(038290 KQ) High-margin overseas operations have just begun Bio Results Comment May 29, 2013 (Maintain) Buy Target Price (12M, W) 55,000 Share Price (05/28/13, W) 39,250 Expected Return 40% OP (13F, Wbn) 8 Consensus OP (13F, Wbn) 8 EPS Growth (13F, %) 81.8 Market EPS Growth (13F, %) 21.6 P/E (13F, x) 34.7 Market P/E (13F, x) 9.4 KOSDAQ 585.76 Market Cap (Wbn) 224 Shares Outstanding (mn) 6 Free Float (%) 88.9 Foreign Ownership (%) 4.2 Beta (12M) 0.63 52-Week Low (W) 20,550 52-Week High (W) 43,700 (%) 1M 6M 12M Absolute 2.4 37.2 72.2 Relative 0.2 33.4 63.3 230 180 130 80 Share price KOSDAQ 5/12 9/12 1/13 5/13 Daewoo Securities Co., Ltd. Pharmaceuticals/Bio Irene Kim +822-768-3251 irene.kim@dwsec.com 1Q13 review: Net profit beats our forecast; Earnings growth to accelerate beat our forecasts in 1Q, posting revenue of W10.8bn (+19.1% YoY), operating profit of W0.53bn (+49.6% YoY), and net profit of W0.92bn (+48.8% YoY). Operating profit and net profit surged YoY despite incentive payments to its employees in the quarter, thanks to: 1) an improved cost-to-revenue ratio owing to top-line growth and 2) the recognition of other non-operating profit. In 2Q, the company is anticipated to deliver record earnings, with revenue of W15.5bn and an operating profit of W2bn. s sequencing revenue (86.8% of total revenue) showed a CAGR of 40.4% in 2010-2012, thanks to Axeq Technologies, the company s premium service for human genome sequencing. The strong performance of Axeq is evidence of accelerating growth of the genome sequencing market. Personalized medicine to ease burdens of national health insurance programs 1) Domestic: Due to a lack of applicable laws, has postponed the domestic launch of its next-generation sequencing (NGS) service, instead choosing to focus on overseas operations (particularly in the US). Once relevant guidelines are established (currently underway at the Ministry of Health and Welfare), however, the company s domestic operations (and the broader clinical sequencing industry) should start to expand. 2) Overseas ( Clinical Lab (MCL)): In 2H, MCL is set to provide clinical sequencing services to major US general hospitals, in addition to their existing business with children s hospitals. As precise diagnosis and personalized medicine not only increase survival rates but also reduce the burdens of national health insurance programs, governments around the globe should invest heavily in genome science. 3) Overseas (LSG): Recently, Thermo Fisher announced its plans to buy Life Technologies in a US$13.6bn deal, the largest acquisition in the genomics industry since Amgen s purchase of decode Genetics in December 2012. We believe that the company s investment plans have been prompted by the growing importance of sequencing technologies for diagnostics and the development of personalized drugs. Amid rising interest in genomics, related stocks (including Illumina) are outperforming the market. And LSG, s USbased subsidiary, is becoming more attractive as an M&A target. Maintain Buy with TP of W55,000 The personal genomics market is expanding rapidly, as sequencing service rates are falling on the launch of more sophisticated gene-sequencing equipment. Personal genomics is taking on more importance, with the Korean government citing the segment as one of its key investment areas for 2013. However, this market is likely to be driven by developed countries in which preventive medicine is widespread and laws and regulations related to the application of gene-sequencing technologies in clinical trials (e.g., CLIA) are in place. As such, the fact that is currently discussing partnerships with US hospitals proves that the company is a leading global genomesequencing firm. We maintain our Buy call with a target price of W55,000. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 23 31 43 57 80 112 OP (Wbn) 2 5 5 8 12 18 OP Margin (%) 7.2 17.3 12.5 14.0 15.5 16.5 NP (Wbn) 1 3 4 6 11 15 EPS (W) 218 498 622 1,130 1,961 2,661 ROE (%) 3.0 6.6 7.4 11.7 17.5 19.6 P/E (x) 64.6 72.7 46.9 34.7 20.0 14.8 P/B (x) 2.0 4.7 3.2 3.8 3.2 2.6 Note: All figures are based on non-consolidated K-IFRS Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
Table 1. 1Q13P earnings results 1Q12 4Q12 1Q13P (Wbn, %, %p) Growth Preliminary KDB Daewoo Consensus YoY QoQ Revenue 9.1 11.9 10.8 11.3 NA 19.1-9.0 Operating profit 0.4 1.7 0.5 0.5 NA 49.6-69.0 OP margin 3.9 14.5 4.9 4.8 NA 1.0-9.5 Pretax profit 0.6 0.6 0.9 0.8 NA 48.8 48.4 Net profit 0.6-0.1 0.9 0.8 NA 48.8 TTR Note: Adjusted operating profit (since 4Q12, following accounting changes) Source: FnGuide, estimates Table 2. Quarterly and annual earnings Revenue (Wbn, %, %p) 2012 2013F 1Q13P 1Q 2Q 3Q 4Q Annual 1QP 2QF 3QF 4QF Annual YoY QoQ Overseas (sequencing) 6.0 7.2 6.3 6.8 26.3 6.6 9.4 9.8 9.1 34.9 10.0-2.9 Overseas (DNA/BAC chips) 0.1 0.2 0.2 0.2 0.6 0.2 0.3 0.3 0.2 1.0 100.0 0.0 Domestic (sequencing) 2.0 2.9 2.5 3.6 10.9 2.8 4.2 3.4 5.5 15.9 40.0-22.2 Domestic (DNA/BAC chips) 0.8 1.1 1.1 1.2 4.2 1.1 1.4 1.3 1.4 5.2 37.5-8.3 Other 0.2 0.2 0.1 0.1 0.8 0.1 0.2 0.0 0.0 0.3-50.0 0.0 Total 9.1 11.6 10.2 11.9 42.8 10.8 15.5 14.8 16.2 57.3 18.7-9.2 Operating profit 0.3 1.8 1.5 1.7 5.4 0.5 1.9 3.2 2.5 8.1 78.3-68.5 OP margin 3.9 15.5 14.5 14.5 12.5 5.0 12.3 21.7 15.2 14.1 1.1-9.5 Pretax profit 0.6 1.5 1.5 0.6 4.2 0.9 1.9 2.3 2.5 7.7 48.8 48.5 Net profit 0.6 1.5 1.5-0.1 3.5 0.9 1.9 2.3 1.3 6.4 48.8 TTB Pretax margin 6.8 12.9 14.7 5.2 9.8 8.6 12.4 15.7 15.7 13.4 1.7 3.3 Net margin 6.8 12.9 14.7-1.0 8.2 8.6 12.4 15.7 7.9 11.2 1.7 9.6 Note: Adjusted operating profit (since 4Q12, following accounting changes) Table 3. Earnings forecast revisions Previous Revised % chg. 12 13F 14F 12 13F 14F 12 13F 14F Revenue 42.8 58.0 81.6 42.8 57.3 80.2 0.0-1.2-1.7 Operating profit 5.4 8.1 12.6 5.4 8.0 12.4 0.0-1.2-1.7 Pretax profit 4.2 8.8 13.6 4.2 7.7 12.5 0.0-12.1-8.4 (Wbn, W, %, %p) Comments Net profit 3.5 7.6 11.6 3.5 6.4 11.2 0.0-15.2-3.5 Reflecting non-operating income EPS 622 1,336 2,037 622 1,130 1,961 0.0-15.4-3.7 OP margin 12.5 14.0 15.5 12.5 14.0 15.5 0.0 0.0 0.0 Pretax margin 9.9 15.1 16.7 9.9 13.5 15.6 0.0-1.7-1.1 Net margin 8.2 13.1 14.2 8.2 11.2 13.9 0.0-1.9-0.3 Note: Adjusted operating profit (since 4Q12, following accounting changes) Personalized medicine to provide solutions to rising medical expenses Although the healthcare industry s progress has extended life expectancies, it has also created problems such as population aging and a rapid increase in chronic diseases. In particular, higher drug consumption and expensive new therapeutic treatments have driven up medical expenses, undermining the financials of Korea s national health insurance program at a time when the government is facing social pressure to expand insurance coverage toward a universal healthcare platform. We believe that the early diagnosis/prevention of diseases and regenerative medicine will help reduce the burden of increasing social costs arising from an aging society. In December 2012, set up MCL, a subsidiary with a CLIA-certified laboratory in Maryland. The subsidiary will launch genomic diagnostics services jointly with US hospitals in 2H13, facilitating the administration of personalized medicine. As precise diagnosis and personalized medicine not only increase survival rates but also reduce the financial burden of national health insurance programs, governments around the globe are anticipated to invest heavily in genome science. The US and Korean governments have already announced their plans to start funding related businesses in 2013 and 2014, respectively. 2
Figure 1. Government s road map for nurturing the genomics industry Government projects Human genome Agri-Life Marine life Source technology Infra/industrial Ministry of Health and Welfare (W157.7bn) Ministry of Agriculture, Food & Rural Affairs (W118bn) Ministry of Land, Infrastructure and Transport (W60.8bn) Ministry of Education and Science Technology (W151.3bn) Ministry of Knowledge Economy (W91bn) - Human genome transitional research for personalized care - Support for genome transitional research - Korean genome database (ICGRC) - Microbial genome research project - Genome sequencing project for agri-life resources - Bio information advancement project (NABIC) - Genome sequencing database for marine life - Support for marine life genome research - Source technology development project - Joint research for genetic information analysis - Software and system development for industrial use of genetic information - Development of genome business model & support for R&D projects Joint research projects International joint research, standardized genome map, disease mechanism identification, host-microbe interaction, human resources development Source: estimates Figure 2. Share performances of global sequencing companies (1/10=100) 260 240 220 200 180 Illumina Thermo Fisher Life Technologies Amgen S&P 500 5/15/2013: Thermo Fisher buys Life; Illumina's value becomes clear 12/10/12: Amgen, buys decode 160 140 2011 & 2012: Roche offers to acquire Illumina twice 120 100 80 60 10 11 12 13 Source: Bloomberg, estimates Figure 3. Revenue and revenue growth Figure 4. Operating profit and OP margin (Wbn) (Wbn) 100 Revenue (L) 50% 14 Operating profit (L) 18% 80 Revenue growth (R) 40% 12 OP margin (R) 15% 10 12% 60 30% 8 9% 40 20% 6 4 6% 20 10% 2 3% 0 0% 0 0% 10 11 12 13F 14F 10 11 12 13F 14F 3
(038290 KQ/Buy/TP: W55,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 43 57 80 112 Current Assets 48 61 81 106 Cost of Sales 25 32 44 60 Cash and Cash Equivalents 6 14 26 40 Gross Profit 18 26 37 51 AR & Other Receivables 9 12 17 24 SG&A Expenses 13 18 24 33 Inventories 5 6 8 12 Operating Profit (Adj) 5 8 12 18 Other Current Assets 2 2 3 4 Operating Profit 5 8 12 18 Non-Current Assets 34 32 30 30 Non-Operating Profit -1 0 0 1 Investments in Associates 3 3 3 3 Net Financial Income 0 0 0-1 Property, Plant and Equipment 27 22 19 16 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 0 0 0 0 Pretax Profit 4 8 13 19 Total Assets 82 93 111 136 Income Tax 1 1 1 4 Current Liabilities 13 17 24 33 Profit from Continuing Operations 4 6 11 15 AP & Other Payables 4 5 7 10 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 4 6 11 15 Other Current Liabilities 9 12 17 23 Controlling Interests 4 6 11 15 Non-Current Liabilities 17 17 17 18 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 13 13 13 13 Total Comprehensive Profit 4 7 11 15 Other Non-Current Liabilities 2 3 3 3 Controlling Interests 4 7 11 15 Total Liabilities 30 34 41 51 Non-Controlling Interests 0 0 0 0 Controlling Interests 52 58 70 85 EBITDA 10 13 16 21 Capital Stock 3 3 3 3 FCF (Free Cash Flow) -3 10 13 16 Capital Surplus 46 46 46 46 EBITDA Margin (%) 23.7 21.7 20.0 19.2 Retained Earnings 3 10 21 36 Operating Profit Margin (%) 12.5 14.0 15.5 16.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 8.2 11.2 13.9 13.6 Stockholders' Equity 52 58 70 85 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 11 10 13 16 P/E (x) 46.9 34.7 20.0 14.8 Net Profit 4 6 11 15 P/CF (x) 19.8 20.6 15.1 12.3 Non-Cash Income and Expense 9 6 5 6 P/B (x) 3.2 3.8 3.2 2.6 Depreciation 5 4 4 3 EV/EBITDA (x) 14.8 16.1 11.7 8.1 Amortization 0 0 0 0 EPS (W) 622 1,130 1,961 2,661 Others -2 0 0 0 CFPS (W) 1,476 1,909 2,599 3,185 Chg in Working Capital -1-1 -2-2 BPS (W) 9,117 10,219 12,187 14,854 Chg in AR & Other Receivables -1-3 -5-7 DPS (W) 0 0 0 0 Chg in Inventories -2-2 -2-3 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 2 1 2 3 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0-1 -1-4 Revenue Growth (%) 39.3 33.9 39.9 39.2 Cash Flows from Inv Activities -25-1 0 0 EBITDA Growth (%) 11.1 22.7 28.9 33.2 Chg in PP&E -12 0 0 0 Operating Profit Growth (%) 0.6 49.8 54.9 48.2 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 24.9 81.8 73.5 35.7 Chg in Financial Assets -11 0 0 0 Accounts Receivable Turnover (x) 5.2 5.6 5.7 5.7 Others -3-1 0 0 Inventory Turnover (x) 11.8 11.0 11.2 11.1 Cash Flows from Fin Activities 16-2 -2-2 Accounts Payable Turnover (x) 20.4 23.2 23.7 23.6 Chg in Financial Liabilities 15 0 0 0 ROA (%) 5.0 7.4 11.0 12.3 Chg in Equity 2 0 0 0 ROE (%) 7.4 11.7 17.5 19.6 Dividends Paid 0 0 0 0 ROIC (%) 17.2 24.1 44.4 62.4 Others 0-2 -2-2 Liability to Equity Ratio (%) 57.6 58.9 59.4 60.0 Increase (Decrease) in Cash 1 8 12 14 Current Ratio (%) 375.4 357.6 337.9 319.2 Beginning Balance 4 6 14 26 Net Debt to Equity Ratio (%) -37.4-47.1-56.2-63.0 Ending Balance 6 14 26 40 Interest Coverage Ratio (x) 4.0 5.2 8.1 12.0 4
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. (W) 60,000 50,000 40,000 30,000 20,000 10,000 Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 0 5/11 11/11 5/12 11/12 5/13 5
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) 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 institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo 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. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 150-716 Korea Two International Finance Centre Suites 2005-2012 8 Finance Street, Central Hong Kong 600 Lexington Avenue Suite 301 New York, NY 10022 United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022 Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan Suite 2602, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Tel: 44-20-7982-8016 Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699 Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28 th Floor, Hang Seng Bank Tower Centec Tower 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 6