Tuesday, November 26, 2013

Biosensors International : Shandong Weigao disposes BIG (DBSV)

Biosensors International Group
HOLD S$0.94
STI : 3,172.38
Price Target : 12-Month S$ 0.94
Shandong Weigao disposes BIG;

•Buyer CB Medical Holdings likely to be a PE fund
•Disposal by Shandong Weigao signifies loss of confidence in the stent business
•BIG remains fundamentally challenged
•CB raising its stake further in BIG could be a catalyst

What's new
Shandong Weigao sells its entire stake in BIG.  Shandong Weigao announced that it is selling its entire 21% stake in BIG for US$312m at S$1.05 per share (c.12% premium to yesterday’s close of S$0.94).
The buyer is CB Medical Holdings Ltd, a holding company incorporated in Bermuda, which we believe could be a China PE fund. Reasons for the disposal cited by Shandong Weigao include competition in the PRC and its intention to focus more on its core medical consumables, blood purification and orthopedic product segments.  Shandong Weigao will recognize a loss of disposal of RMB449m.  It will vacate the two board seats it currently holds in BIG.

Our view
Loss of confidence in stent business; disposal is positive for Shandong Weigao.  As Shandong Weigao is in a net cash position and is in no urgent need for money, we therefore believe this signifies Shandong Weigao’s loss of confidence in the stent business.  The consideration of US$312m is less than the net book value of its interest in Biosensors.  Even though there is a Rmb449m loss on disposal, we think it is good for Shandong Weigao’s share price as it 1) is exiting the competitive stent business and 2) now has additional funds for future business development.  Shandong Weigao is now trading at 25x FY14F PE. Our current rating is BUY with HK$8.90 TP.

Challenges ahead for BIG.  Fundamentally, BIG is looking at weak revenue growth and falling margins decline due to lower licensing contribution and lower ASPs in China.  Competition in China is intensifying; the number of major players for stents has increased from 7 in 2010 to >11 now. Also, the industry is experiencing sharp price cuts (average prices down by >15% YTD).  In addition, Terumo is now developing its own DES product in Japan for launch next year and will rely less on BIG.  We have a cautious outlook on BIG with a current recommendation of HOLD and TP of S$0.94.  Potential upside risks to our recommendation could include CB Medical Holdings acquiring a further stake in BIG.


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