OTC Drug Sales Grow Sharply
The author is an analyst of Shinhan Investment Corp. He can be reached at shawn1225@shinhan.com. -- Ed.
3Q20 preview: Strong earnings likely continued across the board
We now expect Dongkook Pharmaceutical to post consolidated sales of KRW144.7bn (+17.2% YoY) and operating profit of KRW22bn (+21.6% YoY, operating margin 15.2%) for 3Q20, meeting market expectations for KRW143.3bn in sales and KRW21.5bn in operating profit. Strong earnings likely continued on even growth across the board.
OTC drug sales should have increased 15% YoY to KRW37.5bn, with main products such as Censia, Pansidil, and Cheesen delivering over-30% YoY top-line growth. Sharp sales growth at the most profitable OTC division likely drove profit leverage effect in 3Q20. Sales of ETC drugs are projected to have reached KRW31.2bnon steady growth across the board for major products including Pofol injections. The healthcare division (cosmetics, etc.) likely secured sales of KRW46.9bn (+43.4% YoY)on strong home shopping demand for the newly released Mela Capture Ampoule and increased sales to China. Subsidiary Dongkook Lifescience should report sales of KRW24.3bn for 3Q20, backed by solid growth in sales of contrast medium.
Focus on operating margin gains from removal of 2Q20 one-offs
Operating margin is expected to have rebounded in 3Q20 after recording a drop in 2Q20. One-offs that had caused operating margin to fall short of market consensus in the previous quarter were: 1) an increase in COGS ratio as raw material supply issues at the start of the year led to a decline incapacity utilization rates for contrast medium; and 2) a temporary hike in costs from changes made to the product mix for cosmetics sold through the home shopping channel. In 3Q20, however, we believe contrast medium capacity utilization rates recovered to normal levels, demand for new cosmetics products offered through the home shopping channel was strong, and sales of high-margin OTC drugs sharply increased. As a result, we expect the company to report operating margin of 15.2% for 3Q20, marking 2.1%p QoQ improvement and also exceeding 1Q20 levels by 0.3%p.
Retain BUY and raise target price to KRW39,000
We retain BUY on Dongkook Pharmaceutical and raise our target price to KRW39,000, based on 2020F EPS of KRW1,789 and a target PER of 21.3x (30% premium to the average 2021F PER of domestic mid-tier pharmaceuticals). The company's shares have continued to correct since trading resumed after the recent stock split. We believe the current correction offers a good entry point, with: 1) strong earnings continuing each quarter on even growth across all divisions; 2) expansion into the Chinese market to start in earnest in 2021; and 3) additional momentum expected from the planned IPO of subsidiary Dongkook Lifescience in 2022.