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SK Chem has been selected by the Korea Centers for Disease Control & Prevention to be the priority negotiator for a Covid-19 vaccine development project. The firm’s licensing-out deal partner has finished submitting an IND application to conduct global phase-II clinical trials on a next-generational pneumococcal vaccine. We revise up our 1Q20 earnings estimates in light of favorable earnings at SK Chem’s green chemicals division.
To spearhead Korea’s Covid-19 vaccine development
Adhering to a Buy rating, we raise our SOTP-derived TP on SK Chemicals (SK Chem) from W80,000 to W100,000, noting: 1) upward revisions to our earnings estimates in reflection of favorable sales at the firm’s green chemicals division; 2) multiple upward revisions to our earnings projections in light of an improved R&D cost-to-sales ratio; 3) corporate tax rate normalization (76% → 45%); 4) upgraded values for the company’s next-generation pneumococcal vaccines based on the latest market data. In our SOTP calculations, we size fair market cap at W1,155.8bn (operating value of W1,536.9bn; next-generation pneumococcal vaccine value of W359.8bn; net debt of W741.0bn).
On Mar 18, SK Chem was selected by the Korea Centers for Disease Control & Prevention as the priority negotiator for a Covid-19 vaccine development project. SK Chem plans to enter phase-I clinical trials for the new vaccine in September, aiming for domestic approval in 2H21. Of note, on Mar 30, the share price of Johnson & Johnson (J&J) (market capitalization of W350.0tn) jumped 8.0% after the announcement of its Covid-19 vaccine development plans. J&J is targeting for clinical trials to begin before September. Meanwhile, on Mar 30, Sanofi, SK Chem’s licensing-out deal partner, said that it has finished submitting a phase-II trials IND application in the US for a next-generational pneumococcal vaccine. The trials are expected to start as early as 1H20.
To show healthy 1Q20 earnings on oil price plunge and higher Chinese market demand
On a consolidated basis, we expect SK Chem to register 1Q20 sales of W323.1bn (+1.1% y-y) and OP of W10.6bn (+190.2% y-y; OPM of 3.3%). The green chemicals division should show 1Q20 sales of W223.7bn (-6.9% y-y), with co-polyester sales totaling W111.7bn (-10.0% y-y) and biodiesel sales upping to W70.3bn (+5.0% y-y). Versus our previous estimate, we have upped our sales forecast for the green chemicals division by W26.9bn in light of: 1) an improved COGS-to-sales ratio in response to a recent sharp drop in oil prices; 2) strengthened demand in line with the start of increased inventory restocking demand from China; and 3) biodiesel exports. Elsewhere, SK Chem’s life science division will likely book 1Q20 sales of W89.4bn (+13.3% y-y), sales of pharmaceuticals and vaccines climbing to W60.0bn (+15.0% y-y) and W29.4bn (+10.0% y-y), respectively. Although its sales to some hospitals have likely been dampened amid the Covid-19 outbreak, we believe that the life science division will still record y-y top-line growth on both new product offerings and low-base effect.