Expect fast revenues and EPS growth ahead
- WuXi is the second-largest global biologics outsourcing service provider with 10% market share in 2021 and expect it to gain market share further on capacity expansion.
- WuXi’s robust service backlog and significant increase of commercial stage projects should secure its revenue growth outlook, in our view.
- We estimate WuXi to register strong revenue and EPS CAGR of 41% and 36% respectively, over FY21-24F.
- We initiate coverage on WuXi Biologics with an Add rating and DCF-based TP of HK HK$111.6. It trades at undemanding valuation of 40x FY22F P/E.
Gaining market share from a fast growth industry
Frost & Sullivan forecasts a 21% and 30% CAGR over FY21-26F for the global and China biologics outsourcing market, respectively, driven by strong demand of the biologic drugs market. WuXi Biologics (“Wuxi”) is the second-largest global biologics outsourcing service provider with a revenue-based market share of 10% globally in 2021 and we expect it to gain market further because of, a) its full spectrum of services, b) its global capacity expansion, and c) high entry barrier of the sector due to the complex nature of the biologics drugs.
Proven track record since FY16
WuXi provides a full spectrum of services and technologies for biologics discovery, development and manufacturing that many of its competitors are unable to provide. Given its competitive advantages, it recorded a fast CAGR of 164% for its revenues over FY16-21. Meanwhile, it also has diversified client base, which North America/China/Europe accounted for 54%/25%/18% of its revenue in 1H22, respectively.
Strong research capability and fast capacity expansion
Supported by its state-of-art technological platforms for bispecific antibody development, ADC development, and continuous bioprocessing, WuXi is able to provide high quality customizable service to its global clients with competitive costs thanks to rich talent pool and lower labor cost in China. WuXi is also expanding its manufacturing capacity aggressively worldwide to meet the increasing demands of biologic outsourcing service.
To see revenue/EPS CAGR of 41/36% over FY22-24F, respectively
Wuxi adopts two business strategies namely 1) follow the molecule (FtM), which high loyalty of its clients as the company has built relationship with them from the early stage of drug development, 2) win the molecule (WtM), which normally suggest that projects are transferred to WuXi from other service providers during the interim period of drug development. As increasing number of projects in commercial stage in the next few years, we expect Wuxi’s revenues to experience fast growth. Specifically, we estimate its revenue CAGR of 41% over FY21-24F. Supported by relatively stable gross profit margin, we forecast its EPS CAGR of 36% during the same period.
Initiate with an Add rating and TP of HK$111.5
We initiate coverage on WuXi Biologics with an ADD rating and DCF-based TP of HK$111.6 (WACC: 9.3%, terminal growth rate: 4.0%) – suggesting 141% potential upside. It trades at attractive valuation of 40x FY22F P/E, well below its five-year average P/E of 151x. We believe its market leading position and strong profit growth outlook should deserve a higher valuation. Key catalysts include stronger than expected results due to strong US$/Rmb and Wuxi has proposed a share back scheme (repurchase 10% of the total shares) while key risks are potential geopolitical conflicts among Chinese Government and western countries.