Asymchem Laboratories 6821-HK
May 03, 2022 - 6:21pm EST by
Nails4
2022 2023
Price: 160.00 EPS 12.3 9.6
Shares Out. (in M): 261 P/E 13 17
Market Cap (in $M): 10,000 P/FCF 0 0
Net Debt (in $M): -1,000 EBIT 0 0
TEV ($): 9,000 TEV/EBIT 0 0

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Description

This is again a very simple idea so I'll be brief.

 

Asymchem is one of the largest and oldest CDMO companies in China. Its scale and reputation are only behind Wuxi. They work with the who's-who of large pharmas globally. They have a clean regulatory track record. The shares are listed both in A-shares and in HK. The HK shares have little liquidity and trade for an approx 50% discount to A-shares. 

 

Asymchem is a good business with a top notch reputation. About 85% of their revenues are from developed market biopharmas and only 15% are from Chinese biopharma. Of the DM biopharmas, the vast majority are large biopharmas, with PFE the biggest client. I have done extensive customer dilligence and am impressed by Asymchem's capabilities, reputation, service, and so forth. The business has grown by about 30% CAGR for the last decade with strong margins. The CDMO business is structurally a good business as clients are risk averse and there are regulatory concerns w/ switching vendors.

The company primarily works in small molecule APIs but has significantly expanded its capabilities in recent years:  biologics CDMO, finished dosages, formulation expertise, oligonucleatides, clinical CRO. Their vision is to be more of a "one stop shop" similar to its bigger competitor Wuxi. These businesses are small but growing very rapidly. If successful, it clearly makes the company / story more compelling.

 

The stock in HK has gotten halved YTD. This brings opportunity. The stock is down because:

1. About half their 2022 revenues are COVID related. They won massive orders from Pfizer on Paxlovid. They are one of the largest API vendors there. This means 2023 will have a massive air pocket. I estimate 2023 revenues will fall more than 20% from 2022 as COVID related revenues will fall 60%+. It's possible margins will decline. No one knows how big of an air pocket there will be as Paxlovid sentiment seems to drop by the day. 

 

2. Due to the noise around Wuxi, Western shareholders dumped Asymchem in HK. The discount of H-shares to A-shares blew out and is now about 50%. It used to be more like 25%. Asymchem H-shares has comparatively little liquidity and is currently "marooned" even though its has the same rights as A-shares. 

Trade frictions will continue to be a risk here. I have not detected concerns from customers so far but this could change. Investors are not willing to bear that risk today even though Asymchem has not been mentioned in any kind of government action. Its profile is much lower than Wuxi. Call this an "known unknown"

 

 

So why should you buy the stock today?

The stock is super cheap, at about 13x 2022 PE. I estimate 2023 will fall significantly. However, the non-COVID business is unaffected and will grow 30-40% CAGR. I think 2024 profits are semi-flat to 2022. This means the stock really trades for 13x 2024, which are relatively "clean" earnings free of COVID. This seems like a pretty compelling valuation to pay for a business of this type.

It's also important to note that Asymchem is now included in Southbound connect. Theoretically, Chinese investors can arbitrage the A/H spread.

We may be slightly early as sentiment around the 50% of revenues related to COVID will likely continue to fall. You can argue the set up will be even better in the fall. But hey I have to submit something for VIC so here we are. Dynamics here are like buying right before a patent cliff -- which for large pharmas are exactly the right time to buy.

 

Risks:

- Trade issues killing the company. Customers don't want to use a Chinese vendor

- The discount of A/H grows wider from here

- COVID revenues fall 100% from 2022... but TBH at this point this might actually make the stock go up as you totally "derisk" it

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

patent cliff overhang over

A/H arbitrage

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