Earnings Review July 31, 2014 12M rating BUY (Maintain) 12M TP W85,000 from W85,000 Up/downside +44% Stock Data KOSPI (Jul 30, pt) 2,083 Stock price (Jul 30, KRW) 58,900 Market cap (USD mn) 666 Shares outstanding (mn) 12 52-Week high/low (KRW) 88,300/54,600 6M avg. daily turnover (USD mn) 2.5 Free float / Foreign ownership (%) 38.7/11.6 Major shareholders (%) DaeWoong International Corp and 12 others 50.4 National Pension Service (NPS) 7.2 Valuation 2013A 2014F 2015F PE (x) 13.5 10.5 8.7 PB (x) 1.8 1.3 1.2 ROE (%) 14.3 12.7 13.7 EV/EBITDA (x) 8.7 6.4 5.3 EPS (KRW) 5,659 5,608 6,777 BPS (KRW) 41,305 45,430 50,430 Performance 1M 6M 12M Absolute (%) 0.2 (20.6) (16.7) Relative to KOSPI (%p) (3.8) (27.9) (25.3) 12MF PE trend 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 (X) 12MF PER (LHS) price (RHS) 0.0 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Source: WISEfn consensus (KRW) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Gradual earnings improvement Above In line Below What s new: In line with lowered expectations, QoQ improvement Daewoong Pharmaceutical (Daewoong) posted 2Q14 sales of W182bn (up 14.7% YoY, up 7.4% QoQ) and OP of W17.8bn (down 17.5% YoY, up 19.9% QoQ), meeting our estimates and the consensus. OP has contracted since 4Q13 due to the patent expiry of high-margin Olmetec in September 2013 and the high base effect until 2Q14. Fortunately, Olmetec sales, which plummeted in 1Q14 on aggressive early promotions by generics, rebounded to W12.9bn (up 29% QoQ). As such, overall earnings improved QoQ. Pros: Steady co-promotion product growth, Olmetec sales recovery As expected, Olmetec sales recovered after dipping in 1Q14 on aggressive early promotions by generics. The impact from Olmetec s price cut should persist over the near term, but sales volume has stabilized. Meanwhile, co-promotion commission revenue continued steady growth, increasing 9.4% YoY, or 12.7% QoQ. Olostar, a hypertension-hyperlipidemia combined therapy released in April, also generated new revenue from 2Q14 as it is smoothly landing in general hospital channels. Cons: Limited contribution from Nabota, to expand from 3Q14 Botox biosimilar, Nabota (W1.3bn based on supply price), which was released in April, did not contribute to 2Q14 earnings as much as expected. Since biological products, including botulinum toxin medicines, are under the lot release program, most production was used for quality assessment and approval until end-july. As such, distributor inventories were insufficient, and Daewoong could not generate substantial sales. As the doctors response to Nabota has been favorable, we expect rapid sales expansion from August as products are fully supplied. Also, Nabota should contribute to overall margin improvement given a high OPM. Conclusion: Gradual earnings improvement, but lower expectations on additional price cut in 2H14 Earnings improvement in 2Q14 is positive. However, we should lower earnings expectations as additional price cuts are scheduled in 2H14 (price cut on Nexium following patent expiry in July, and additional cut on Olmetec in September one year after patent expiry). As such, we lowered our 2014F OP estimate 8.3%. We maintain our TP at W85,000 (implied 2014F PE 15x, 2015F PE 12.5x) as the change in fair value is less than 10%. We maintain BUY despite the lower earnings (W bn, %, %p) Jung-In Lee 822-3276-6239 jilee@truefriend.com Sangeun Lee 822-3276-6196 sangeun.lee@truefriend.com 2Q14P Change 2014F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 183 182 (0.8) 180 7.4 14.7 734 729 OP 18 18 (2.7) 19 19.9 (17.5) 72 74 OP margin 10.0 9.8 10.5 9.8 10.1 EBT 18 19 7.1 20 16.1 (16.6) 74 77 NP 14 15 7.0 15 18.4 (14.0) 58 61 Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT.
expectation, given: 1) attractive PE valuations, and 2) long-term OP growth potential (2014-2016 CAGR 18%) based on larger sales of Nabota and copromotion products. Table 1. Quarterly earnings 2012 2013 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14P (W bn, %) %QoQ %YoY % Diff. KIS est. Sales 665 675 163 159 172 182 169 182 7.4 14.7 (0.8) 182 ETC 526 545 133 130 143 140 137 148 8.2 14.5 Co-promotion commission revenue 43 50 10 14 15 11 13 15 12.7 9.4 Co-promotion merchandise sales 30 58 7 7 14 30 33 41 23.4 497.1 Pure ETC 454 437 116 109 114 99 91 93 2.0 (15.0) OTC 76 54 13 14 13 13 13 14 6.9 (2.8) Consignment 23 28 7 8 7 8 7 7 4.2 (1.3) Export 9 15 2 2 3 8 6 5 (1.8) 125.0 Others 30 33 8 5 7 14 7 7 3.2 44.9 Gross profit 273 286 73 73 77 63 65 69 6.3 (6.3) Operating profit 38 72 17 22 25 9 15 18 19.9 (17.5) (2.7) 18 Net profit 35 59 12 17 20 9 12 15 18.4 (14.0) 7.0 14 COGS % 58.9 57.6 55.1 53.7 55.2 65.4 61.8 62.2 SG&A % 35.4 31.8 34.5 32.6 30.4 29.9 29.4 28.0 OPM % 5.7 10.7 10.4 13.6 14.4 4.8 8.8 9.8 10.0 Source: Company data, Korea Investment & Securities Table 2. Earnings revisions Previous Revised % Difference 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F Sales 734 814 877 734 813 877 0.0 (0.1) 0.0 Operating profit 79 93 107 72 87 100 (8.3) (6.5) (6.0) Pre-tax profit 80 95 109 74 89 103 (8.1) (6.4) (5.9) Net profit 63 75 86 58 70 81 (8.1) (6.4) (5.9) (OP margin %) 10.7 11.5 12.2 9.8 10.7 11.5 EPS 6,104 7,243 8,320 5,608 6,777 7,828 (8.1) (6.4) (5.9) Source: Korea Investment & Securities (W bn, % ) Company overview & Glossary Founded in 1961, Daewoong Pharmaceutical (pre-separation) is the sixth largest pharmaceutical in Korea by market cap and no. 1 in OTC sales. With traditional strength in operating activities, the firm is leading distribution of license-in products. On Oct 1, 2002, the firm was separated (spin-off) to Daewoong, a holding company, and Daewoong Pharmaceutical, an operating entity. Co-promotion: Joint sales of original drugs with their original makers by separating customers such as large hospitals vs. small/mid-size hospitals and clinics ETC (Ethical drug): A medicine that requires a diagnosis and medical prescription from a doctor before it can be obtained 2
Balance sheet FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Current assets 229 303 290 308 332 Cash & cash equivalent 50 60 85 81 88 Accounts & other receivables 91 88 100 111 120 Inventory 86 115 102 113 122 Non-current assets 248 269 326 396 458 Investment assets 22 42 26 28 31 Tangible assets 105 108 169 223 271 Intangible assets 30 28 30 33 36 Total assets 477 572 616 704 790 Current liabilities 74 81 71 96 108 Accounts & other payables 62 60 65 72 77 ST debt & bond 0 0 0 0 0 Current portion of LT debt 0 0 0 0 0 Non-current liabilities 18 54 58 60 61 Debentures 0 40 40 40 40 LT debt & financial liabilities 0 0 0 0 0 Total liabilities 93 135 129 156 169 Paid-in capital 28 29 29 29 29 Capital surplus 101 100 100 100 100 Other Reserves (45) (45) (45) (45) (45) Retained earnings 295 346 395 457 530 Shareholders' equity 385 437 487 548 621 Adj. shareholders' equity 383 434 481 539 609 Income statement FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F Sales 665 675 734 813 877 COGS 392 388 440 483 515 Gross profit 273 286 293 330 362 SG&A expense 235 214 221 243 262 Operating profit 38 72 72 87 100 Financial income 9 4 4 4 4 Interest income 1 2 2 2 2 Financial expense 8 6 8 8 8 Interest expense 1 0 1 1 1 Other non-operating profit 4 4 5 6 6 Gains (Losses) in associates, subsidiaries and JV 0 0 0 0 0 Earnings before tax 43 75 74 89 103 Income taxes 8 16 16 19 22 Net profit 35 59 58 70 81 Other comprehensive profit (1) 2 0 0 0 Total comprehensive profit 33 61 58 70 81 EBITDA 55 90 93 113 132 Adj. net profit 34 58 58 70 81 Cash flow FY-ending Dec. (W bn) 2012A 2013A 2014F 2015F 2016F C/F from operating 45 56 70 101 108 Net profit 35 59 58 70 81 Depreciation 16 16 19 25 30 Amortization 1 1 1 2 2 Net incr. in W/C (17) (45) (10) 4 (6) Others 10 25 2 0 1 C/F from investing (13) (77) (37) (96) (93) CAPEX (23) (19) (80) (78) (78) Decr. in fixed assets 1 0 0 0 0 Incr. in investment 15 (59) 17 (3) (2) Net incr. in intangible assets (8) 0 (4) (5) (4) Others 2 1 30 (10) (9) C/F from financing (37) 31 (8) (8) (8) Incr. in equity 0 0 0 0 0 Incr. in debts (30) 40 (0) (0) (0) Dividends (8) (8) (8) (8) (8) Others 1 (1) 0 0 0 C/F from others 0 (0) 0 0 0 Increase in cash (5) 9 25 (4) 6 Key financial data FY-ending Dec. 2012A 2013A 2014F 2015F 2016F per share data (KRW) EPS 3,302 5,659 5,608 6,777 7,828 BPS 37,937 41,305 45,430 50,430 56,469 DPS 800 800 800 800 800 Growth (%) Sales growth (5.9) 1.5 8.7 10.8 7.8 OP growth (37.3) 90.5 0.2 20.8 15.3 NP growth (32.1) 71.4 (0.9) 20.8 15.5 EPS growth (33.9) 71.4 (0.9) 20.8 15.5 EBITDA growth (27.1) 62.3 3.2 22.4 16.6 Profitability (%) OP margin 5.7 10.7 9.8 10.7 11.5 NP margin 5.1 8.7 7.9 8.6 9.2 EBITDA margin 8.3 13.3 12.6 13.9 15.1 ROA 7.1 11.2 9.7 10.6 10.8 ROE 9.2 14.3 12.7 13.7 14.1 Dividend yield 1.7 1.0 1.4 1.4 1.4 Dividend payout ratio 23.5 13.8 13.8 11.4 9.9 Stability Net debt (W bn) (50) (59) (45) (41) (48) Debt/equity ratio (%) 0.1 9.2 8.3 7.3 6.5 Valuation (X) PE 14.4 13.5 10.5 8.7 7.5 PB 1.3 1.8 1.3 1.2 1.0 EV/EBITDA 8.1 8.7 6.4 5.3 4.5 Note: 1. Based on K-IFRS (non-consolidated) 2. EPS and BPS are calculated using adjusted net profit and shareholders equity that includes equity-method gains/losses 3
Changes to recommendation and price target Company (Code) Date Recommendation Price target 09-28-12 Hold - 05-05-13 BUY W95,000 07-17-13 BUY W82,500 10-15-13 BUY W105,000 02-05-14 BUY W95,000 05-07-14 BUY W85,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 4
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Distribution United States: This report is distributed in the U.S. by Korea Investment & Securities America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Korea Investment & Securities, Co., Ltd. or its affiliates. Pursuant to Rule 15a-6(a)(3), any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Korea Investment & Securities America, Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. person absent registration or an applicable exemption from the registration requirement. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Daewoong Pharmaceutical. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Daewoong Pharmaceutical in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Daewoong Pharmaceutical in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from Daewoong Pharmaceutical in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Daewoong Pharmaceutical s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Daewoong Pharmaceutical shares as of July 30, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of July 30, 2014. Prepared by: Jung-In Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 5