Jacob Research Pharmaceuticals has announced that it will acquire Victor Luck Limited and Happy Echo Limited for a total consideration of HK $568 million. The target group is mainly engaged in the production, marketing and sales of he Jigong brand generic drugs, which enjoys a high reputation and has a strong market share in the field of painkillers. Deducting the asset value from the consideration, we calculate that the purchase price of the brand corresponds to 12.5 times the price-to-earnings ratio of fiscal year 16. Taking into account the acquisition, we raised our profit forecast for FY18 by 17%. Maintain the valuation basis of 13 times forward earnings for fiscal year 18 and raise the target price to HK $2.42. Reiterate the buy rating.
The main factors supporting rating
Enrich the product portfolio. He Jigong is a well-known OTC brand specializing in the field of painkillers. At the same time, we believe that by injecting more high-quality new imitation pharmaceuticals into the he Jigong product family, Jacobs has the ability to enhance the brand value of he Jigong.
Ease the pressure of tight production capacity and accelerate growth. Production capacity of the target group has been tight in recent years. We believe that under the management of Jacobs, the problem of tight capacity can be easily solved because Jacobs can coordinate and share spare capacity with the target group. With capacity synergies, we believe growth will accelerate in the next few years.
Positive financial impact and improved profitability. In fiscal year 16, the target group had a net profit margin of 45 per cent, much higher than Jacob's existing business. We predict that the integration with the target group will lead to profit margin expansion for Jacob.
Main risks faced by rating
Due to the competition and strict requirements in the bidding process, there may be bidding risks in public sector drug tendering, and uncertainty in drug registration and renewal.
Valuation
Taking into account the acquisition, we raised our profit forecast for FY18 by 17%. We maintain the valuation base at 13 times forward earnings for FY18 and raise the target price from HK $2.07 to HK $2.42. Reiterate the buy rating.
