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Kimia Farma (KAEF IJ) Summary

Core Content

Kimia Farma (KAEF IJ) is an Indonesian state-owned pharmaceutical company that is positioned to benefit significantly from the National Health Insurance (NHI) expansion. The company's current share price is IDR975, with a target price of IDR1,200, indicating a potential 23% increase. Its market capitalization is USD394M, with an average daily trading volume of USD0.3M.

Main Points

• NHI Growth Potential: The continuous expansion of NHI is expected to drive growth in the unbranded generic drugs market, with KAEF gaining market share. The segment's domestic moving annual value (ex-vaccine) increased by 17% YoY in 2Q15, significantly outperforming branded generics (+3% YoY). KAEF's generic drug sales grew by 34% YoY in Jun15, capturing 12% of the market share, second only to Hexpharm (16%).

• Market Share and Strategy: KAEF is one of the major producers of unbranded generics and owns the most extensive pharmacy chain in Indonesia. It plans to expand its retail presence by adding 100 stores annually, with clinics and laboratories, to meet the growing healthcare demand driven by NHI.

• Integrated Healthcare Strategy: KAEF aims to become an integrated healthcare company by expanding into raw materials, medical devices, and hospital operations. It has started a pharmaceutical salt factory by the end of 2015F and has several projects in the pipeline, including production of APIs and medical devices.

• Potential for Expansion: The company is looking into a rights issue to fund its expansion into new business areas, such as raw materials and hospitals. It also plans to use idle assets for partnerships with third parties to generate additional income.

• Financial Performance: KAEF's financial metrics show consistent growth in revenue and EBITDA. Its core net profit and EPS have increased steadily, with a target P/E ratio of 22x for FY16F. The company has a strong ROAE and ROAA, indicating good profitability.

• Key Financial Metrics (FYE Dec)

• Growth Drivers

  • Market share gain in the unbranded generic segment due to NHI expansion.
  • Rapid expansion of its pharmacy/clinic business to capture growing healthcare demand.
  • Long-term strategy to become an integrated healthcare company through raw materials, medical devices, and hospital ventures.
  • Continuous efficiency improvements and potential for additional income from idle assets.

• Risks and Challenges

  • Government price caps on unbranded generic drugs pose margin risks.
  • Volatility in raw material prices and currency exchange rates (~95% of raw materials are imported).
  • Reliance on external funding for expansion projects.

• Recent Developments

  • KAEF is building a new generic drug factory in Banjaran, West Java, which will increase total capacity by ~300%.
  • The company is adopting an asset-light strategy for retail expansion, with only ~15% of stores self-owned.
  • KAEF is planning to have three hospital units (Jakarta, Bali, Makassar) with 200 beds each.

Key Information

• KAEF is a major player in Indonesia's unbranded generic drugs market, with a strong potential for growth as NHI expands.
• The company is diversifying into raw materials and medical devices to strengthen its position in the healthcare sector.
• It is expanding its retail presence through pharmacy and clinic operations, which are expected to benefit from increased healthcare demand.
• KAEF has a strong financial performance, with consistent revenue and profit growth.
• The company's target price of IDR1,200 reflects its growth potential and is based on a 22x P/E ratio for FY16F and +1 SD of the historical mean.
• There are potential risks from government policy changes and currency fluctuations, which may impact margins.