Biosensors Int’l Group (OCBC)

Maintain BUY
Previous Rating: BUY

Current Price: S$1.29
Fair Value: S$1.60

Acquiring remaining 50% stake in JWMS

Proposal to acquire remaining 50% stake in JWMS. Biosensors International Group (BIG) has proposed to acquire the remaining 50% stake in JW Medical Systems (JWMS) from Shandong Weigao Group Medical Polymer (Shandong Weigao). JWMS is currently a joint venture between BIG and Shandong Weigao. The purchase consideration amounts to ~S$625.4m, comprising of (i) a cash payment of S$160m; (ii) issuance of 260m new ordinary shares to Shandong Weigao at S$1.2215 per share (0.12% premium to 10 Jun closing price) and (iii) issuance to Shandong Weigao of US$120m principal amount of 4% convertible notes due 2014. Upon the successful completion of this transaction, JWMS would be a wholly-owned subsidiary of BIG. Shandong Weigao would also own 21.6% of BIG assuming full conversion of the notes. We view this move positively from a strategic standpoint as BIG's own BioMatrix drug-eluting stent (DES) has yet to obtain approval from the relevant authorities in China and currently penetrates the China market via JWMS. Hence the move to gain full control of JWMS would allow BIG to strengthen its position in China.

Rationale for proposed acquisition. Management believes that China is one of the fastest growing DES markets in the world, with industry sources estimating the current market size to be worth approximately US$500m. The new healthcare reform initiative by the Chinese government has also allowed stent treatment to be reimbursable under China's basic medical insurance coverage. This would likely result in lower costs and increase the demand for stent treatments. Moreover, the changing demographics in China towards an aging population and increasing prevalence of coronary diseases also augurs well for the DES market. Hence this acquisition is in line with BIG's strategy to expand and consolidate its DES business in China. Nevertheless, we note that the industry is undergoing ASP erosion due to increasing competition although this should be mitigated by strong volume growth.

Maintain BUY. We believe that this move would help to support BIG's earnings momentum moving forward. Management estimates that this acquisition would be completed by the later part of the year (assuming shareholder approval is obtained), implying that JWMS is likely to be consolidated from 2H12 onwards. We take into account the dilutive impact caused by the enlarged share base and also update our required return on equity assumption to 9.1%. However, our FCFE model also captures the accretive earnings growth potential of the combined entity. As such, our fair value estimate increases from S$1.55 to S$1.60. Maintain BUY.