Wednesday, November 27, 2013

Biosensors Int'l - BIG belief leads to BIG value (CIMB)

Biosensors Int'l -
Current S$0.98
Target S$1.19
BIG belief leads to BIG value.

A change in major shareholder from a strategic one to a value-driven one augurs well for BIG. Paying a premium over BIG's last closing price, CITIC's move to replace Weigao signals its greater ambition, in our view. We keep our EPS and SOP-based target price. Our unchanged contrarian Outperform rating hinges on the instant success of BIG's Spectrum Dynamics, product launches, regulatory approvals and M&A accretion. More importantly, new shareholder, CITIC, could seek to enhance its investment value through more active participation.


We keep our EPS and SOP-based target price. Our unchanged contrarian Outperform rating hinges on the instant success of BIG's Spectrum Dynamics, product launches, regulatory approvals and M&A accretion. More importantly, new shareholder, CITIC, could seek to enhance its investment value through more active participation.

What Happened
Last Friday, BIG's shareholder Shandong Weigao announced that it was selling off its entire stake (21.7%) in BIG to CB Medical at a price of S$1.05/share, representing an 11.7% premium to BIG's last closing price of S$0.94 on Thursday. CB Medical is an investment vehicle of the CITIC Group in China.

What We Think
We think: 1) CITIC will play a more active role not just in managing BIG's operations but also strategic direction, from M&As to corporate finance; 2) while BIG's earnings had been dragged down by weaker contributions from Japan's licensing income (which we think has been priced in), BIG's objective is to obtain SFDA approval for BioFreedom in China as well as add other accretive acquisitions. As these could be the forte of private-equity funds, we believe CITIC's involvement will work in BIG's favour; 3) CITIC's choice of owning BIG could be an endorsement of the latter's leadership in stent-making and intent to be a serious medical-platform contender, potentially setting BIG apart from the rest of its Asian peers, including Terumo; and 4) a privatisation of BIG could even be possible if its current two private-equity shareholders want to rejig BIG.

What You Should Do
We think BIG's valuation has only priced in its near-term challenges, not a potential earnings uplift from the commercialisation of new products in FY15. BIG is working on multiple product launches for generating new revenue. Other products are gaining ground with various regulatory authorities and a soft launch of BioFreedom remains a source of excitement.


CITIC to play a more activerole than Weigao
While Shandong Weigao is a medical-equipment maker/distributor in China, we believe CITIC’s involvement can possibly bringina lot more.We thinkCITIC will play amore active role not just in managing BIG’s operationsbut also its strategic direction, rangingfrom M&Asto corporate finance. With CITICfeeding BIG with various opportunities, BIGmay just be able to emerge as a medical-platform company,finally.

CITIC’s choice of owning BIG is an endorsement of the latter’sleadershipinstent-making, in our view,and intentto be a serious medical-platform contender. This could set BIG apart from the rest of its Asian peers, including Terumo.

Forget about Japan; think of what China can offer…
Although contributionsfrom Terumo have been dwindlingin the past year(Terumo is in the midst of developing its own DES), all will not be lost for BIG.When theiragreement ends at end-2014, BIG will have theopportunity to pursue theJapanese market without a leash. Moreover,it is the Chinese market that BIG really wants.

… which is product approvals
BIG has beensharing withinvestors recentlyabout potential SFDA approval in China for BioFreedom in the near term. Our guess is that it will be in the summer of 2014.

The main reason forour contrariancall on the stock (Outperform) is that the market seems to be too focusedon the weaker numbers related to Japanese licensing and not the dynamics of itsmedical-equipment business around the world.

BIG’s recent acquisition of Spectrum Dynamics was an instant success, thatshouldboost its earnings further if approved by China’s Food and Drug Administration (SFDA). BIG is working on multiple product launches to generate new revenue.Other products are gaining ground with various regulatory authorities and asoft launch of BioFreedom remains a source ofexcitement.

Two private-equity(PE) funds:a lesson in healthcare history
With the completion of the latest transaction, both CB Medical(CITIC) and Hony Capital (another big PE fund in China) will be substantialshareholders of BIG. CITIC will own 21.7% andHony Capital,16%. This is reminiscent of Parkway Holdings’(present-day IHH) shareholding developments in 2010. We think that having two ChinesePE funds could add toBIG’s corporatedynamics, especially given that Shandong Weigao’s involvement in BIG’s corporate activities outsideChina hadbeenfairly muted.

Background of Shandong Weigao’s substantial stake in BIG There werea few transactionsleading up to BIG's purchase of a50% stake inJWMS from Weigao (WG) back inJun 11. 1) BIG paid WG S$160m 2) BIG issued 260m shares to WG atS$1.2215/share 3) BIG issued a 4% convertible note worth S$120m to WG. Exercise price was US$1.0913/share(exchange rate then was 1.2313), implyinga conversion price of S$1.344/share. WGconverted itsnotesin Nov 11 for 110m shares inBIG.

Weigao,as such, owned370m shares of BIG from Nov11,withBIG owning100% of JWMS.

Background of CITIC CITIC is a state-owned investment company of the People's Republic of China. It owns 44 subsidiaries,including China CITIC Bank, CITIC Holdings, CITIC Trust Co. and CITIC Merchant Co., Ltd (mainly banks) in China, Hong Kong, theUS, Canada, Australia and New Zealand.

Who heads CITIC’sPE fund? Liu Lefei, whois the Executive Chairman of CITIC’s PE fund. Born in 1973, hewas ranked No. 22 of the 25 Most Powerful Businesspeople in Asia by Forbes on 20 Apr 11. He also serves as committee member of theFTSE Xinhua Index and Reuters China Pension Index. Before joining CITIC, Liu had served as CIO ofChina Life (since Jul 06), where he led investments in China Southern Power Grid and China Union Pay. He also served as the General Manager of the Investment Management Department of China Life Insurance. Before that, Liu served as a General Manager of China Galaxy Securities Investment Management LLC (2003-04)andExecutive Director of Capital Securities (1998-2003). Liu is the son of Liu Yunshan.

Liu Yunshanis one of the seven members of China’s central politburo, at the very top of China’s political structure. He currently holds the positions of First Secretary of the Central Secretariat of the Communist Party of China, Chairman of the CPC Central Guidance Commission for Building Spiritual Civilization and President of the CPC Central Party School.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 25/11/13

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