Strong Earnings Growth Expected in 2020

The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.

 

Celltrion Healthcare registered a 4Q19 earnings surprise, led by: 1) high-margin exports of Truxima and Herzuma to the US; and 2) adjustments to its EU partnership agreement. Considering such, we raise our TP from W67,000 to W85,000. Anticipating strong earnings growth in 2020, we continue to suggest Celltrion Healthcare as our top pick for the bio sector.

Revise up 2020E EPS to 25.5%

Raising our TP on from W67,000 to W85,000, we maintain a Buy rating on Celltrion Healthcare, continuing to suggest it as our top pick for the bio sector. In 4Q19, OPM widened 6.0%p q-q to 13.6% on increased US sales of Truxima and Herzuma. Launched in Nov 2019, Truxima’s US M/S has topped our estimate, coming to 4.9% as of end-January. Reflecting such, we revise up our US Truxima M/S assumptions for 2020 (5.3 → 7.3%) and 2021 (11.3 → 13.3%). Of note, US February prescription data for Truxima is to be released around Mar 20. Elsewhere, with the firm’s domestic corporate tax rate having normalized, we adjust our 2020 corporate tax rate assumption from 30% to 22%. For 2020, we forecast consolidated sales of W1,619.4bn (+47.1% y-y) and OP of W212.0bn (+156.1% y-y; OPM of 13.1%). We estimate a DCF method-based operating value of W13.2tn (assumptions: terminal growth of 3.5%, WACC of 6.3%, and beta of 0.9). Adding in its net cash holdings of W225.0bn, we size Celltrion Healthcare’s EV at W13.4tn.

Posts 4Q19 earnings surprise, beating our estimates and consensus

Celltrion Healthcare posted consolidated 4Q19 sales of W313.6bn (+66.2% y-y) and OP of W42.8bn (TTP y-y; OPM of 13.6%), surpassing our estimates by 6.0% and 22.8%, respectively, supported by: 1) a more than W30.3bn q-q rise in US sales; 2) changes in EU partnership agreement, which has resulted in lower sales in some regions, but an improvement in COGS-to-sales ratio; and 3) a reduction in the transfer price for Remsima IV. Meanwhile, SG&A expenses upped 60.1% y-y to W47.3bn, and labor costs stemming from the establishment of an EU direct channel will likely be reflected in mid-2020. We expect SG&A-to-sales ratio to remain around the 11% level this year in response to ongoing top-line growth. Also positive, the firm’s domestic 2019 annual corporate tax rate was 13.9%, a hefty drop from 53.4% experienced in 2018. From 2020, we believe that the corporate tax rate will remain at the industry average of 22%.

 

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