Tuesday, March 20, 2018

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

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Wuxi Biologics (2269 HK) Invest to be the best ■ 2017 rev/adj. NP beat consensus by 5%/9% (but in line with our

est.), reflecting strong growth in service and milestone revenue;

other good news including solid market share gain, steady backlog

growth and late-stage projects increase

■ Meanwhile, the greater depreciation charges from higher CAPEX

in 18-19 and a weaker USD forced us to lower 18/19E EPS

■ Nevertheless, we believe Company’s investment will be duly

rewarded by higher CMO revenue, and the currency risk is more of a

passing nature; upgraded TP to DCF-based HK$83.8 (c.2x PEG);

reiterate BUY

Many positive surprises in financials, backlog 2017 revenue grew 64% to RMB1,619mn and adjusted NP grew 85% to

RMB408mn (non-GAAP) . The drivers were strong service revenue (up 63%),

milestone (up 70%), and efficiency gains. Meanwhile, three-year service

backlog continued to grow to US$557mn (up 28% from 1H) and potential

milestone surged to US$1bn (from US$33mn in 1H). This reflects solid

progression in integrated projects (the number of late-stage pipeline grew

from 6 in June to 8 in December) and successful deal-making (like the one

with Arcus which contributed the total milestone of US$816mn).

Aggressive CAPEX plans to whiz through capacity bottleneck Management now forecast that the utilisation rate in its newly installed

30,000L CMO capacity will reach 80% in 2019, and is planned to more than

triple its bioreactor capacity to 111,700L over 2018-20. We believe

Company’s visibility on demand should justify such investment. Nevertheless,

the higher depreciation charges linked to the significant CAPEX

(c.US$800mn in 2018-19) could weigh on earning growth in the near-term.

TP upgraded on more positive long-term outlook We trimmed 2018/19E EPS by 9%/6% on higher depreciation charge and

currency headwind (as flagged in the last note; we now assume a more

cautious USD:RMB exchange rate of 6.3 in 2018-19). We nevertheless

upgraded TP to HK$83.8 to reflect potentially greater CMO revenue and

milestone income post 2020, which should also boost its long-term growth

(we integrated longer high growth period in the model). Our TP translates into

c.2x PEG, justified on Wuxi Bio’s leading biotech enabling platform.

Financials

RMB mn 2015 2016 2017 2018E 2019E

Consolidated revenue 557 989 1,619 2,542 4,743

% YoY change 68% 78% 64% 57% 87%

Adjusted net profit 71 221 408 639 1,213

% YoY change 53% 209% 85% 57% 90%

EPS Fully diluted (HKD) 0.00 0.25 0.42 0.63 1.19

PER adj (x) n.a. n.a. 118.8 120.6 63.8

PBR (x) n.a. n.a. 13.2 16.6 13.2

Dividend yield (%) n.a. n.a. 0.0 0.0 0.0

Sources: Company data, CMS (HK) estimates

Su Zhang

+852 3189 6357

suzhang@cmschina.com.hk

WHAT’S NEW

TP/estimates upgraded

BUY

Previous

BUY

Price HK$75.7

12-month Target Price (Potential upside)

HK$83.8 (+11%)

Previous HK$65.2

Price Performance

Source: Bigdata

% 1m 6m 12m

2269 HK 42.3 88.9 155.2 HSI 1.3 12.3 29.6

Sector: Pharmaceutical & Healthcare

Hang Seng Index 31550

HSCEI 12597

Key Data

52-week range (HK$) 25.9-81.8

Market cap (HK$ mn) 88,223

Avg. daily volume (mn) 2.91

BVPS (HK$) 3.63

Shareholding Structure Wuxi Biologics Holding 62.4%

Management 4.7%

Free float 32.9%

Related Research

1. Wuxi Biologics (2269 HK) - Positive profit alert: Strong

execution made the year (BUY), 2018/03/06

2. China Pharmaceutical & Healthcare – CMS China healthcare

sector outlook 2018 (OVERWEIGHT), 2018/01/05

3. Wuxi Biologics (2269 HK) - Main NDR takeaways: IP value and

pricing power (BUY), 2017/09/05

4. Wuxi Biologics (2269 HK) - No rest over the summer months

(BUY), 2017/08/24

5. Wuxi Biologics (2269 HK) - Empowering a Bio-rilliant Future

(BUY), 2017/07/17

-50

0

50

100

150

200

Jun/17 Oct/17 Jan/18

(%) 2269 HSI

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Focus charts

Figure 1: Market share of global biologics outsourcing services Market by revenue in 2017

Figure 2: Market share of China’s biologics outsourcing services based on revenue in 2017

Source: Frost & Sullivan Sources: ContractPharma

Figure 3: Revenue breakdown and forecasts Figure 4: Margin trend and forecasts

Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates

Figure 5: PE band Figure 6: Consensus worms

Sources: Bloomberg, CMS (HK) estimates Sources: Bloomberg, CMS (HK) estimates

0%

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2014A 2015A 2016A 2017A 2018E 2019E

(% YoY)(RMB mn)

CMO

Royalty

FFS (Milestone)

FTE (full-time-equivalent)

FFS(fee-for-services)revenue ex milestone

Total YoY Change (RHS)

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32%

34%

36%

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42%

0

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2014A 2015A 2016A 2017A 2018E 2019E

(RMB mn) Gross Profit (LHS) Gross Profit Margin (RHS)

15

25

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45

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6/12/2017 8/12/2017 10/12/2017 12/12/2017 2/12/2018

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07/17 08/17 09/17 10/17 11/17 12/17 01/18 02/18 03/18

(EPS RMB) Worm Chart - Wuxi Biologics 2269 HK

2018

2017

CMS FY19E

CMS FY18E

2019

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Figure 7: Solid backlog increase

Source: Company

Figure 8: Rapid capacity addition plan

Source: Company

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Figure 9: Earnings estimates Old vs New (RMB mn) –––––––––––– 2018E –––––––––––– –––––––––––– 2019E ––––––––––––

Income statement Before After Delta %

Change Before After Delta

% Change

Consolidated revenue 2,428 2,542 115 4.7% 4,551 4,743 192 4.2%

COGS (1,486) (1,585) (99) 6.7% (2,781) (2,949) (168) 6.0%

Gross profit 942 957 16 1.7% 1,770 1,795 25 1.4%

( – ) Total SG&A expense (206) (236) (30) 14.6% (387) (408) (21) 5.4%

Administrative expenses (182) (198) (16) 8.9% (341) (346) (5) 1.4%

Selling and distribution costs (24) (38) (14) 57.1% (46) (62) (16) 35.5%

(+/-)Other income/loss 31 41 10 31.0% 58 76 18 30.4%

( – ) R&D (102) (112) (10) 9.7% (191) (204) (13) 6.7%

EBITDA adjusted 1,040 1,012 (28) -2.7% 1,708 1,896 188 11.0%

( – ) Total Depreciation and amortisation (230) (210) 20 -8.7% (230) (400) (170) 73.9%

O/W: Stock-based comp (146) (153) (7) 4.7% (228) (237) (10) 4.2%

EBIT adjusted 810 802 (8) -1.0% 1,478 1,496 18 1.2%

( +/– ) Finance (expense)/income - net 35 (37) (72) -204.8% 70 (43) (113) -160.8%

( +/– ) Profit from JV & Asso. - - 0 n.a. - - 0 n.a.

( +/– ) Other income/expense, gains/losses

- - 0 n.a. - - 0 n.a.

Profit before tax 700 613 (87) -12.4% 1,321 1,216 (104) -7.9%

( – ) Tax (139) (126) 13 -9.5% (255) (240) 16 -6.1%

( +/– ) Minority interest - - 0 n.a. - - 0 n.a.

Net profit attributable to shareholders 560 486 (74) -13.2% 1,065 976 (89) -8.3%

Adjusted net profit 706 639 (67) -9.5% 1,293 1,213 (79) -6.1%

Adj EPS Fully diluted (RMB) 0.56 0.51 (0.05) -9.5% 1.03 0.96 (0.06) -6.1%

Adj EPS Fully diluted (HKD) 0.65 0.63 (0.02) -3.0% 1.18 1.19 0.01 0.6%

Margins (%)

p.p.

p.p.

Gross Margin 39% 38% -1

39% 38% -1

Adjusted EBITDA Margin 43% 40% -3

38% 40% 2

Adjusted Net Profit Margin 29% 25% -4

28% 26% -3

YoY Growth (%)

Consolidated revenue 56% 57% 1

87% 87% -1

Gross profit 54% 45% -9

88% 87% 0

Adjusted EBITDA 69% 59% -11

64% 87% 23

Adjusted net profit 74% 57% -18

83% 90% 7

Source: Company, CMS (HK)

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Valuation

DCF

The DCF approach arrived at an equity value of RMB87,082mn, which translates into the equity valuation of HK$83.8 per share, based on 11.5% WACC and 5% terminal growth.

Figure 10: WACC assumption

Cost of equity (%)

Risk free rate (%) 3.2

Beta 1.0

Equity risk premium (%) 8.3

CAPM unleveraged discount rate 11.5

Cost of debt (%)

Average spread over risk-free rate (%) 1.6

Pre-tax cost of debt (%) 4.8

Average corporate tax rate for company (%) 16.5

Post-tax cost of debt (%) 4.0

Estimated target gearing (net debt/EV) (%) -

WACC (%) 11.5

Sources: CMS (HK) estimates

Figure 11: DCF details (RMB mn)

Source: CMS (HK)

High Growth Phase

Year 1 2 3 4 5 6 7

FY 2018 2019 2020 2021 2022 2023 2024

EBIT Adjusted 802 1,496 2,484 3,380

% YoY 86% 66% 36%

NOPAT (EBIT*(1-t)) 670 1,249 2,074 2,822

Add: Depreciation and amortization 210 400 700 700

Less: Capital Expenditures (2,205) (2,646) (600) (600)

Less: Net Working Capital (176) (423) (421) (495)

FCFE (1,501) (1,420) 1,753 2,428 3,253 4,359 5,841

% YoY -5% -224% 38% 34% 34% 34%

PV (1,346) (1,142) 1,265 1,571 2,726

Transitional Growth Phase

Year 8 9 10 11 12 13 14

FY 2025 2026 2027 2028 2029 2030 2031

% YoY Growth 30% 26% 22% 17% 13% 9% 5%

EBIT*(1-t)

Add: Depreciation and amortization

Less: Capital Expenditures

Less: Net Working Capital

FCFE 7,585 9,535 11,592 13,613 15,421 16,831 17,673

PV 3,175 3,580 3,903 4,111 4,177 4,088 3,850

End-of-Life Index - - - - - - 1

Stable Growth Phase

Year 15

FY 2032

FCFE in terminal year = 17,673

Price at the end of growth phase = 285,486

Present Value of FCFE in high growth phase = 4,420

Present Value of FCFE in transition phase = 26,884

Present Value of Terminal Price = 55,778

Intrinsic Value = 87,082

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PEG valuation

Our financial model estimates that the adjusted net profit should grow 71% CAGR and the diluted EPS should grow 65% CAGR over 2018-20E. Applying a discretionary 2.0x PEG would suggest 130x forward PER. Meanwhile, we note that the PEGs are generally 0.9-1.3x for overseas CMO/CRO peers and 0.6-1.7x for Chinese CMO peers, calculated as 2018E PER over the EPS CAGR of 2018-19E.

Figure 12: PEG valuation summary

CAGR 2018-20

Adj. net profit growth 71%

Diluted adj. EPS growth 65%

2018E PER based on 2x PEG 130x PER

Valuation per share (HKD) 81.8

Sources: CMS (HK) estimates

Peers’ comparison table

We don’t think there is a direct peer comparable to Wuxi Biologics. Still, here are the multiples of the leading players in the CDMO/CMO business for investors’ reference.

Figure 13: Peers’ comparison table

Sources: Bloomberg, CMS (HK), as of 20 Mar 2018

Div Yield PEG

16A 17E 18E 16A 17E 18E 17E 16A 17E 18E 18E

CRO - Overseas

IQV US IQVIA HOLDINGS I IQVIA控股股份有限公司 USD USD 104.8 21,818 12/2018 46.0 22.6 19.4 2.5 2.8 2.3 0.0 15.6 12.6 12.8 0.3

DGX US QUEST DIAGNOSTIC Quest Diagnostics股份有限公 USD USD 103.9 14,087 12/2018 18.7 18.4 15.7 2.7 2.9 2.8 1.7 16.1 15.7 17.2 1.3

CRL US CHARLES RIVER LA 查理斯河实验室国际有限公司 USD USD 110.9 5,258 12/2018 25.5 21.6 19.5 5.0 5.2 4.5 0.0 13.1 24.9 22.2 1.3

SYNH US SYNEOS HEALTH IN Syneos健康股份有限公司 USD USD 38.9 4,068 12/2018 25.7 16.6 14.4 1.5 3.0 1.8 0.0 (8.3) 6.0 6.7 0.5

ICON US ICONIX BRAND GRO 艾康尼斯品牌集团公司 USD USD 1.3 77 12/2018 1.2 1.8 3.2 N.A. N.A. N.A. N.A. N.A. (38.8) 1.0 N.A.

CRO - Overseas average 9,062 33.2 20.6 17.8 2.8 3.1 2.7 1.7 15.5 14.4 14.7 0.8

CRO - China

2269 HK WUXI BIOLOGICS C 药明生物 CNY HKD 75.7 11,247 12/2018 304.9 179.8 120.6 248.7 20.0 16.6 0.0 105.9 19.0 14.7 3.3

300347 CH HANGZHOU TIGER-A 泰格医药 CNY CNY 46.1 3,645 12/2017 90.0 78.1 56.7 7.9 10.7 8.9 0.1 10.7 14.0 16.2 0.6

603127 CH JOINN LABORATO-A 昭衍新药 CNY CNY 64.9 838 12/2018 100.0 N.A. N.A. 20.0 N.A. N.A. N.A. 18.7 N.A. N.A. N.A.

600721 CH XIN JIANG BAI-A 百花村 CNY CNY 11.0 696 12/2017 37.6 N.A. N.A. 2.8 N.A. N.A. N.A. 10.6 N.A. N.A. N.A.

300404 CH GUANGZHOU BOJI-A 博济医药 CNY CNY 16.2 343 12/2017 2064.3 N.A. N.A. 10.1 N.A. N.A. N.A. 0.5 N.A. N.A. N.A.

CRO - China average 3,354 272.9 154.9 104.9 169.9 17.7 14.7 0.0 74.8 17.8 15.1 2.6

CMO - Overseas

207940 KS SAMSUNG BIOLOGIC Samsung Biologics Co Ltd KRW KRW 462,000 28,568 12/2018 N.A. N.A. N.A. 6.2 N.A. N.A. 0.0 (2.4) N.A. 1.1 N.A.

Lonn SW LONZA GROUP -REG 龙沙集团股份有限公司 CHF CHF 235.4 18,525 12/2018 24.6 24.0 20.5 3.2 3.0 2.7 1.3 17.0 14.6 13.0 (4.6)

CTLT US CATALENT INC 康泰伦特股份有限公司 USD USD 40.8 5,439 06/2018 34.1 29.5 24.4 6.1 7.4 5.0 0.0 16.2 25.2 25.5 0.9

CMO - Overseas average 17,511 26.8 25.2 21.4 5.1 4.0 3.2 1.3 16.8 17.0 7.8 0.9

CMO - China

2269 HK WUXI BIOLOGICS C 药明生物 CNY HKD 75.7 11,247 12/2018 304.9 179.8 120.6 248.7 20.0 16.6 0.0 105.9 19.0 14.7 3.3

832159 OC STAPHARMA 合全药业 CNY CNY 118.0 2,269 12/2017 44.9 35.0 24.2 N.A. 8.4 N.A. N.A. 27.8 N.A. N.A. N.A.

002821 CH ASYMCHEM LABOR-A 凯莱英 CNY CNY 72.9 2,651 12/2017 52.2 25.8 19.1 9.2 7.4 6.2 N.A. 19.2 15.9 17.3 1.7

300363 CH PORTON PHARMA -A 博腾股份 CNY CNY 13.1 880 12/2017 48.9 52.5 43.8 6.6 3.9 3.5 N.A. 14.2 6.6 7.5 (3.1)

CMO - China average 4,262 217.8 130.0 88.0 191.3 15.7 13.9 0.0 77.3 17.7 14.7 3.0

Mkt Cap

(USD mn)

Next

FY end

P/E Ratio P/B Ratio ROETicker Name 中文名 Rept curr List curr

Last

Price

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Financial Summary

Balance Sheet

RMB mn 2015 2016 2017 2018E 2019E

Non-current assets 756 1,155 1,816 3,811 6,057

PP&E 754 1,153 1,780 3,775 6,021

Deferred tax assets 2 2 7 7 7

Current assets 601 830 3,034 2,213 3,022

Inventories 50 79 136 224 417

Account receivables 190 294 314 491 916

Prepayments & other receivables 93 132 300 300 300

Service work in progress 101 123 202 318 593

Total cash and cash equivalents 167 202 1,440 238 154

Total assets 1,357 1,985 4,849 6,023 9,078

Current liabilities 1,202 801 798 1,034 1,575

Trade and bills payables 271 105 137 227 422

Advance from customers 27 132 255 400 746

Other payables 428 321 393 393 393

Income tax payable 20 9 13 13 13

ST bank debt - 39 - - -

Non-current liabilities 9 914 27 327 1,627

Deferred government grants 9 13 20 20 20

Deferred tax liabilities - 6 7 7 7

LT bank loans - 866 - 300 1,600

Obligation under a finance lease - 30 - - -

Shareholders' funds 146 270 4,024 4,663 5,877

Minorities - - - - -

Total liability and equity 1,357 1,985 4,849 6,023 9,078

Cashflow Statement

RMB mn 2015 2016E 2017E 2018E 2019E

Cash flow from operating 104 53 334 680 1,257

Pretax profit 65 176 304 613 1,216

OP before WC changes 151 336 518 952 1,896

Net working capital change (40) (206) (98) (146) (352)

Income tax paid (4) (47) (51) (126) (240)

Interest paid (3) (30) (36) - (48)

Cash flow from investing (336) (421) (1,364) (2,182) (2,641)

Purchase of PPE (334) (429) (671) (2,205) (2,646)

Option fee received - 27 - - -

Pledged bank deposit, net (8) (24) - - -

Interest received - 0 9 23 5

Others 6 5 (702) - -

Cash flow from financing 380 362 2,280 300 1,300

Proceeds from IPO, net - - 3,368 - -

Dividends (18) - - - -

Proceeds/repayment of bank loans (4) 905 (905) 300 1,300

Paid/repaid from sister companies 402 (542) (183) - -

Others - (1) - - -

Beginning cash 6 158 169 1,419 217

Forex 4 16 - - -

End cash 158 169 1,419 217 133

Profit & Loss Statement

RMB mn 2015 2016 2017 2018E 2019E

Consolidated revenue 557 989 1,619 2,542 4,743

Cost of goods sold (376) (600) (958) (1,585) (2,949)

Gross profit 181 389 661 957 1,795

( +/– ) Other income/expense 7 7 26 41 76

( – ) Total SG&A expense (86) (110) (162) (236) (408)

Administrative expenses (72) (95) (134) (198) (346)

Selling and distribution costs (13) (15) (28) (38) (62)

( – ) R&D expenses (40) (53) (74) (112) (204)

Adjusted EBITDA 146 374 638 1,012 1,896

Total Depreciation and amortisation (57) (93) (123) (210) (400)

SBC (27) (48) (65) (153) (237)

EBIT 62 233 450 650 1,259

( +/– ) Finance cost- net 4 (22) (52) (37) (43)

( +/– ) Profit from JV & Asso. - - - - -

( +/– ) Other gains/losses (1) (3) (11) - -

( – ) Listing expense - (32) (16) - -

Profit before tax 65 176 304 613 1,216

( – ) Tax (21) (35) (51) (126) (240)

Net Profit 45 141 253 486 976

( +/– ) Minority interest - - - - -

NP attributable to shareholders 45 141 253 486 976

Adjusted net profit 71 221 408 639 1,213

EPS Fully diluted (RMB) - 0.21 0.36 0.51 0.96

EPS Fully diluted (HK$) - 0.25 0.42 0.63 1.19

Financial Ratios

2015 2016 2017E 2018E 2019E

Growth (%)

Consolidated revenue 68% 78% 64% 57% 87%

Gross profit 47% 115% 70% 45% 87%

Adjusted net profit 53% 209% 85% 57% 90%

Profitability (%)

Gross margin (%) 32.4% 39.3% 40.8% 37.7% 37.8%

Adj. net profit margin (%) 12.8% 22.3% 25.2% 25.1% 25.6%

ROE (year end) 27.6% 105.9% 19.0% 14.7% 23.0%

ROA 7.2% 13.2% 11.9% 11.8% 16.1%

Efficiency

Inventory days 40 39 41 41 40

Accounts receivable days 67 60 57 53 50

Accounts payable days 202 114 46 42 40

Cash cycle days (95) (15) 52 53 49

Liquidity

FCF (RMB mn) (230) (376) (337) (1,525) (1,389)

Net gearing (%) 197.6 338.6 -51.7 -12.4 13.7

Sources: Company data, CMS (HK) estimates

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Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

Analyst Disclosure

The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the

personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst’s compensation was, is, or will be directly or indirectly, related to the specific

recommendations or views expressed in this research report.

Regulatory Disclosure

Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html or http://www.cmschina.com.hk/Research/Disclosure.

Disclaimer

This document is prepared by China Merchants Securities (HK) Co., Limited (“CMS HK”). CMS HK is a licensed corporation to carry on Type 1 (dealing in securities), Type 2 (dealing in futures),

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Important Disclosures for UK Persons

IN THE UNITED KINGDOM, THIS DOCUMENT IS FOR DISTRIBUTION ONLY TO PERSONS WHO: (I) ARE PERSONS FALLING WITHIN THE DEFINITION OF "INVESTMENT

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PROMOTION ORDER”); (II) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) TO (D) (“HIGH NET WORTH COMPANIES, UNINCORPORATED ASSOCIATIONS ETC”) OF THE

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FOR NON-INDEPENDENT RESEARCH COMMISSIONED OR PRODUCED BY PERSONS AUTHORISED IN THE UK BY THE FSA: THIS DOCUMENT DOES NOT PROVIDE AN IMPARTIAL

OR OBJECTIVE ASSESSMENT OF THE SUBJECT MATTER AND DOES NOT CONSTITUTE INDEPENDENT "INVESTMENT RESEARCH" UNDER THE APPLICABLE RULES OF THE

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PROMOTE THE INDEPENDENCE OF INVESTMENT RESEARCH AND IS NOT SUBJECT TO ANY PROHIBITION ON DEALING AHEAD OF THE DISSEMINATION OF INVESTMENT

RESEARCH.

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