Incremental rev opportunity of new LOI for CMO contract
SSY on Dec 18th announced Co. has entered into a LOI with a Chinese pharmaceutical company to manufacture Ibuprofen sustained-release tablets and pediatric paracetamol granules with an annual volume of 1- 2.5bn tablets and 65mn bags respectively. Co. now has a manufacturing capacity of oral administration drugs up to 3.5bn pills/tablets, but only achieved ~30% utilization rate as Co. expects to receive more drug approvals in the coming years. We believe the execution of the potential CMO contract will allow the earlier-than-expected full utilization of the Co.'s capacity in 2023E. We thus reckon this should add a potential of HKD300-500mn incremental revenue for 2023E and has the potential to improve the segment GPM thanks to improving utilization rate.
IV infusion might benefit from the easing COVID policies
We expect China’s recent easing COVID-19 policies might benefit Co.’s IV infusion and COVID-related products lines in 2023E. We reckon the IV infusion growth should be supported by the pent-up demand of elective surgery in China after returning to normality. We forecast IV infusion business to grow 21% yoy to HKD4.5bn for 2023E, o/w therapeutically IV products should grow at a faster pace. In addition, we think Co.’s Arbidol sales should be benefitted as it is included in the eased epidemic-related drugs list of 174 drugs for antipyretic, cough, antiviral, and antibacterial.
Maintain BUY, SOTP-based TP upgraded to HKD5.6
We revised down FY22E adj. NP by 4% due to RMB depreciation and weaker Caffeine demand. But we upgraded 23E adj. NP by 3% to reflect the stronger growth outlook for FY23E, thanks to incremental revenue from CMO contracts and robust growth of IV infusions. We rolled forward to FY23E valuation basis and upgraded SOTP TP to HKD5.6 from HKD4.4. With ~30% earnings CAGR outlook in FY21-23E, current valuation trading at 9x FY23E P/E with 4% FY23E div yld, offering attractive risk/reward in our view. Investment risks: VBP risk, COVID disruption, unfavourable ASP of bulk products.