DHG update – BUY

DHG PHARMACEUTICAL JSC (DHG VN)

We give a BUY recommendation on the stock given that DHG remains one of the leading domestic producers in the industry with a well-known brand name, pervasive distribution network and healthy financials.

DHG generated VND1,229bn of net revenue, jumping by 15.4% YoY, in 1Q23. Finished products, capturing 90% of DHG’s overall net revenue, reported vibrant growth of 21.1% YoY in 1Q23, largely thanks to continued demand for the company’s main categories. This trend has been seen since 2022, when antibiotics, analgesic-antipyretic, respiratory categories experienced high demand for post Covid-19 treatment, while supply chain disruption also caused considerable impacts. DHG witnessed broadened market share thanks to having stocked raw materials with good prices while many other companies found difficulties in ensuring inputs for production.  Nevertheless, we project the demand for these products may lessen in the following quarters as the pandemic peak might be over. 

The pharmacy channel remains and is going to be DHG’s key revenue earner, although the hospital channel accounts for c.13% (2022) and is targeted to expand further. DHG has obtained Japan-GMP certification for tablets, film-coated tablets, effervescent tablets, and effervescent granule production lines. A new beta-lactam factory meeting Japan/EU-GMP standards (investment of VND627bn; designed capacity of 470m units per year) started construction in 2022, tentatively going into operation in 2024.

Thanks to a widened gross margin (50% in 1Q23 vs 47.4% in 1Q22) and a lower SG&A to net revenue ratio (20.9% in 1Q23 vs 21.3% in 1Q22), the company’s EBT jumped by 36.7% YoY to VND391bn in 1Q23. Low-priced raw materials inventories, enhanced labor productivity, cost management, etc. might have supported the company’s margins. We project the company may achieve its 2023 revenue target (VND5,000bn) while EBT is forecast at VND1,227bn, up by 11.6% YoY and c.9% higher than the company’s full-year plan. Combining the DCF and PER methods, our target price for this stock is VND136,569/share, representing a 27.3% expected total return at the end of the year.