Background: C&O Pharmaceutical Technology (Holdings) Limited is an integrated pharmaceutical group in China. Its businesses range from R&D and manufacturing to marketing and distribution of products via 2,000 distributors and 300,000 clinics, pharmacies and hospitals across China. The company’s portfolio includes eight exclusive products and 28 C&O-branded products.
Recent development: In December last year, Sumitomo Corporation of Japan bought a 29% stake in C&O for $96m or $0.50 per share. Sumitomo consequently took three seats on C&O’s board including the position of Non-executive Chairman.
Key ratios…
Price-to-earnings: 12.2x
Price-to-NTA: 3.3x
Dividend per share / yield: S$0.068 /15%
Net cash/(debt) per share: S$0.023
Net cash as % of market cap: 5%
Share price S$0.45
Issued shares (m) 663.36
Market cap (S$m) 298.51
Free float (%) 35%
Recent fundraising activities Nil
Financial YE 30 Jun
Major shareholders Leo Star Development (29.1%), Sumitomo Corp (29.0%)
YTD change -7.22%
52-wk price range S$0.325-0.535
Our view Price ceiling on drugs. One of the priorities of China’s healthcare reform involves establishing an essential drugs list and placing price caps on these drugs. The government’s announcement of another round of price adjustments in March this year has cast uncertainties over C&O’s ASP and some customers are holding back orders. Management, however, has assured that its ASP would remain stable as the prices of its products are generally below the ceiling.
Leveraging on Sumitomo. With Sumitomo as its second-largest shareholder, C&O can leverage on its network to expand its product range. It recently secured the exclusive distributorship of an antibiotic product from Shionogi & Co, a major pharmaceutical company in Japan.
Cash-generative business. C&O has been generating strong operating cash flows in its business. It also returned a major portion of cash to shareholders through a special interim dividend of 6.3 Singapore cents in FY Jun10. Total dividends came up to 6.8 Singapore cents. The stock currently trades at 12.2x FY Jun10 PER.
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