, and another in Shanghai in August 2015.
• The Shanghai acquisition is expected to contribute Rmb28m in earnings, which is 16% of 2015F earnings.
• The company is believed to be in discussions with one or two M&A targets, which could act as a strong catalyst for share price growth.

3. Valuation and Financial Metrics

• The price target (HK$4.27) is based on the sector average 12-month forward PE of 31x.
• EPS (HK$) is projected to grow from 0.07 in 2014A to 0.19 in 2017F.
• Net profit (HK$) is expected to rise from HK$101m in 2014A to HK$346m in 2017F.
• P/Book Value (X) is projected to decrease from 15.0 in 2014A to 3.5 in 2017F.
• EV/EBITDA (X) is expected to drop from 28.0 in 2014A to 8.0 in 2017F.

4. Business Segments

• Color photographic paper revenue is expected to grow at 7.7% in 2015F and 2.8% in 2017F, with a gross margin of 21.7% in 2015F and 22.3% in 2017F.
• Medical imaging products revenue is projected to increase by 20.7% in 2015F and 21.6% in 2017F, with a gross margin of 12.4% in 2015F and 13.4% in 2017F.
• In-vitro diagnostic products distribution is expected to grow significantly, contributing Rmb883m in 2015F and Rmb2,140m in 2017F, with a gross margin of 27.1% in 2015F and 30.2% in 2017F.

5. Risk Factors

• Slower M&A progress could negatively impact earnings growth.
• Price cuts in medical film and color photographic paper could create gross margin pressure.
• The Central government's policy to reduce drug sales by public hospitals may increase demand for IVD services, but it could also create market competition.

Key Information

• Major Shareholders: Hartono family holds 61% of shares.
• Free Float: 39%.
• 3m Avg. Daily Valuation (US$m): 3.0.
• Market Cap (HK$m/US$m): 5,749 / 741.
• Net Debt/Equity (X): CASH in 2014A, CASH in 2015F, CASH in 2016F, and CASH in 2017F.
• ROAE (%): 31.1 in 2014A, 23.6 in 2015F, 22.4 in 2016F, and 23.1 in 2017F.

Peer Comparison

Summary of Financial Highlights

• Revenue Growth: Expected to increase from Rmb1,173m in 2013A to Rmb4,343m in 2017F.
• EBITDA Growth: Projected to rise from Rmb166m in 2013A to Rmb658m in 2017F.
• Net Profit Growth: Expected to grow from Rmb101m in 2014A to Rmb346m in 2017F.
• Gross Margin: Expected to increase from 17.2% in 2013A to 23.4% in 2017F.
• Operating Profit Margin: Projected to rise from 9.7% in 2013A to 14.5% in 2017F.
• Net Profit Margin: Expected to increase from 6.6% in 2013A to 8.0% in 2017F.
• ROAE: Projected to decrease from 31.1% in 2014A to 23.1% in 2017F.
• Net Cash: Expected to reach Rmb29m in 2015F, Rmb902m in 2015F after the June share issue, and Rmb495m in 2017F.

Conclusion

Yestar International is positioned for strong growth in the IVD business, with a 47% CAGR in EPS expected over the 2014-2017 period. The company's M&A strategy is seen as a key driver of future performance, and the BUY recommendation is based on the company's favorable valuation and potential for earnings upgrades. However, the report also highlights risks such as slower M&A progress and price cuts in its core products.