DHG update – BUY

DHG PHARMACEUTICAL JSC (DHG VN)

DHG remains one of the  leading domestic producers in the industry with a well-known brand name, pervasive distribution network and healthy company financials.  We give a BUY recommendation on the stock with a target price of VND111,512/share, representing a 30.1% expected total return.

DHG generated VND1,065bn of net revenue, climbing by 4.7% YoY, in 1Q2022. Finished products, capturing 85% of DHG’s overall net revenue, experienced decent growth of 13.6% YoY, explained by higher demand for healthcare products and drugs that support COVID-19 treatment in light of the outbreak in early months of this year. Nevertheless, we do not assume this growth may extend in the following quarters considering a relatively high base in 2Q and 3Q2021, unless the virus variants trigger additional waves of infection. 

The pharmacy channel remains DHG’s key revenue earner while the hospital channel accounts for c.10%. DHG currently has two Japan-GMP standardized production lines, enabling the company to enter top-ranking bids in hospital channel for generic drugs. More production lines could be upgraded to higher standards if needed. A new beta-lactam factory meeting Japan/EU-GMP standards (investment of VND627bn) may start construction this year, tentatively going into operation in 2024 and doubling the current capacity.

Thanks to a widened gross margin (47.4% in 1Q2022 vs 44.3% in 1Q2021) and a lower SG&A to net revenue ratio (21.3% in 1Q2022 vs 22.2% in 1Q2021), the company’s EBT jumped by 24.5% YoY to VND286bn in 1Q2022. However, the company projects 2022 gross margin may be maintained around 2021’s level, driven by increased raw material prices owing to higher logistic and transportation costs. The current SG&A to net revenue ratio is not expected to sustain for the whole year as the company plans to implement more activities, recognizing more expenses in the following quarters. 

We project the company’s top line growth at 5.4% YoY in 2022; in which finished products revenue may increase by 7.8% YoY. EBT is forecasted at VND903bn (+4.5% YoY), compared with the company’s target of VND853bn (-1% YoY). Combining the DCF and PER methods, our target price for this stock is VND111k/share.