20170717-招商证券_香港_-药明生物-02269.HK-Empowering_a_Bio-rilliant_Future_57页_4mb_4mb

Wuxi Biologics (2269 HK) Summary

Core Content

Wuxi Biologics is a leading biologics outsourcing platform in China, offering end-to-end services in drug discovery, development, and manufacturing. The company is positioned to benefit from the growing global and Chinese biologics markets, which are expected to expand significantly over the next few years.

Main Points

• Market Growth: The global biologics outsourcing market is expected to grow at a CAGR of 18%, reaching US$17bn by 2020E from US$7bn in 2015. The global biologics market itself is projected to grow at a CAGR of 9%, expanding from US$205bn in 2015 to US$315bn in 2020E.
• China's Market: China's biologics market is growing rapidly, from RMB120bn in 2015 to RMB276bn in 2020E at a CAGR of 18%. The market is supported by rising disposable income, expanded medical insurance coverage, and the emergence of affordable biosimilars.
• Outsourcing Strategy: Wuxi Biologics employs a "follow-the-molecule" strategy, aligning its revenue growth with the development stages of its clients' drugs. This allows for increasing income as projects progress from discovery to commercialization.
• Competitive Position: Wuxi Biologics is one of the few companies offering end-to-end biologics outsourcing services, differentiating itself from specialized competitors like CROs, CMOs, and CDMOs. It has a 1.2% market share in the global biologics outsourcing market in 2015.
• Financial Outlook: The company is projected to see strong revenue and profit growth, with adjusted net profit expected to increase by +91% / +62% / +77% YoY in FY17E-19E. Revenue is forecasted to grow from RMB557mn in 2015 to RMB4,024mn in 2019E.
• Valuation: The target price is set at HK$35.2, based on a 1x 2018E PEG valuation, assuming a 58% CAGR in diluted EPS over FY18E-20E. The valuation includes EV/adj. EBITDA of 38x / 23x and PER of 58x / 34x for FY18E and FY19E respectively. Other valuation methods like SOTP and DCF are also referenced.
• Valuation Drivers: The company's growth is driven by expanding backlog, growing service revenue, and incoming milestones. However, CMO income and royalties will only contribute to revenue from 2019 onwards.
• Key Advantages: Wuxi Biologics has proprietary cell line engineering, customizable manufacturing capacity, and diversified client base, which give it a sustainable competitive edge.
• Policy Support: China's regulatory reforms, including the MAH (Marketing Authorization Holder) program and green channel for foreign biologics, are expected to boost the growth of biologics outsourcing services in the country.

Key Information

Market Trends

• Global Biologics Market: US$205bn in 2015, expected to grow to US$315bn by 2020E at a CAGR of 9%.
• Global Biologics Outsourcing Market: US$7bn in 2015, expected to reach US$17bn by 2020E at a CAGR of 18%.
• Outsourcing Penetration: Only 14% of the global biologics market was outsourced in 2015, indicating significant growth potential.
• China's Biologics Outsourcing: The market is expected to grow at a CAGR of 18% to RMB276bn in 2020E, supported by policy reforms and expanding coverage of biologics in the National Drug Reimbursement List (NDRL).

Business Model

• "Follow-the-molecule" Strategy: Revenue grows as the molecule progresses through development and commercialization stages, with the "jackpot" being CMO income and milestones/royalties.
• Client Retention: The company has a high client retention rate, with top five clients showing strong revenue growth annually.
• Diversified Customer Base: Clients are spread across key geographies, reducing dependency on any single region.

Financial Highlights

• Revenue Growth: Expected to increase from RMB557mn in 2015 to RMB4,024mn in 2019E, with YoY growth rates of +54% in 2018E and +71% in 2019E.
• Adjusted Net Profit: Projected to grow from RMB71mn in 2015 to RMB1,210mn in 2019E, with YoY growth of +91% / +62% / +77% in FY17E-19E.
• EPS Growth: Fully diluted EPS is expected to rise from HKD0.25 in 2016 to HKD1.05 in 2019E.

Valuation

• Target Price (TP): HK$35.2 (a +9% increase from current price).
• PEG Valuation: Based on a 58% CAGR in diluted EPS, the TP is set at 1x 2018E PEG.
• EV/adj. EBITDA: 38x / 23x for FY18E and FY19E.
• PER: 58x / 34x for FY18E and FY19E.

Investment Risks

• Weak Demand: Revenue depends on pharma and biotech R&D and manufacturing spending.
• Execution Risks: Includes project failure, lower client retention, slow capacity expansion, and milestone failures.
• Competition Risk: Faces competition from CDMOs, CMOs, and CROs, as well as in-house capabilities of pharma companies.
• Reputation Risk: Involves non-compliance with regulations and breach of IP.
• Staff Risk: Potential difficulty in retaining or hiring key staff.
• Related Party Transaction Risk: Involves significant transactions with related parties, including R&D services, materials, and interest expenses.
• Two-Tier Shareholding Structure: Founding individuals hold 20.83% economic interest and 56.82% voting power, affecting corporate governance.

Conclusion

Wuxi Biologics is well-positioned to benefit from the expanding biologics market, increasing R&D spending, and policy tailwinds in China. Its end-to-end outsourcing platform and proprietary technologies give it a unique competitive advantage. With strong financial growth projections and attractive valuation metrics, the company is considered a BUY recommendation. However, execution risks and competition remain key challenges.