Singapore | Health Care Equipment & Supplies

Asia Pacific Equity Research

BIOSENSORS INTL GROUP | BUY

MARKET CAP: USD 1.7B AVG DAILY TURNOVER: USD 6M 9 Apr 2013 Company Update

CHALLENGES APPARENT, BUT SEEKING MARKET SHARE GAINS

Peers experienced industry headwinds Weakening Yen to stifle licensing revenue Maintain BUY, but FV lowered to S$1.60

BUY (maintain)
Fair value add: 12m dividend forecast versus: Current price 12m total return forecast S$1.60 S$0.00 S$1.265 26%

Market share gains should partially mitigate industry challenges Biosensors International Groups (BIG) regional peers Lepu Medical and Microport Scientific Corp recently announced their FY12 results in end Mar. For Lepu, its management attributed the slowdown in topline growth to a deceleration in growth in percutaneous coronary intervention (PCI) surgeries in China and more intense competition in the drug-eluting stent (DES) market. For Microport, its DES sales rose 1.7% to CNY741.7m, driven by a 5.2% increase in volume but partially offset by an estimated 3.3% decline in ASPs. Its management also highlighted higher competitive pressures as four new local players entered the Chinese DES market. Tenders by some provincial governments have also led to stent price cuts and we expect BIG to be adversely affected by this as well. However, this would be partially mitigated by continued market share penetration in its key markets, such as the EMEA region, which is still growing at double-digit pace. Deepening collaboration with Terumo Corp Licensing and royalties revenue from Terumo Corps (Terumo) Nobori DES sales in Japan used to be a key growth driver for BIG when it was launched in May 2011. However, with the increased competitive pressures caused by new product launches, this component became a drag on BIGs overall revenue growth in the last two quarters. Hence, BIG is stepping up its collaboration with Terumo to promote the Nobori DES system at specific specialist cardiology centres in Japan. However, we are cognisant of the negative impact which would result from a further depreciation of the Japanese Yen (JPY) due to stimulus measures by the Bank of Japan. Maintain BUY with slightly lower FV We thus trim our FY14F revenue and core PATMI forecasts by 0.6% and 1.6%, respectively. Our FCFE-derived fair value estimate declines marginally from S$1.63 to S$1.60. BIG is currently trading at 14.9x FY14F PER, approximately in line with its 3-year average forward PER. But if we strip out its strong net cash, its FY14F ex-cash PER translates into an attractive 11.0x. Maintain BUY.

Analysts Wong Teck Ching (Andy) (Lead) +65 6531 9817 andywong@ocbc-research.com Lim Siyi +65 6531 9824 limsiyi@ocbc-research.com

Key information Market cap. (m) Avg daily turnover (m) Avg daily vol. (m) 52-wk range (S$) Free float (%) Shares o/s. (m) Exchange BBRG ticker Reuters ticker ISIN code GICS Sector GICS Industry Top shareholder S$2,167 / USD1,746 S$7 / USD6 5.6 1.025 - 1.63 51.4 1,713.1 SGX BIG SP BIOS.SI B20 Healthcare HC Equip & Supplies Weigao Int'l 21.6% 1m 1 1 3m 2 0 12m -20 -34

Relative total return Company (%) STI-adjusted (%) Price performance chart
Shar e Pr i ce (S$ ) 2.05 1.80 1.55 1.30 1.04 0.79 Apr -12 Jul -12 Oct-12
`

Index Level 3900 3400 2900 2400 1900 1400 Jan-13 Apr -13

Fair Value
Sources: Bloomberg, OIR estimates

BIG SP

FSSTI

Key financial highlights Year Ended Mar 31 (US$m) Revenue Gross profit EBIT Core PATMI Core EPS (US cents) Cons. EPS (US cents) EBIT margin (%) Net profit margin (%) ROE (%) EV/EBITDA (x) FY11 156.6 122.1 44.5 52.6 4.8 na 28.4 27.6 16.5 32.8 FY12 292.1 234.6 106.5 101.0 6.7 na 36.5 124.7 48.7 12.6 FY13F 335.9 282.9 128.9 109.8 6.4 6.7 38.4 33.8 9.7 9.3 FY14F 383.6 318.1 152.1 119.9 7.0 7.5 39.7 31.3 9.3 7.6

Industry-relative metrics
P er c ent i l e 0t h 25t h 50t h 75t h 100t h

M k t Cap B et a ROE PE PB

Company

I ndust r y A v er age

Note: Industry universe defined as companies under identical GICS classification listed in the exchanges in Asia Pacific (Developed). Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MICA (P) 035/06/2012

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Depreciating JPY could be a concern for BIGs licensing revenues The JPY has depreciated ~14.5% against the USD YTD, driven largely by the introduction of aggressive new monetary easing measures by the Bank of Japan in a bid to boost the economy and end deflation in the country. Given that BIGs licensing agreement with Terumo for Nobori DES sales in Japan is denominated in JPY while its reporting currency is in USD, a depreciation of the JPY against the USD would impact its licensing revenue negatively. Notwithstanding this, BIG is also aiming to step up its operations in Japan and enhance its collaboration with Terumo by acting as its distributor for the sale of the Nobori DES to Japanese hospitals which Terumo is currently not selling to. Previously, BIG was only selling bare metal stents and critical care products in Japan. Hence we believe that this would help to form a natural hedge as the licensing cash flows received from Terumo can be used to pay for the expected increase in operating expenses in Japan.

Exhibit 1: JPY has depreciated sharply against the USD YTD 104 USD-JPY exchange rate 100 96 92 88 84 80 01/01/13 08/01/13 15/01/13 22/01/13 29/01/13 05/02/13 12/02/13 19/02/13 26/02/13 05/03/13 12/03/13 19/03/13 26/03/13 02/04/13

Source: Bloomberg

China provincial stent tenders a negative on margins, but could lift overhang We understand that there are only five provinces in China which have completed the government tenders for high-value consumables such as coronary stents, namely Gansu, Henan, Hunan, Jiangxi and Zhejiang. We believe that the coming months would likely see more provincial stent tenders in other parts of China, following the completion of the leadership transition. According to Microports management, three other provinces (Guangxi, Yunnan and Xinjiang) have already officially started the tender process, but they have yet to be completed. As the intention of these tenders is to make healthcare costs more affordable, we believe that price reductions of ~15-20% are a reasonable estimate, which is in line with the general market expectations. Given the uncertainties over these stent tenders, many distributors had held back on inventory restocking in anticipation of the lower stent ASPs. Hence we believe that this overhang could be lifted and conditions would normalise once the tenders are completed, although margins would be impacted by the price cuts.

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New product launches to consolidate its strong market position BIG has earmarked a pipeline of products to be launched in 2013, including an improved version of its flagship BioMatrix Flex DES, which we expect to remain as its main growth driver this year. Other products include its next-generation BioFreedom drug-coated stent (full commercial launch expected only in 2014), coronary and peripheral drug-eluting balloons under an OEM agreement, Axxess bifurcation stent with new dimensions and a bare metal cobalt chromium stent.
Exhibit 2: YTD share price performance of BIG versus STI 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2%

02/01/13

09/01/13

16/01/13

23/01/13

30/01/13

06/02/13

13/02/13

20/02/13

27/02/13

06/03/13

13/03/13

20/03/13

27/03/13

Biosensors International
Source: Bloomberg, OIR

STI

03/04/13

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Company financial highlights

Income statement Year Ended Mar 31 (US$m) Revenue Gross profit EBITDA EBIT Net interests Share of results of JVs, net Profit before tax Income tax expense Profit attributable to shareholders Core PATMI

FY11 156.6 122.1 47.5 44.5 -5.1 19.3 49.1 -5.8 43.3 52.6

FY12 292.1 234.6 119.8 106.5 -3.8 8.0 365.6 -1.4 364.3 101.0

FY13F 335.9 282.9 150.8 128.9 -0.7 0.0 115.8 -2.1 113.7 109.8

FY14F 383.6 318.1 174.5 152.1 -5.6 0.0 130.4 -10.4 119.9 119.9

Balance sheet As at Mar 31 (US$m) Bank and cash balances Other current assets Property, plant, and equipment Total assets Debt Current liabilities excluding debt Total liabilities Shareholders equity Minority interests Total equity and liabilities

FY11 259.4 69.9 12.0 478.0 34.4 61.5 99.5 378.5 0.0 478.0

FY12 313.5 116.1 43.0 1,257.2 37.1 78.5 139.6 1,117.7 0.0 1,257.2

FY13F 624.3 142.4 62.2 1,597.3 262.0 79.9 365.9 1,231.4 0.0 1,597.3

FY14F 705.7 161.5 81.0 1,700.4 242.0 83.0 349.1 1,351.3 0.0 1,700.4

Cash flow statement Year Ended Mar 31 (US$m) Op profit before working cap. chg. Working cap, taxes and int Net cash from operations Purchase of PP&E Other investing flows Investing cash flow Financing cash flow Net cash flow (inc forex) Cash at beginning of year Cash at end of year

FY11 49.0 -21.3 27.8 -2.9 -6.8 -9.6 176.1 199.4 60.1 259.4

FY12 123.3 -42.2 81.0 -5.2 -26.4 -31.7 7.6 54.1 259.4 313.5

FY13F 138.5 -27.7 110.8 -25.0 0.0 -25.0 224.9 310.8 313.5 624.3

FY14F 158.3 -31.9 126.4 -25.0 0.0 -25.0 -20.0 81.4 624.3 705.7

Key rates & ratios Reported EPS (US cents) Core EPS (US cents) EBIT margin (%) Net profit margin (%) PER (x) Price/NTA (x) EV/EBITDA (x) Dividend yield (%) ROE (%) Net gearing (%) Sources: Company, OIR forecasts

FY11 4.0 4.8 28.4 27.6 26.0 3.8 32.8 0.0 16.5 net cash

FY12 24.1 6.7 36.5 124.7 4.3 5.3 12.6 0.0 48.7 net cash

FY13F 6.6 6.4 38.4 33.8 15.7 3.8 9.3 0.0 9.7 net cash

FY14F 7.0 7.0 39.7 31.3 14.9 3.0 7.6 0.0 9.3 net cash

Company financial highlights

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Important disclosures