This article first appeared in The Edge Financial Daily on July 19, 2018

YSP Southeast Asia Holding Bhd
(July 18, RM2.69)
Maintain add with an unchanged target price (TP) of RM3.46: YSP Southeast Asia Holding Bhd stated that it won more tenders during last year’s health ministry (MoH) tender cycle to supply drugs to government healthcare facilities. We believe this could boost sales from the hospital segment (MoH and private) beyond 18% of total revenue (financial year ended 2017 [FY17]). The potential liberalisation of the MoH’s procurement process and/or an increase in the MoH budget will also be catalysts for YSP in winning more tenders. Based on our estimates, YSP sales to the MoH currently make up less than 1% of the MoH’s drug budget (RM4 billion).

YSP is targeting to grow its export sales from the 71:29 local/export ratio currently to a balanced mix of 50:50 local/export ratio. We gather that YSP is present in more than 20 countries, with its focus on emerging markets with large populations in Asean and the African region. YSP plans to register more products in each of its export markets as well as participate in more overseas tenders, especially government ones.

YSP indicated that it is constructing a new research and development (R&D) lab in Bangi, Selangor. With the new lab (RM3 million capital expenditure) slated for completion by the end of the fourth quarter of 2018, YSP aims to increase its R&D activities, which could allow it to develop and register more generic drugs for local and overseas markets. Although YSP has no plans to build a new production facility in Malaysia, it is making an effort to automate its production lines. This should lead to a higher production capacity and improvement in overall efficiencies.

As expected, its Vietnam plant that produces animal drugs should still be loss-making in financial year ended 2018 forecast (FY18F) due to lower demand for animal health drugs as there is a persistent oversupply of livestock (farmers are reducing their livestock volumes). This plant’s losses should not widen versus FY17 as YSP plans to produce more products there. For its Indonesia plant, YSP obtained good manufacturing practice certification from Indonesia’s National Agency of Drug and Food Control in mid-2017. We gather that YSP has started drug production but mainly for product registration purposes. We only expect commercial production to begin in FY20F.

Our “add” call and TP of RM3.46 are intact. Our TP is based on 14.2 times calendar year 2019 (CY19) price- earnings (PE), which is at +1 standard deviation of its five-year historical mean. With appealing dividend yields of 4.2% to 5.4% (FY18F to FY20F), we believe that YSP has an attractive risk-reward profile at 10.5 times CY19 forecast PE and robust earnings growth prospects (FY18F to FY20F compound annual growth rate of 17.4%).

Downside risks to our view are sharp decline in sales and unexpected delays in product registrations. — CGSCIMB Research, July 17