Wednesday, May 9, 2012

YSPSAH ... May12

What’s The News
YSP announced that its Indonesia subsidiary had entered into a sale and purchase agreement with an
Indonesian Vendor for the acquisition of two pieces of leasehold industrial land measuring 3.1k sq m
together with buildings erected thereon in Jawa Barat, Indonesia for a total cash consideration of
RM3.4mn (IDR10.3bn).

Currently the buildings (i.e. 2 storey office building and single storey production building) are still
under construction, expecting to be completed by June 2012. The property acquired is for the setup of
manufacturing plant in Indonesia.

Our Take
We view positively the company’s active capacity expansion plan. During early part of this year, the
company also acquired similar type of properties in Bandar Baru Bangi, Selangor. Year-to-date, this
marks the second acquisition effort by the company.

The company already has two existing commissioning plants in Bangi and Vietnam. We understand that the average utilisation rate at the existing factories have already reached 80%. Hence, we think the capacity addition is timely to cater for the expected strong surge in demand going forward. Moreover, the locations of the newly acquired plants are also strategic to capture the growing demand in the Asean region. This would translate into cost saving in terms of logistic as the company could strategically plan to produce the drug based on the targeted export destination.

Operating cost would also be lower, in our view. Cost such as, say, labour could be lower due to ample supply of labour in the republic.

Based on the valuer’s findings, the entire property is valued at IDR11bn, which approximately 7% above the purchase price. As such, we view that the acquisition price is fair.

As at end of 2011, the company has a healthy cash pile of RM58.3mn. Taking into consideration the
borrowings, net cash position stands at RM38.4mn. Thus, we view that the purchase, which is internally
funded, would not have a grave impact on the financial position of the company.

Impact
We are leaving our earnings forecasts unchanged. At this juncture, there is little information on the capacity of the new plant. We shall review our forecasts once we receive the relevant information from the management.

Outlook
The local pharmaceutical industry is expected to grow by 8% this year to RM610mn. Given the nascent
stage of the pharmaceutical industry, there is still high reliant on imports. Moving forward, with government funding of RM96mn from 2010 to 2012 to construct manufacturing facilities for the production of generic drugs which may help to reduce reliance on import drugs.

Valuation
We maintained our BUY recommendation on the stock as well as our target price of RM1.27 based on
FY12 PER of 9.5x. Key risks include 1) active M&A play; 2) delay in scheduled plant commissioning and
3) delay in rolling out original drugs which in turn may affect that of generic drugs.

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