Strong earnings growth in 2019. Tigermed reported inline 2019 results with attributable net profit surged 78% YoY to RMB842mn which was mainly due to 1) 22% YoY revenue growth, 2) RMB278mn one-off investment gains and fair value gains, and 3) spin-off of Shengtong (晟通) in 2Q19. Core net profit rose 56% YoY in 2019 to RMB658mn. We estimate the organic revenue growth in 2019E was around 27% YoY, excluding impact from the Shengtong spin-off. Gross margin improved 3.4ppts to 46.5% in 2019 thanks to the spin-off of low margin logistics business and improving operating efficiencies. To factor in the impact from COVID-19 outbreak, we trimmed 2020E/21E net profit forecasts by 17%/11% respectively and cut SOTP-based TP to RMB87.18, implying 56x FY21E P/E.
- Short-term impact from COVID-19 outbreak. The progress of clinical trials in China was delayed due to the COVID-19 outbreak. However, hospitals in most regions in China have resumed operation from Mar 2020. We think the overall impact on Tigermed’s domestic income will be minimal. However, given that the virus outbreak in the US and Europe were more serious than in China, Tigermed’s overseas orders could face some delays. We noticed that the daily increases in infections cases in the US and major European countries have peaked recently. Thus, we believe the impact on Tigermed’s overseas business will last in short term.
- Strong backlog growth indicates solid demand in high-quality clinical CRO services. Tigermed recorded RMB4.2bn backlog additions in 2019, up 28% YoY while the Company had RMB5.0bn backlogs as of end-2019, up 36% YoY. The number of ongoing clinical trials in China has been increasing fast thanks to encouraging policies on drug innovation and pharma and biotech companies’ rising focus on innovative drug development. Tigermed participated in the development of 7 out of the 13 domestic innovative drugs approved in 2019, demonstrating its leading position in China’s CRO industry.
- Global expansion opens up room for long-term growth. Tigermed’s subsidiary DreamCIS will be listed in KOSDAQ, which will further strengthen the Company’s presence in South Korea. In Nov 2019, Tigermed announced to establish a JV with Accerise to provide MRCT services in Japan. Tigermed also acquired 3.06% stake in EPS, a Japanese CRO company, in Dec 2019. Tigermed may complete its dual-listing in HKEX in 2020E. With sufficient capital raised overseas, we believe Tigermed will accelerate the acquisition process in global market.
- Maintain BUY. Tigermed disclosed preliminary 1Q20 results and its attributable net profit rose 58-88% YoY due to one-off gains. Core earnings was largely flattish in 1Q20 due to the COVID-19 impact. We trimmed our forecasts and expect Tigrmed’s adjusted net profit to grow 18%/38%/36% YoY in 2020E/21E/22E, respectively. We like Tigermed given its leading industry position and big overseas expansion potential.
