Hau Giang Pharma: Taisho Is Helping DHG To Boost Its Capabilities
Hau Giang Pharma: Taisho Is Helping DHG To Boost Its Capabilities
Hau Giang Pharma: Taisho Is Helping DHG To Boost Its Capabilities
Company Note
100
budgets. The rules were revised in Jul 2016, which should help DHG’s ETC sales.
Nov-15 Feb-16 May-16 Aug-16
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
use of promotional products. Recall from the title page of this report that the
implementation of C200 depressed DHG’s gross margins by about 11%pts last
year. We estimate that the treatment of promotional goods under C200 by itself
trimmed the company’s gross margin 5%pts in FY15, so DHG’s on-going efforts
to phase out the use of promotional products should add about 3%pts to the
company’s FY16 gross margin.
Next, the construction of DHG’s new non-Beta Lactam factory was completed in
2014, but the ramp-up in production at that new factory was impeded by
regulatory issues that are being solved (each product at the new factory has to
be individually licensed). The new factory enjoys significant tax benefits, so the
company’s overall effective tax rate will fall as its utilisation rate rises. This year,
we expect the utilisation rate of the new non-Beta Lactam factory to increase
from 45% to 70%, and a new Beta Lactam factory began operating in October,
all of which will help reduce DHG’s overall effective tax rate from 15.5% in FY15
to 8% in FY16.
Finally, the company’s original factory, which is located in a cramped area in
Can Tho city, is now being used to manufacture nutritional products, which
carry gross margins that are about 2%pts above those of the rest of DHG’s
product portfolio. We estimate that the sales of such products increased by
about 20% in 9M16, and are likely to increase by a similar rate for FY16 –
although the company reported a 50% increase in the sales of such products in
9M16 because some products that were previously considered drugs were
reclassified as nutritional products.
FY17 Forecasts
We expect DHG’s revenue to increase by 12% in FY17, and net profits to grow
17% yoy, with the outperformance of earnings growth over revenue growth
driven by: 1) an expected fall in DHG’s effective tax rate from 8% in FY16 to 6%
in FY17, as DHG’s new tax-advantaged factory continues to ramp up production,
and 2) an increase in the proportion of revenues derived from the sales of
products DHG produces itself, versus those of other manufacturers it distributes,
from 81% in FY16 to 83% in FY17. Further to that last point, DHG earns a 53%
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Recall from above that the other factor which boosted our gross margin forecast
is DHG’s decision to phase out promotional products, given the unfavourable
accounting treatment such products receive under C200. According to
management, just over half of such “give aways” should be curtailed by the end
of 2016 (promotions are popular with both customers and salespeople, so it will
take some time to completely phase these out).
Finally, we expect sales of drugs DHG makes to increase 15% in FY17, versus
10% industry-wide growth because: 1) the salesforce restructuring programme
is starting to yield results, 2) DHG has significant intrinsic strengths, which are
discussed below, and which are being further bolstered by Taisho, and 3) new
changes in the rules for selling to hospitals should help propel ETC sales by
15% next year.
One reason for the decline in ETC sales of Vietnam’s major drug firms is the
fact that such firms have much bigger R&D efforts than those of some of the
smaller firms in the industry, so they have bigger cost overheads, and the major
firms tend to source their Active Pharmaceutical Ingredients (API) from
European or American companies, which also pushes up their costs. For that
reason, the government revised the new bidding rules this past July, to
incorporate more qualitative factors, in addition to the purely quantitative
consideration of the particular firm’s offering price, as can be seen in the table
below.
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Figure 5: Pharmaceutical market: ETC vs. OTC Figure 6: Pharmaceutical market: Generics vs. Branded
Title:
100%
10%Source:
90%
Please fill in the values above to have them entered in your report
80% 40%
70%
30%
60%
50%
90%
70% 40%
30% 60%
20%
10%
0%
Volume Value
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Figure 8: Local pharmaceutical companies' market share Figure 9: Top 10 market players
3.3%
Astrazeneca UK 6.9%
2.7% Roche Germany 6.8%
Novatis USA 6.5%
MSD USA 5.6%
Pfizer USA 5.3%
DHG Vietnam 5.0%
78%
Bayer H/C Germany 4.9%
Servier France 4.1%
DHG Traphaco Domesco Imexpharm Others
About half of DHG’s sales are derived from the sales of non-prescription
medicines, such as “Hapacol”, the company’s version of paracetamol, about
12% is derived from nutritional/herbal products such as NattoEnzym, about 15%
is derived from the sale of prescription drugs sold through hospitals, and about
¼ of DHG’s revenues are attributable to the sale of (generic) prescription drugs
via pharmacies. Note that: 1) in practice, it’s not necessary to present a doctor’s
prescription note to buy most prescription drugs at local pharmacy outlets in
Vietnam, and 2) the primary source of health advice for most run-of-the-mill
aliments is a patient’s local pharmacist – and DHG’s success has stemmed
from its excellent relationships with those small “mom & pop” outfits.
Further to that last point, DHG offers generous incentive programmes to its
pharmacists, subsidises their children to study medicine/pharmaceutical science,
and DHG even has its own travel agency to facilitate incentive trips for those
local pharmacy owners.
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Further to that last point, we would like to mention that in addition to maintaining
excellent relationships with Vietnam’s legions of “mom and pop” pharmacists,
our impression is that DHG’s sales force is more diligent, more ethical and is
more closely supervised than the sales teams of some of its competitors (DHG
has better ERP systems, etc.)
For example, one common problem for DHG’s competitors stems from the fact
that the sales people at those competing firms are apportioned a certain amount
of promotional products (or other incentives) according to the aggregate
revenues of the individual salesperson, but those sales people are then left to
allocate those incentives among their accounts as they see fit. The moral
hazard entailed is that a salesperson is thus put in a position to pass on the
incentives they have been apportioned (i.e. promotional products, discounts,
other forms of incentives, etc.) to pharmacy owners that are willing to pay the
salesperson a petty bribe – instead of to the pharmacy owners that generated
disproportionate amounts of the salesperson’s revenues.
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
BY THE NUMBERS
Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs)
FD Core EPS Growth (rhs)
Cash Flow
(VNDb) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
EBITDA 800.4 782.6 839.9 939.9 1,055.3
Cash Flow from Invt. & Assoc. (0.1)
Change In Working Capital (8.2) (29.4) (20.4) (92.4) (142.1)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense (110.0) (120.0) (90.0)
Other Operating Cashflow (147.7) (65.2) (46.8) (47.0) (47.2)
Net Interest (Paid)/Received 29.9 21.1 15.7 23.2 34.5
Tax Paid (326.6) (191.6) (55.7) (47.6) (54.8)
Cashflow From Operations 347.7 517.5 622.7 656.1 755.8
Capex (294.0) (163.8) (139.1) (89.1) (89.1)
Disposals Of FAs/subsidiaries 2.1 16.2
Acq. Of Subsidiaries/investments
Other Investing Cashflow (90.6) (221.7)
Cash Flow From Investing (382.6) (369.3) (139.1) (89.1) (89.1)
Debt Raised/(repaid) 49.7 94.0 (13.5) (12.9) 12.2
Proceeds From Issue Of Shares 0.0 0.0 0.0 0.0 0.0
Shares Repurchased (15.7)
Dividends Paid (131.6) (261.8) (305.1) (305.1) (305.1)
Preferred Dividends
Other Financing Cashflow (40.5) 45.8 17.4 13.6
Cash Flow From Financing (81.9) (224.0) (272.8) (300.6) (279.3)
Total Cash Generated (116.8) (75.8) 210.8 266.4 387.5
Free Cashflow To Equity 14.8 242.2 470.1 554.1 678.9
Free Cashflow To Firm (30.0) 157.4 499.5 582.0 686.7
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Balance Sheet
(VNDb) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
Total Cash And Equivalents 757 928 1,139 1,406 1,793
Total Debtors 796 621 675 751 854
Inventories 781 639 652 726 841
Total Other Current Assets 52 33 33 33 33
Total Current Assets 2,386 2,221 2,498 2,916 3,521
Fixed Assets 964 1,083 1,117 1,091 1,059
Total Investments 17 16 17 17 17
Intangible Assets 0 0 0 0 0
Total Other Non-Current Assets 116 42 45 48 52
Total Non-current Assets 1,096 1,142 1,179 1,156 1,127
Short-term Debt 177 271 257 244 257
Current Portion of Long-Term Debt
Total Creditors 803 465 508 563 635
Other Current Liabilities 37 30 33 36 40
Total Current Liabilities 1,016 766 799 844 932
Total Long-term Debt 0 0 0 0 0
Hybrid Debt - Debt Component 0 0 0 0 0
Total Other Non-Current Liabilities 69 62 97 137 183
Total Non-current Liabilities 69 62 97 137 183
Total Provisions 103 13 13 13 13
Total Liabilities 1,189 842 909 994 1,128
Shareholders' Equity 2,277 2,501 2,736 3,061 3,480
Minority Interests 17 20 25 30 35
Total Equity 2,294 2,521 2,761 3,090 3,515
Key Ratios
Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
Revenue Growth 15.4% (7.8%) 3.9% 12.2% 14.7%
Operating EBITDA Growth 19.4% (2.2%) 7.3% 11.9% 12.3%
Operating EBITDA Margin 20.5% 21.7% 22.4% 22.3% 21.9%
Net Cash Per Share (VND) 6,659 7,544 10,118 13,322 17,627
BVPS (VND) 26,120 28,692 31,392 35,113 39,924
Gross Interest Cover 149.0 79.4 46.4 54.8 46.6
Effective Tax Rate 26.8% 15.5% 8.0% 6.0% 6.0%
Net Dividend Payout Ratio 29.3% 52.2% 56.5% 48.5% 42.1%
Accounts Receivables Days 59.48 67.33 58.37 57.52 56.94
Inventory Days 164.9 123.1 119.2 113.9 111.8
Accounts Payables Days 56.73 42.16 43.27 42.64 41.93
ROIC (%) 50.4% 37.1% 38.2% 41.7% 45.6%
ROCE (%) 31.8% 26.9% 26.3% 27.1% 27.7%
Return On Average Assets 14.5% 16.2% 16.4% 17.1% 17.1%
Key Drivers
Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
ASP (% chg, main prod./serv.) 0.0% 0.0% 0.0% 0.0% 0.0%
Unit sales grth (%, main prod./serv.) 6.0% -2.0% 10.0% 10.0% 10.0%
Util. rate (%, main prod./serv.) 60.0% 65.0% 70.0% 70.0% 70.0%
ASP (% chg, 2ndary prod./serv.) 0.0% 0.0% 0.0% 0.0% 0.0%
Unit sales grth (%,2ndary prod/serv) 7.0% -2.0% 10.0% 10.0% 10.0%
Util. rate (%, 2ndary prod/serv) 60.0% 65.0% 70.0% 70.0% 70.0%
R&D Cost/sales (%) 0.9% 1.0% 0.9% 0.9% 0.9%
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
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AAV, ADVANC, AMATA, ANAN, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BJCHI, BLA, BLAND, BTS, CBG,
CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, ERW, GL, GLOBAL, GLOW, GPSC, GUNKUL, HANA,
HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, JWD, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PS,
PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPCG, STEC, STPI, SVI, TASCO, TCAP,
THAI, THCOM, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VNG, WHA, WORK.
Corporate Governance Report:
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Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result
Description: Excellent Very Good Good N/A
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand)
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Distribution of stock ratings and investment banking clients for quarter ended on 30 September 2016
1598 companies under coverage for quarter ended on 30 September 2016
Rating Distribution (%) Investment Banking clients (%)
Add 57.7% 7.5%
Hold 31.7% 2.8%
Reduce 9.8% 0.6%
115,000
96,000
93,000
116,000
106,000
96,000
86,000
76,000
66,000
Add Hold Reduce Not Rated
56,000
Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Aug-16
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in
2015, Anti-Corruption Progress Indicator 2015.
AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP -
Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available,
no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2,
BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very
Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA -
Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not
available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B,
GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL -
Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK -
Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very
Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very
Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good,
3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very
Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5,
SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC -
Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very
Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM –
Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not
available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good,
3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.
Comprises level 1 to 5 as follows:
Level 1: Committed
Level 2: Declared
Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)
Level 4: Certified
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Pharmaceuticals│Vietnam│Hau Giang Pharma│November 23, 2016
Level 5: Extended.
15