Small-cap Company Note July 3, 214 i-sens (9919) Not rated Stock Data KOSPI (Jul 2, pt) 2,15 Stock price (Jul 2, KRW) 53,1 Market cap (USD mn) 476 Shares outstanding (mn) 9 52-Week high/low (KRW) 58,4/33,6 6M avg. daily turnover (USD mn) 3.6 Free float / Foreign ownership (%) 73.5/35. Major shareholders (%) Geun-Sik Char and 2 others 25.8 Performance Arkray Inc. 1.4 1M 6M 12M Absolute (%) 15.1 26.1 55.5 Relative to KOSPI (%p) 14.4 23.7 46.9 12MF PE trend 3. 25. 2. 15. 1. 5. (X) 12MF PER (LHS) price (RHS). Aug-9 Aug-1 Aug-11 Aug-12 Aug-13 Source: WISEfn consensus (KRW) 6, 5, 4, 3, 2, 1, Growth potential stemming from a high-quality customer base Specialized in blood glucose monitoring systems - Specialized in making blood glucose meters and test strips - While the blood glucose meters are durable, test strips are single-use; Diabetic patients use four or five strips a day - As of 213, sales broke down to 85% blood glucose test strips and 1% glucose meters - The company differentiates itself from peers with a clientele comprising global leaders that offers a basis for stable growth; Another merit is the firm is less exposed to the stagnant/shrinking US market Investment points 1. Stable growth achievable thanks to quality customers - A quality customer base comprising Arkray, AgaMatrix and PHARMAC would ensure stable growth - Japan s Arkray is the world s fifth-biggest manufacturer of blood glucose selfmonitoring systems after Roche, Johnson & Johnson, Bayer and Abbott with an estimated market share of 5-6%; As a supplier of test strips, i-sens generated W8bn in sales from Arkray in 213 and the figure should expand to W12bn in 214F and W2bn in 215F - AgaMatrix is the US-based distributor but it has a focus on the European market (AgaMatrix is a vendor for Europe s biggest pharmaceutical company); AgaMatrix has limited exposure to the US market where the prices for blood glucose test strips were recently lowered - PHARMAC procures drugs and medical devices on behalf of the New Zealand government; i-sens signed an exclusive supply contract with PHARMAC that runs through 215; i-sens has an unrivaled competitive edge in the country as its products are under exclusive coverage of the insurance program adopted in March; Sales to PHARMAC should reach W8bn in 214F 2. Product diversification - In addition to blood glucose monitoring systems, i-sens has entered the blood analyzer (electrolyte analyzer and cartridge) segment; The company is also pushing to branch out into the glycated hemoglobin (HbA1c, for clinician use) and gas analyzer markets - Electrolyte analyzers now account for a mere 4% of total sales but the weighting should gradually increase - HbA1c and gas analyzers are scheduled for release in 2Q15; It would take some time before the products generate meaningful sales Jee Hyung Han 822-3276-6236 jhh6@truefriend.com Seoyun Kim 822-3276-5782 seoyun.kim@truefriend.com Yr to Sales OP NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) 21A 37.8 6.3 6.1 1,435 NM 1 NM (.6) NM 12.1-211A 52.2 9. 7.6 953 (33.6) 13 NM.3 NM 13.8-212A 66.5 7.9 8.7 1,88 14.2 13 NM.8 NM 13.7-213A 82.9 18.6 18.6 2,86 91.7 25 19.9 15.4 3.6 21.7-214F 15. 24. 2. 2,25 5.7 32 24.1 15.3 3.9 17.7 - 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.
i-sens Inc. (9919) Earnings forecast & valuation - Trades at 24.1x 214F PE; Solid growth lies ahead backed by quality clients with no over-reliance on a specific customer or region, which justifies a valuation that sets the company apart from other medical device makers 1. Earnings: Fast growth, fat margins likely in 214 We set 214F sales at W15bn (+27% YoY) and OP at W24bn (+3% YoY). Better earnings should be driven by blood glucose test strips supplied to Arkray and AgaMatrix. Of note, sales and OP grew 2% YoY and 14% YoY, respectively, in 1Q14. OPM disappointed at 18.1% but this was because blood glucose meters(sold at a near loss) accounted for a large portion of sales. The company should be able to improve its margins during the remaining quarters. Figure 1. Earnings by year Figure 2. Global blood glucose monitoring systems (W bn) 12 Sales (L) OP (L) OPM (R) 15. 35% 25, (USD mn) 1 8 6 4 2 82.9 16.6% 66.5 17.2% 22.4% 22.9% 52.2 37.8 11.9% 24. 18.6 6.3 9. 7.9 3% 25% 2% 15% 1% 5% 2, 15, 1, 5, 1,438 11,515 13,1 14,846 17,72 19,847 21A 211A 212A 213A 214F % 21 211E 212E 213E 214E 215E Source: Korea Investment & Securities Source: Global Industry Analysts, 211 Figure 3. Sales breakdown by customer Figure 4. Sales breakdown by region 34% 29% 1% AgaMatrix Arkray PHARMA C Domestic (W bn) 3 25 2 15 1 6.1 9.6 14.1 7.9 1.5 16.2 211 212 213 25.4 23.9 22.3 14.9 12.9 1.6 8.3 6.1 18% 9% Others 5 Europe Asia North America Korea Oceania Source: Company data, Korea Investment & Securities Source: Korea Investment & Securities 2
i-sens Inc. (9919) 2. Analysis of key variables Benefits from customers growing outsourcing need With the downturn for blood glucose monitoring system prices, manufacturers are ratcheting up cost-reduction efforts. It has been known that Arkray depends on i- SENS as an outsource vendor while running its own production bases in Japan, US, UK, etc. If competition intensifies and price-cut pressure builds up, such outsourcing needs would inevitably grow. At present, i-sens blood glucose test strip supply already accounts for ~5% of total volume at Arkray and the Japanese company owns 1% of i-sens. Given the firm partnership, i-sens would benefit if Arkray expands outsourced volume. 3. Risk check Reliance on Arkray Although Arkray-bound sales would be a major growth driver going forward, we believe i-sens needs to be wary of its reliance on a single customer. In 214F, Arkray-related sales are expected to slightly exceed 11%, which is not yet cause for serious concern. As i-sens depends on blood glucose monitoring systems for 95% of sales (almost a single revenue source), ongoing business diversification efforts to blood analyzers, HbA1c, gas analyzers, etc., must progress without faltering. i-sens is a manufacturer of medical, environmental and industrial-use sensors and measuring instruments, and its specialty is self-monitoring blood glucose systems and blood analyzers. Self-monitoring blood glucose systems consist of blood glucose meters, test strips and lancets, and are used to measure the blood sugar level for patients diagnosed with diabetes (or those at risk) either at home or at clinics. Replacing desktop blood analyzers located in a hospital s central laboratory, blood gas and electrolyte analyzers allow an instant on-site analysis, for example in an operating room. Sales broke down to 95.1% blood glucose monitoring systems and 3.8% blood analyzers in 213. As such, most sales are from blood glucose meters and test strips. Blood glucose meter: A hand-held device that measures glucose concentration in blood; The device can be used tens of thousands of times Test strip: A thin paper strip-shaped consumable with a receptacle containing chemicals, including enzymes that electro-chemically react with glucose in a blood drop Lancet: A device mounted with a disposable needle that is used to prick a patient s skin (usually a finger) to get a drop of blood from capillary vessels 3
i-sens Inc. (9919) Company overview EQ Main business: Specializes in medical devices such as blood glucose meters and test strips Major shareholders: Geun-Sik Char and 2 others(26.%) Akrav Inc. 1.44% Growth potential: Earnings stability: Company reliability: Growth potential and profitability by division G r o w t h p o t e n t i a l Blood glucose meters Profitability Test strip Key variables for EV and share price Arkray s greater outsourcing needs and i-sens order receipts Stability of production yields at the Songdo plant Benefits from implementation of remote medical services in Korea Tougher international quality standards (ISO 15197) for blood glucose meters Risks KRW/USD rate (export weighting more than 79%) Reliance on a single item Possible delay for new product releases 3C (company, customer, competitor) analysis Product Sales (% of total) OPM 3C Company Customer Competitor Others Glucose meter W8.2bn (1%) -2 to -15% A durable device that measures blood sugar level 5% ODM products, 5% in-house developed products Own brands include CareSens, POP, N, etc. Handok Exported to 84 countries Domestic: Infopia, All Medicus, SD Biosensor, etc. Overseas: Roche, Johnson & Johnson, Bayer, Abbott, etc. Global market (including test strips) is worth ~W1tn-12tn Priced at ~W5, per device As test strips are only compatible with the corresponding blood glucose meters, the devices can be sold at a loss No. 2 domestic market share after Roche Test strip W7.1bn (85%) 3 to 35% A bar-shaped test strip with a part that reacts with glucose in blood; Disposable Competitive prices: 1-2% cheaper than major manufacturers AgaMatrix (US), Arkray (Japan), PHARMAC (New Zealand) Exported to 84 countries Domestic: Infopia, All Medicus, SD Biosensor, etc. Overseas: Roche, Johnson & Johnson, Bayer, Abbott, etc. W2,-25, per pack of 5 strips Established Arkrayexclusive strip production line (current capacity 2mn strips, to expand to 4mn by 215) 4
i-sens Inc. (9919) Balance sheet FY-ending Dec. (W bn) 21A 211A 212A 213A 214F Current assets 43.1 37.6 36.5 61.1 75.6 Cash & cash equivalents 3.4 8.5 1.6 8.9 11.6 Accounts & other receivables 8.8 1. 18.6 21.7 26.3 Inventory 1.5 14.9 13.7 21.7 26.8 Non-current assets 31.1 44.9 55.5 8.3 86.2 Investment assets...7.. Tangible assets 27.5 41.3 52. 75.3 79.3 Intangible assets 2.6 2.6 2. 3.7 5.3 Total assets 74.1 82.5 92. 141.4 161.8 Current liabilities 1.4 14.9 12.5 13.5 15.4 Accounts & other payables 4. 5.4 6.3 8.1 1.3 ST debt & bonds.6.3 5.1 1.4 1.4 Current portion of LT debt 5.1 7.5... Non-current liabilities 12.9 8.3 11.2 23.6 22.1 Debentures..... LT debt & financial liabilities 11.1 6.7 9. 21.4 19.4 Total liabilities 23.3 23.2 23.6 37.1 37.5 Controlling interest 5.8 59.3 68.4 13.1 123.1 Capital stock 2.2 4. 4. 4.5 4.5 Capital surplus 29.8 28.8 29.4 46.2 46.2 Capital adjustments.5.6.7.7.7 Retained earnings 18.2 25.9 34.4 51.8 71.8 Minority interest... 1.2 1.2 Shareholders' equity 5.8 59.3 68.4 14.3 124.3 Income statement FY-ending Dec. (W bn) 21A 211A 212A 213A 214F Sales 37.8 52.2 66.5 82.9 15. COGS 23.1 32.5 43.9 47.6 6.2 Gross profit 14.7 19.7 22.6 35.2 44.8 SG&A expenses 8.4 1.8 14.7 16.7 2.8 Operating profit 6.3 9. 7.9 18.6 24. Financial income.9 1. 2.1 2.3.9 Interest income.6.7.1.4.4 Financial expenses 1.6 1.1.6.4 1.4 Interest expenses.5.4.4.3.3 Other non-operating profit.8.2.8 1.7.9 Gains (Losses) in associates, subsidiaries and JV....2. Earnings before tax 6.4 9. 1.3 22.4 24.5 Income taxes.2 1.4 1.5 3.8 4.5 Net profit 6.1 7.6 8.7 18.6 2. Net profit of controlling interest 6.1 7.6 8.7 18.6 2. Other comprehensive profit (.2).1 (.3) (1.3). Total comprehensive profit 5.9 7.7 8.4 17.3 2. Total comprehensive profit of controlling interest 5.9 7.7 8.4 17.3 2. EBITDA 9.7 12.9 13.2 24.8 31.6 Cash flow FY-ending Dec. (W bn) 21A 211A 212A 213A 214F C/F from operations 5.6 9.4 5.1 16.2 19.8 Net profit 6.1 7.6 8.7 18.6 2. Depreciation 2.8 3.1 4.4 5.5 6.2 Amortization.6.8.8.8 1.4 Net incr. in W/C (5.3) (5.5) (9.5) (9.7) (8.) Others 1.3 3.4.6.9.2 C/F from investing (12.6) (1.9) (13.6) (35.9) (15.2) Capex (2.4) (16.9) (15.5) (28.4) (1.2) Decr. in fixed assets..... Incr. in investment (9.7) 16. 2.3 (6.1) (.) Net incr. in intangible assets (.8) (.8) (.5) (.5) (2.9) Others.3 (.2). (.9) (2.) C/F from financing 7.5 (2.3) 1.6 27.1 (2.) Incr. in equity 12.2.6.5 17.5. Incr. in debt (4.7) (2.9) 1.1 9.6 (2.) Dividends..... Others. (.) (.). (.) C/F from others.. (.) (.1). Increase in cash.5 5.1 (6.9) 7.3 2.6 Key financial data FY-ending Dec. 21A 211A 212A 213A 214F Per-share data (KRW) EPS 1,435 953 1,88 2,86 2,25 BPS 11,519 7,394 8,481 11,391 13,597 DPS Growth (%) Sales growth. 38. 27.5 24.5 26.7 OP growth NM 42.6 (11.6) 133.8 29.5 NP growth NM 23.7 15.1 113.2 7.1 EPS growth NM (33.6) 14.2 91.7 5.7 EBITDA growth NM 32.5 2.6 88.4 27.3 Profitability (%) OP margin 16.6 17.2 11.9 22.4 22.9 NP margin 16.3 14.6 13.1 22.5 19. EBITDA margin 25.7 24.6 19.8 3. 3.1 ROA 8.3 9.7 1. 16. 13.2 ROE 12.1 13.8 13.7 21.7 17.7 Dividend yield - - - - - Dividend payout ratio..... Stability Net debt (W bn) (6) 3 11 6 () Debt/equity ratio (%) 33.3 25. 2.6 21.9 16.8 Valuation (x) PE NM NM NM 19.9 24.1 PB NM NM NM 3.6 3.9 EV/EBITDA NM.2.8 15.3 15.1 Note: K-IFRS (consolidated) 5
i-sens Inc. (9919) Changes to recommendation and price target Company (Code) Date Recommendation Price target (9919) 7-2-14 NA - 7, 6, 5, 4, 3, 2, 1, Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 6
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 1 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 i-sens, Inc.. 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 i-sens, Inc. in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from i-sens, Inc. 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 i-sens, Inc. in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in i-sens, Inc. s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of i-sens, Inc. shares as of July 3, 214. 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 3, 214. Prepared by: Jee Hyung Han 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.
HEAD OFFICE CHUN SOO LIM, Executive Vice President, Head of Global Institutional Group (cslim@truefriend.com +822 3276 58) PAUL CHUNG, Sales Trading (pchung@truefriend.com +822 3276 5843) 27-1 Yoido-dong, Youngdeungpo-ku, Seoul 15-745, Korea Toll free: US 1 866 258 2552 HK 8 964 464 SG 8 8211 32 Fax: 822 3276 5681~3 Telex: K2296 NEW YORK DONG KIM, Managing Director (dkim@kisamerica.com +1 212 314 681) HOON SULL, Head of Sales (hoonsull@kisamerica.com +1 212 314 686) Korea Investment & Securities America, Inc. 135 Avenue of the Americas, Suite 111 New York, NY 119 Fax: 1 21 592 149 HONG KONG DANIEL KIM, Managing Director, Head of HK Sales (daniel.kim@kisasia.com +852 253 895) DAN SONG, Sales (dan.song@kisasia.com, +822-3276-5621) Korea Investment & Securities Asia, Ltd. Suite 221-2, Jardine House 1 Connaught Place, Central, Hong Kong Fax: 852-253-1516 SINGAPORE SUNG NAMGOONG, Managing Director, Head of Singapore Sales (snamgoong@truefriend.com +65 651 561) ALEX JUN, Sales (alex.jun@truefriend.com +65 651 562) Korea Investment & Securities Singapore Pte Ltd 1 Raffles Place, #43-4, One Raffles Place Singapore 48616 Fax: 65 651 5617 LONDON JJ MOON, Managing Director (jamesmoon@kiseurope.com +44 27 65 2765) Korea Investment & Securities Europe, Ltd. 2nd Floor, 35-39 Moorgate London EC2R 6AR Fax: 44-27-236-4811 Telex: 8812237 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. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private investors.