Needs R&D Investments to Bear Fruit
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
CKD’s 1Q20 results topped consensus on steady sales growth for prescription drugs (led by treatments for chronic diseases) and reduced SG&A expenses.
Needs R&D investments to bear fruit
Although adhering to our TP of W100,000, we lower our investment rating on CKD from Buy to Hold. The firm’s sales mix is being worsened by a greater portion of merchandise sales. We attribute the firm’s higher-than-expected 1Q20 results to a temporary increase in earnings due to both a contraction in marketing activities and delay in planned execution of R&D expenses amid the Covid-19 crisis. We have adjusted up our target multiple from 20.8x to 24.1x on a rise in 12M FWD average P/E for Yuhan, Green Cross, Dong-A ST, Dongkook Pharm, and Huonz. Reflecting this change and taking into account a drop in GPM, we now size CKD’s operating value at 1,222.6bn by applying a target P/E of 24.1x to 12M FWD NP of W50.9bn. With the firm’s shares having recently leaped 57% from their previous low, the upside of our TP is now limited. Thus, until R&D momentum such as large-scale licensing out deals for CKD-506 (autoimmunity, HDAC6, European phase IIa trials) becomes visible, we advise taking a conservative approach towards the company’s shares.
GPM sapped by worsened sales mix
CKD’s non-consolidated 1Q20 results show sales of W292.8bn (+25.2% y-y) and OP of W26.1bn (+56.1% y-y; OPM of 8.9%). With a portfolio focused on the treatment of chronic diseases, the firm’s sales were free of Covid-19 effects. CKD’s sales of major ethical drug items climbed in 1Q20, breaking down as Atojet (hyperlipidemia) W15.3bn (+24.0% y-y), Januvia (diabetes) W34.5bn (+3.1% y-y), Emorton (autoimmune) W8.5bn (+13.8% y-y). SG&A-to-sales ratio narrowed 3.9%p q-q on a contraction in marketing activities and delay in planned execution of R&D expenses amid the Covid-19 crisis. While sales and OP beat consensus by 6.0% and 23.1%, respectively, we point out that this growth was driven by sales of newly-introduced merchandise items, including K-cap (gastroesophageal reflux disease), Kushimia (appetite suppression), Minirin (nouria), and Merceron (contraception), a development which led to a 2.1%p q-q drop in GPM. Considering such, we have cut 2021F GPM from 39.2% to 36.4%, and downwardly adjusted 2021F and 2022F EPS by 9.5% and 13.1%, respectively.