20140804-Maybank_KERPL-Solid_business_in_a_growing_industry_41页_1mb

Summary of DHG Pharma (DHG VN)

Core Content

DHG Pharma (DHG VN) is a leading pharmaceutical company in Vietnam, listed on the Ho Chi Minh Stock Exchange (HSX). It is currently trading at VND94,500 per share, with a target price of VND115,600, implying a 22% upside. The company has a market capitalization of USD387m and an average daily trading volume of USD0.2m. The investment rating is BUY, indicating strong growth potential and favorable fundamentals.

Main Points

Industry Positioning

• DHG is among the top 3 pharmaceutical companies in Vietnam, with a market share of 10–11% of locally produced medicines.
• It is the only local manufacturer in the top 5 companies by revenue, behind international giants Sanofi and GSK.
• The Vietnamese pharmaceutical industry is part of the 'pharmerging markets' and is expected to double spending on medicines from 2013–2017, outperforming global growth trends.

Growth and Profitability

• DHG has shown strong growth over the past years, with sales and earnings growing at 18.9% and 35.5% CAGR respectively from 2008–2013.
• The company is projected to maintain an average NPAT growth above 15% per annum until 2018.
• DHG's profitability is robust, with an average net margin of 17.8% and ROE of 25.7% in 2009–2013.
• It has a strong ROAE of 32.1% in FY13, significantly higher than its regional peers.

Capacity Expansion

• DHG will double its production capacity to 9.5b units per year by 2014, through the construction of two new factories (Non-Betalactam and Betalactam).
• These factories will benefit from a preferential corporate income tax rate of 4% over 15 years, compared to the normal rate of 20–22%.
• The company is also investing in a factory in Myanmar, aiming to gain 70% exposure in a joint venture to serve the growing market there.

Competitive Advantages

• DHG has a size advantage, being the largest domestic pharmaceutical company in Vietnam.
• It has a strong distribution network, reaching over 20,000 direct sales points across all 64 provinces.
• The company has excellent relationships with pharmacists and doctors, supported by its marketing and branding initiatives.
• Its tax advantage allows significant savings, which are expected to exceed the total investment in the new factories.
• DHG's branding strategy includes 12 core brands, with notable products such as Hapacol, Klamentin, and Eyelight.

Dividend Policy

• DHG has historically prioritized business expansion over dividends, with a payout ratio around 40%.
• The effective cash dividend per share is higher than the nominal due to share dividends (e.g., 1-1 or 3:1).
• With increased production capacity, the company is expected to increase its annual cash dividend, leading to a more attractive dividend yield.

Strategic Initiatives

• DHG is focusing on organic growth and M&A to solidify its market leadership and enhance its growth potential.
• The company is exploring export markets, especially in Japan and the EU, and has already begun the process of obtaining GMP certification.
• It is also diversifying its product portfolio, with notable growth in natural enzyme-based products like NattoEnzym and Naturenz.

Key Information

Financial Highlights (FY13A to FY16F)

Ownership Structure

• State Capital & Investment Corp. holds 43% of shares.
• Templeton Asset Management and Portal Global hold 13% and 7% respectively.
• Institutional investors hold 93% of shares, indicating a stable and long-term investment base.

Strategic Focus

• OTC channel is prioritized due to less regulation and faster receivables.
• DHG is expanding its international footprint, especially in Myanmar and potential EU/Japan markets.
• The company is investing in R&D and product development, particularly in natural enzyme-based medicines.

Conclusion

DHG Pharma is well-positioned to benefit from the growing Vietnamese pharmaceutical industry, supported by its strong fundamentals, extensive distribution network, and strategic capacity expansion. The company's management is prudent and market-oriented, leading to consistent profitability and growth. With the tax incentives and plans for M&A and international expansion, DHG is expected to further solidify its market leadership and enhance its value proposition.