Brief Growth Ideas: Shenwan Hongyuan (申万宏源) A+H: No Reason for a Valuation Premium and more

In this briefing:

1. Shenwan Hongyuan (申万宏源) A+H: No Reason for a Valuation Premium
2. So-Young (新氧) Pre-IPO Review – Au Naturel
3. Maybe Koito’s Premium Can Be Justified
4. CHG: Short-Term Cost Pressures Create an Opportunity to Invest
5. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field

1. Shenwan Hongyuan (申万宏源) A+H: No Reason for a Valuation Premium

Shenwan Hongyuan started institutional book building today. We have covered the fundamentals of the company in our previous insight (Shenwan Hongyuan (申万宏源) A+H: A Commoditized Broker Business). In this insight, we will discuss:

• Valuation comparison with peers
• A-H premium history of Chinese brokers
• Key metrics of past Chinese brokers listing in the H-share market
• Concerns of liquidity

2. So-Young (新氧) Pre-IPO Review – Au Naturel

So-Young (SY US) is looking to raise US$150m in its upcoming IPO. The company filed its prospectus with the SEC on Monday.

The company operates online platforms (mobile, website, and WeChat mini program) for discovering, evaluating, and reserving medical aesthetic services in China. It helps medical aesthetic service providers acquire customers through user generated content and other creative content format.

In this insight, we will look at the company’s business model, analyze its financial and operating performance, review the competitive landscape and point out some questions for management.

3. Maybe Koito’s Premium Can Be Justified

We mentioned in Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target, that Koito Manufacturing (7276 JP) has managed to beat consensus estimates in 3Q after a series of disappointing results in the previous quarters. This was despite the weak nine-month ended results. The company cited the loss in sales from China (as a result of the deconsolidation of the Shanghai unit) alongside unfavourable economic conditions especially in China and Europe as key reasons for the decline in earnings. Our visit to Koito in March, gave us more insight on the effect of its deconsolidated Shanghai unit and its future plans in China, alongside their investment for capacity expansions and new products. Following these insights, we have revised our view on Koito in a slightly positive manner.

4. CHG: Short-Term Cost Pressures Create an Opportunity to Invest

We initiate coverage of CHG with a BUY rating and a 2019E target price of Bt2.53, derived from a discounted cash flow valuation (WACC of 6.2% and terminal growth of 2.0%). This is equivalent to 44.5 PE’19E, which is near its five-year trading average of 43.7x.

The story:

• Competitive player in a key strategic location
• Pressures from launch of new greenfield hospitals should be short term
• Recent share price retreat opens an investment opportunity
• Expected flat earnings in 2019E and growth at a 19% CAGR in 2020-21E

Risks:     Medical personnel shortage

                Litigation for medical services

                Change in social security policy

5. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field

Anti-PD-1 monoclonal antibody (mAb) is a hotly contested immunotherapy area in China, with seven companies working on clinical trials covering various lines of treatment for more than a dozen indications. Out of these indications, we have highlighted in our previous coverage on Chinese biotech companies that the most critical indication is the first line treatment of lung cancer, particularly non-small cell lung cancer (NSCLC). Valuation of PD-1 related drugs anchors many of the Hong Kong-listed biotech companies, such as Innovent Biologics Inc (1801 HK), Shanghai Junshi Bioscience Co. Ltd. (1877 HK), BeiGene Ltd (6160 HK), CStone Pharma (2616 HK)  and China A-share listed Jiangsu Hengrui Medicine Co., (600276 CH). 

In March, Merck’s Keytruda (generic name pembrolizumab) was approved by NMPA for the first line treatment of EGFR and ALK-negative non-squamous NSCLC. This marks Keytruda the first approved PD-1 drugs for the first line treatment of NSCLC in China.

In this insight, we will review the status and targeted indications of clinical trials of PD-1 candidates by domestic players.