[stock] Wuxi Biologics - share placement doesn't change long term outlook

Wuxi Biologics said on Tuesday that a substantial shareholder of the Company (Wuxi Biologics Holdings Limit) has entered into a block trade agreement to place 108 million existing shares at HK$107.00 each, a 6.8% discount to the stock's closing price Monday.

The placement would raise ~HKD 11.6 bn (~USD1.5 billion), represents about 2-3% of Wuxi's total issued share capital. This comes after Wuxi Biologics' placement of new shares in February this year to raise ~HKD13 bn, which the Company said would be used for mergers and acquisitions in drug manufacturing, as well as to expand manufacturing for technology platforms.

This kind of share placements is not new; in fact Wuxi Biologics Holdings has conducted ~10 rounds of existing share placement in the past, with its equity interest reduced from >60% initially to <20% after the current round of share placement. We believe the current round of share placement is, similar to the past placement, driven by institutional shareholder of Wuxi Biologics Holdings from a profit taking perspective, and hence have no material impact on Wuxi Biologics itself in the long run.

As you can see from the chart below, the Company's valuation has not been impacted by past placements.

 

Source: Bloomberg

[bond market] China bond yield still at attractive level after narrowing premium vs Treasuries

For all the fears around a short term sell off in the Chinese government bonds market, those haven't materialized. 

In fact, the Chinese government 10 year bond yield has been stabilizing around 315bps to 320bps at the current level, illustrating the adequate liquidity in the market. 

Source: Bloomberg

As for the spread between the Chinese government 10year bond yield and US Treasuries 10 year yield, the gap has arrowed by nearly 100bps since the beginning of the year, driven by the rising inflation expectation in the US. Still, from an asset allocation perspective, the ~150bps yield premium in the China 10-year bond (vs 10 year Treasuries) is sitting at an attractive relative to the historical range. 

[stock] Meituan - food / dining platform giant with plenty optionalities

Company overview

Meituan is China's leading e-commerce platform for services focusing on mass market, essential and high-frequency service categories to connect consumers and merchants. The Company’s mission is to “help people eat better, live better”, and from the strategy perspective, the Company will stay focused on its “Food + platform” strategy.

The Company’s main business segments include i) food delivery, ii) in-store dining, hotel booking and travel booking, iii) new initiatives (eg. community e-commerce and others). Meituan operates several popular mobile apps including Meituan Dianping, Meituan Waimai and Mobike.

As of 2020, Meituan is the world's largest on-demand food delivery service provider with the GTV (Gross Transaction Volume) of its food delivery business approaching RMB 500bn. In the year of 2020, the Company’s food delivery business generated an operating profit of RMB 2.8bn and a ~4% operating margin. Meanwhile, the in-store dining, hotel booking, and travel businesses generated a RMB 8.2bn in 2020 with an impressive ~39% operating margin. The new business initiatives segment is where the Company burnt most of the cash inflow to pursue future growth opportunities such as community e-commerce, online groceries, etc.



Competitive advantage

Food delivery in China is essentially a duopoly business, with Meituan and Ele.me (Alibaba subsidiary) being the number one and number two player respectively. Meituan has a strong execution track record and proven efficiency in this space, and it could be reasonable expected that the Company’s competitive advantage in the food delivery space can be sustained in the long run, capturing the secular growth in this space.

Meanwhile, the Company is also the largest online platform for in-store dining and local discovery in China, with strong growth potential from converting food delivery merchants into in-store dining merchants. The Company’s in-store dining business represents >70% of its segment revenue with a strong profitability, thereby explaining the fat operating margin (~40%) at the in-store, hotel and travel business. On the other hand, the hotel and travel booking business is more competitive, with other scaled players like Ctrip and Tongcheng Elong.



Valuation

Using a conservative set of assumption and a 12% WACC, I still get a HKD 350 fair valuation for the Company’s share.



Investment risks

Rising competition from tech players, rising driver / labor costs, regulatory risks

[stock market] near term tailwinds for HSI in 4 charts

Hang Seng Index (HSI) has been recovering from the 28,000 level to the 29,000 level. While short term capital market directions is very difficult to predict, there seems to be a number of tailwinds in favor of the Hong Kong equity market.

Perhaps it is best to visualize it with a few charts: Historically, there is a decent correlation between CSI 300 and HSI (>50% correlation over the past 5 years). Now as the A share market is gaining some traction, the Hong Kong equity market is also likely to the supported. 

This is evidenced in the inflection in Southbound buying, where Southbound turnover appears to be stabilizing and inflecting. 

Meanwhile, borrowing cost is at record low in Hong Kong, supporting potential “re-leverage” in the stock market.

On the US front, President Joe Biden has seek to roughly double capital gain tax to ~40% of wealthy individuals. This would be the highest tax rate on investment gain (if passed through Congress), mostly paid by wealthy individuals in the US. While some equity research houses suggest there has been no historical correlation between capital gain tax and stock market performance, this would still potentially spark a re-allocation to overseas markets (including Hong Kong stock market). 

Finally, according to back-testing done by some reputed investment research providers, historically it could be an alpha gaining strategy to buy into the Hong Kong market when USDHKD is weak (defined as USDHKD<7.76, which is approximately where USDHKD is trading at right now). 

[stock | Forward] insights on Chinese drug CMO/CDMO/CRO

[转发: link] 中国的CRO是富士康还是台积电？

• 中国创新要改革背景：2015年监管层改革后，给鼓励研发、压缩仿制的政策旋律定了调，自此也拉开中国创新药的序幕。所以，近5年来中国临床研发总开支也以19.1%的复合年增长率增长，到2020年共计收到2086个临床申请，同比增长48%，三年时间翻了一倍。

• 什么是CMO/CDMO/CRO？传统的新药研发制造一般由药企一手包揽。然而随着时代发展，新药开发复杂程度加大，临床试验成本增长，研发投入回报不确定性越来越高，这一冗长流程的成本和风险令大多数药企开始打退堂鼓。于是，专业外包的第三方机构CXO（contract XXXorganization）便应运而生，按时间顺序来分就是临床前CRO、临床CRO以及CDMO。因为是做中间服务，不保证最终产品的结果如何，这一类也被称为某个行业里的「卖水者」，无论如何，旱涝保收。 我国CRO起步于世纪之交，这是由于欧美国家的CRO行业此时已经发展得较为成熟，与此同时外资药企发现了亚太地区低廉的人工成本，将研发重心转移。药明康德、康龙化成和泰格医药纷纷在这段时间成立，借助着全球药品研发重心的转移，迅速拓展业务模式，从单一业务扩张到了全产业链条，从此我国CRO行业进入了一轮高速发展期。近两年，生物医药东风吹，资本、政策、人才纷纷到位，其中兴起了一种叫做VIC的玩法，即由风险投资(Venture Capital), 知识产权(Intellectual Property)和CRO三者结合开发新药的一种模式。在此模式下，具备研发能力的一方（海归科学家、科研院所、制药公司）找到一笔风险投资获得资金，成立项目化公司，请CRO帮自己来孵化项目，便诞生了一家制药公司。从一级到二级，从港交所到科创板，毫不夸张的说，这两年生物医药一半的涨幅是被这种模式所带起来的。而这种模式的关键角色之一就是CRO/CDMO，它给制药公司和资本提供了一个加速孵化的平台，能让实验室里的idea快速变成病人可以吃的创新药。也就是说，原来只有传统大药厂才能做的药品研发，如今任何一个有想法的人都可以做。VIC模式并不是新鲜事，最早起源于美国，在旧金山湾区和波士顿地区两大生物制药中心的成功中得以发扬光大。生产神药瑞德西韦的吉利德(Gilead)，就是这样一个借助CRO服务发展成创新药巨头的案例。只是在中国，医药行业自上而下的政策环境近两年才逐渐清晰，这才得以在中国火起来.

创新研发服务产业链，来源：浙商证券

• 中国CRO龙头的诞生：前国内的CXO业务可以分两类，一类是服务于海外制药企业，另一类是帮助中国医药公司成长。前者享受的是中国工程师红利，后者则受益于中国医药市场规模崛起；但更多时候，这两种红利是同时存在的。以CRO龙头药明康德为例，创始人李革自2000年从美国回来后，最开始接礼来、赛诺菲、默克等头部跨国药企的单子；08年全球金融危机下，老外日子不好过后，中国的业务量也逐渐堆了起来。所以，药明既利用低成本的劳动力赚到了给老外代工的钱，又吃到了中国医药市场崛起时卖铲子的利润。业务代工并不是一个新鲜玩意，门槛低的诸如富士康，劳动密集型、「可有可无」，高大上的如台积电，属于壁垒深、「缺你不可」。这些公司其实做的都是一个服务外包的活，只不过医药行业本身壁垒深，CRO也只在自己的圈子里火热，只是这两年股价涨上了天，才逐渐为大众所知。

• 中国的医药CRO行业，到底是富士康，还是台积电呢？基因治疗里有一项病毒测试的技术，总而言之，这项技术是保证基因疗法研究能够正常进行的关键。药明康德是全球第三家拥有这项技术的的公司，连瑞士老牌巨头龙沙（Lonza，全球第一CDMO）也得仰其鼻息，制药公司就更难接触到这项技术了。所以，在市场对研发效率越来越高、分工越来越明确下，国内的医药CRO企业，正在逐渐地从「可有可无」向「缺你不可」的道路上进发。

• 泰格医药：国内最大的临床CRO是泰格医药。临床CRO顾名思义，主要代理完成临床试验，就是给猴子用完药发现效果和安全性都还不错后，就在病人的身上试，需要和医生以及病人打交道。为了方便客户，临床CRO通常也会包办后续的工艺研究、注册申报、药物生产以及药物上市后再评价等工作。临床实验大多是由PI（学术带头人，主要是大医生）牵头，涉及技术面的不多，拼的是医生资源和以及人力规模（需要一个人一个人的去撮合），和管理水平挂钩。无论是去年近32亿的营收，还是超过90个临床试验项目，毛利率高达47.24%的泰格当之无愧的个中翘楚。

• 昭衍新药： 前不久在A+H上市的昭衍新药营收刚过10亿，规模上并不起眼，但它是最早做药物安全性评价的CRO公司，毕竟如果一款药毒性大，直接给猴子打太「废猴子」了，本来猴子就不多。而药物的安全性有时候比效用还要重要，也是药品监管机构越来越重视的一个评价维度，如何评价也是一块专业性和需求刚性高的小众板块。

• 凯莱英：当然，药品研发完上市了，还有一个生产环节也存在外包服务，叫CMO，这一块国内走在前面的是高瓴一直加码的凯莱英，其连续性反应技术在全球top有一席之地，因此也拿下了不少国际药企大订单，常年利润率在45%以上。 值得一提的是，去年凯莱英毅然拒绝了高瓴资本120元每股的定向增发价格（总规模20亿），后来凯莱英把价格涨到了180，高瓴还是欣然接受，也许正是因为高瓴在药明和泰格两大巨头上没拿到太多股份，所以这一次便拼命抓住了来自CDMO龙头里的机会。

• 真正的CXO王者药明系： 不过，真正的CXO王者，还要数深耕最久的药明系，从药物发现到CMO，从小分子到大分子，无所不有、无所不精，自己技术没跟上就把对手买下来，药品研发「一体化、全栈式」服务，雪球滚起来后，便成就了药明系万亿版图。和腾讯阿里一样，药明手里的钱多了后，也开始在整个产业链上下游到处买买买。其中有一种模式最为无解：即利用资本入股中小型生物药企业，然后以股东身份锁定这家药企的CRO订单，然后赚资本和实业两条路的钱。这种自己调研、自己立项，左手买药企，右手卖CRO服务，卖铲子的人自己造起了矿，简直无敌。药明系因为起的早，这种模式已经玩的炉火纯青，泰格目前正大力布局中，而后知后觉的凯莱英和康龙化成也开始重视起来。 这种模式带来的增长比传统的自己拉业务要快得多，所以大家可以看到药明康德已经是4000亿体量，去年净利润仍然做到了60%的增长。

药明系投资布局，来源：健康界

• 历史毛病：就像互联网里有数据造假、平台垄断等负面情况一样，CRO在和医药公司相处时，幺蛾子也不少。有坐地起价的、有收钱不做事的、有伪造临床批件的、有CRO开发到一半发现项目真香结果自己据为己有的、还有直接玩数据造假的……每一个行业在发生格局重塑的时候，秩序和野蛮往往都是同时进行的，而医药行业又是个跟生命打交道的行业，各种私心的背后也许影响的就是一批活生生的人。引导行业规范需要更好地顶层设计，而如果哪天中国的CRO巨头真的解决了这些历史遗留问题，并更好的引领整个医药制造的发展，那它比富士康和台积电，都多了一层意义。

[stock market] weak price reaction to a strong quarter

With the US stock market making a tremendous comeback since the COVID bottom a year ago and stocks trading at pre-COVID levels, many are questions whether the stock market still have room to run. 

The latest quarterly earnings may have given us some clues: while expectation was high coming into the quarter with consensus estimating ~25% aggregate earnings growth y/y, companies have been meeting the high bar so far. Out of the S&P 500 companies that have reported so far, 80%+ of the companies have beaten consensus EPS expectations. In aggregate, companies are reporting earnings that are 20%+ above expectations. Hence, the bull argument is that we are still in the early innings of a strong economic recovery, and the companies have successfully emerged from the COVID crisis bigger, stronger, and better. 

That said, the (muted) price reaction indicate to us that a big part of the earnings beats are already priced in. Look -- for example -- at Coca Cola (KO), Kimberly Clark (KMB), Procter & Gamble (PG), which have missed their bottom line estimates, casting doubts on whether companies can pass on the cost-inflation to end customers. Another example would be Netflix (NFLX), which has disappointed investors on subscriber growth (link: Bloomberg - Netflix Falls after Pandemic Boom reverses to Rare Weakness), casting doubts on whether the pandemic-driven growth to some of the tech companies are sustainable at all.

Notably this week, the Bank of Canada announced its plan to slow asset purchases, essentially beginning to taper (link: Bloomberg - Bank of Canada becomes first to signal exit from stimulus). It should be noted that the Bank of Canada is the first major central bank to do so, but we can assume that as time passes and as more positive economic data points come out, the FED and the ECB will also see increasing pressure to exit stimulus. That would be another headwind to the equity market, in additional to the weakening company fundamentals that we discussed above. 

Net-net, we can protect ourselves from potential downside by being cautious, adhering to companies with strong fundamentals, staying away from the more "speculative" investments (SPACs, etc.?), and making sure we have some dry powder ready. 

[stock] Wuxi Biologics - leader in a growing market

Company overview

Wuxi Biologics is a China-based CDMO (Contract Development and Manufacturing Organization) focused on biologics drug development. With its ~80% mkt share (2019) it is the No.1 player in China biologics outsourcing market.

The biologics CDMO industry is one where the revenue would grow exponentially for the CDMO, when a project advances through the various drug development stages (from drug discovery initially through clinical development to the eventual commercial manufacturing). Wuxi Biologics has >300 integrated project as of 2020, with most of these projects in preclinical / early phase development stages; in other words, the revenue growth potentially from these projects are immense.

Source: Company presentation

Competitive advantage

The core competitiveness in CDMO industry is technology, and Wuxi Biologics has developed its in-house technology to a competitive advantage. WuXi Bio’s four key innovative technical platforms act as engines for its sustainable growth and should help maintain its global leading position. These platforms include the WuxiBody Bispecific platform (a proprietary antibody platform), Wuxia (a cell line development platform), WuxiUp (a proprietary high-productivity continuous perfusion cell culture platform – which is essentially a next-gen biologic manufacturing solution) and Wuxi Bio ADC platform.

Source: Company presentation

Valuation level

Assuming i) 10-15% medium term growth (before lowering to 2% in the long run) and a ~12% WACC, the Discount cashflow model is estimating 25-40% upside to the current price.

Source: Bloomberg

Risk

Not being able to keep up with technological advances, increasing competition, not being to comply with existing regulations, geopolitical risks.

[crypto] Bitcoin - investment opportunity or a trap?

Bitcoin is experiencing its biggest decline since February, with intraday decline of as much as 15%. Several news sources / online reports suggest that the plunge is due to the speculation that U.S. Treasury may crack down on money laundering that’s carried out through digital assets.

In the past months, Bitcoin / cryptocurrencies have been gaining increasing institutional acceptance. For example, Tesla allocated part of its assets to Bitcoin and started accepting Bitcoin as a means of payment; MasterCard said it will start supporting cryptocurrencies on its network; Bank of New York (one of the oldest US banks) said it will start financing Bitcoin and other digital currencies. All these would mean institutional investors are taking Bitcoin more seriously, and increased institutional ownership would be a long term tailwind for digital currencies such as Bitcoin.

Another latest development is the IPO of Coinbase (one of the largest exchange platform catered to the buying, selling and storage of Bitcoin and other digital currencies.) What the IPO really means is more capital are being committed to the development of digital currencies and the associated infrastructure.

The supply of Bitcoin and other digital currencies are finite, while the institutional ownership may just be starting to boom. Of course, Bitcoin itself doesn't produce any value (similar to gold, silver, etc.), but that doesn't it cannot further appreciate in value. The increasing adoption of digital currencies as a storage of value / a medium of exchange would drive increasing demand, thereby driving the value of these digital currencies.

Increasing regulatory actions on Bitcoin is an incremental negative. I am looking forward to see how these different forces would react to drive the development (or un-development) of digital currencies.

[crypto] the investment case of Bitcoin

While Bitcoin may not be widely accepted as a medium of exchange, its investment value is being increasingly recognised. From asset allocation point of view, introducing Bitcoin into one's investment portfolio can increase diversification, thereby maximising the Sharpe ratio of the investment portfolio.

Apart from the diversification effect, the question is what else could drive the value of Bitcoin? My answer to this question is really around its scarcity value.

In order to understand the scarcity value of Bitcoin, we need to discuss more about Bitcoin mining. Why does people mine Bitcoin in the first place? The answer is actually pretty simple: financial benefits. Everytime a miner successfully mines bitcoin, the miners get rewarded. The reward is that they get to write the next block in the Bitcoin blockchain and they get rewarded with a certain number of bitcoin (so called "Subsidy"). Today, the Subsidy is approximately 6.25 BTC, vs 12.5 BTC four years ago (2016) vs 25 BTC four more years ago (2012). This is known as the Bitcoin Halving (ie. the phenomenon that the Subsidy for mining Bitcoin halves every four years).

Bitcoin Halving limits the supply of Bitcoin, thereby increasing its scarcity value. One valuation methodology for Bitcoin is therefore the stock-to-flow ratio, which measures the production volume of an asset vs the total availability of an asset. Historically, there is a strong correlation between Bitcoin price and its stock-to-flow ratio, that's because every time Bitcoin Halving occurs, the flow (production) of bitcoin is reduced, increasing Bitcoin' scarcity value while the stock-to-flow ratio jumps.

Source: https://francistapon.com/Work/WanderLearn-Podcast/8-Flaws-in-Bitcoin-s-Stock-to-Flow-Model-Will-Doom-It

In the previous Halving cycle, the bitcoin price overshot the stock-to-flow ratio before coming back down and averaging along the stock-to-flow ratio. Currently, the bitcoin stock-to-flow ratio indicates that bitcoin should hit a price of $100,000 by the end of 2024. Of course, the Bitcoin price can entirely overshoot this theoretical value of $100,000 if investment sentiment is bullish.