China Animal Healthcare Ltd - In Search of Greener Pastures (AMFraser)

BUY

F A IR V A L U E : S $ 0 . 39

LAST CLOSE: S$0.27

Previous: BUY Previous: S$0.345

Potential delisting from SGX. China Animal Healthcare (“CAH”) announced they are evaluating a potential delisting from the SGX whilst continuing to maintain their primary listing on the HKEx. They have consulted the SGX who has no objection to any potential delisting, as long as various conditions are met. We believe that if the move is successful, CAH will see a significant jump in share price when primarylisted in Hong Kong.

Unique proposition on HKEx. CAH’s peers in the animal drugs and vaccine business in China are listed on the Shanghai and Shenzhen stock exchanges—they do not have direct comparables on the HKEx. This makes their primary listing a unique proposition for Hong Kong investors. Their peers listed on the Chinese stock exchanges are trading at an average 12-month historical PER of 30x (see exhibit 1). This compares favourably with CAH’s current PER of 13.5x. We believe Hong Kong investors can better appreciate CAH’s business model and ascribe a valuation closer to their Chinese-listed peers.

Re-rating potential. Since 2007, many SGX-listed companies with core businesses in China have delisted from the SGX and re-listed in Hong Kong. Want Want China Holdings, a Taiwanese food manufacturer, delisted from the SGX in 2007 to re-list on HKEx in 2008 after a corporate re-organisation. Their PER on re-listing in Hong Kong was ~20x FY08E earnings, compared to 10-15x historical PER while trading on the SGX. In 2009, Sihuan Pharmaceutical Holdings, a manufacturer of cardiovascular drugs, achieved an almost 10-fold increase in valuation following their US$741 million IPO in Hong Kong. For sofa manufacturer Man Wah Holdings, despite a weaker IPO sentiment in March 2010, they still managed to double its PER upon relisting. Having said the above, we should still caution that CAH’s case is not a conventional de-list-then-re-list exercise, and hence, may not generate the same outsized buzz.

Good business outlook. A delisting exercise without a good fundamental story is naturally futile. With increasing affluence among the Chinese middle-class, the macro story of strong chicken meat and pork demand remains intact. The ever-present threat of inflation also causes farmers to be more concerned with the survival of their livestock. Hence, barring any unforeseen natural disasters, demand for animal drugs and vaccination should continue to be strong. Within the industry, CAH remains the market leader in powdered drugs with the largest sales and technical staff of ~1800. Their vaccine segment is also performing well, and going into FY2012, we expect the FMD vaccine to overcome the initial hiccups.

Raise FV to 39 SG cents and maintain BUY. We change our valuation methodology from DCF to a PER peg of 14x to FY2011 estimated EPS (adjusted for FV gain in derivative instrument) of 2.8 SG c. This gives us an FV of 39 SG cents. As this is still a 44% premium over the last close price of 27 SG cents, we maintain our BUY recommendation.