Kim Eng on 25 Apr 2012

TP cut to SGD1.67, beware the risk to margins. Biosensors is expected to report its FY3/12 results in the last week of May. Excluding the SGD273m remeasurement gain from the full acquisition of JW Medical Systems (JWMS), recurring net profit looks set to grow by 145% YoY to SGD106m. Management has guided for topline growth of 80% and we think that this target could easily be achieved. But our fear is that margins are becoming increasingly vulnerable to ASP pressure, although we believe that the adverse impact would likely be felt from FY3/13F onwards. We cut our target price to SGD1.67 on lower ASP assumptions but maintain our BUY rating.

More cautious stance on ASP. There has been growing concern over where the ASP for drug-eluting stents (DES) in China is headed. Industry sources expect Beijing’s new DES tender process to lead to a 15% price cut. We are lowering our price estimates as our previous assumption of about 5% decline in FY3/13F may have been too conservative. We now assume a 15% price decline in FY3/13F. We estimate China to account for 30% of Biosensors’ total revenue in the same fiscal year. Management has previously said that volume increase would mitigate the impact of a price drop.

Price decline easing outside of China. Outside of China however, ASP pressures have moderated with Abbott and Boston Scientific stating in their recent results update that DES price declines are in the mid-single-digit range. Our assumption is for a 5% decline in FY3/13F.

Management change heralds greater push ahead. The recent promotion of Dr Jack Wang to the position of chief executive officer could indicate a greater push ahead to transform Biosensors into a medical device platform company. From our understanding, this management change had been planned for much earlier.

Sell-down overdone, maintain BUY. Biosensors’ share price has retreated recently. Even after making downward adjustments to our forecasts, we find that valuations are still attractive. Our FY3/13F-14F net profit estimates have been lowered by about 10-11% after our adjustments. Maintain BUY with SOTP-based target price of SGD1.67.