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24 May, 2017

Wuxi Biologics, Wuxi Apptech’s IPOs could benefit from scarcity value – Ally Bridge founder Frank Yu

  •  Wuxi Biologics has ‘scarcity value’, worth 10% to 15% of group
  •  Future HK IPO of Shandong Luoxin is possible

The listings of Wuxi Biologics in Hong Kong and the remainder of WuxiPharmatech‘s assets in China will benefit from their scarcity value, according to Frank Yu, founder of Ally Bridge, the firm that led the delisting the Shanghai-based Wuxi Pharmatech from New York in 2015. Wuxi Biologics, which was incorporated in Feb 2014 and has been a wholly owned entity of WuXi PharmaTech since, will open the book for its USD 300m Hong Kong IPO on 25 May, this news service has learnt. Wuxi Biologics, a specialist in discovery, development and manufacturing of biologics, filed in January an application to list on the mainborad of the Hong Kong stock exchange. Two months later Shanghai-based Wuxi Apptech said it had mandated Huatai United Securities, to lead its mainland initial public offering. Wuxi Pharmatech, which went public on NYSE in 2007, acquired US company Apptech in 2008. Wuxi Pharmatech then changed its name to Wuxi Apptech but remained listed as Wuxi Pharmatech on NYSE, according to a person briefed on the situation.  Yu, whose firm Ally Bridge invested more than USD 600m in the USD 3.3bn take private of Wuxi Pharmatech, which provides contract research outsourcing services, wouldn’t comment on possible IPO valuations or timing but said the biologics was worth around “10% to 15%” of Wuxi Pharmatech at the time of the delisting and noted the business’s value is enhanced due to “barriers of entry” in the sector. The lower end of the 10% to 15% range is in line with the biologics division’s revenue contribution to the group at end 2015. Based on Wuxi PharmaTech’s third-quarter 2015 report, it had total assets of USD 1,354.156m (CNY 8,593.61m based on the foreign-exchange rate on 1 Oct 2015). According to Wuxi Biologics IPO prospectus, its assets totaled CNY 601.112m as of 31 Dec 2015, roughly 7% of Wuxi Pharmatech’s assets as of end-2015, based on Dealreporter analytics.  The take-private of Wuxi Pharmatech, completed in December 2015, valued the company at 29x P/E (2015E), several notches higher than a selected contract research organization (CRO) peer group’s mean and median P/E multiple. According to Dealreporter analytics, peers Quintiles and Charles River were in 2Q15 trading with P/E multiples of 23.96x and 23.71x, respectively. Should the biologics IPO come first, then it could trade in line with the consensus forward 2018E P/E multiple of around 20x for peer 3Sbio, which was delisted in 2013 from the US at USD 369m (equity value) and is today worth HKD 27.7bn (USD 3.56bn) in Hong Kong, based on analysis by this news service. Last year this news service reported that Wuxi Biologics would look to raise USD 200m to USD 300m from the Hong Kong IPO and target a market value of around USD 1.3bn. This would require 2018 net income of around RMB 414m, which is around double its actual 2016 comparable figure. Wuxi Biologics draft financials indicate net income in 2016 grew around 200% from the previous year and this level of continued growth looks feasible based on the recent year-on-year earnings growth of peer 3Sbio. 3Sbio reported a net income of CNY 292m in 2014 on a revenue of CNY 1.1bn in revenue, compared with CNY 526m and CNY 1.7bn, respectively, in 2015. The biologics IPO will also provide some insight into the likely value for the future A-share company. Assuming the biologics unit trades post listing at around USD 1.2bn then a simple see-through calculation would value Wuxi Apptech at least USD 10bn on the A-share market.

This looks eminently possible purely based on the fact that other Chinese ADRs to have delisted from the US and relisted on the mainland or in Hong Kong, such as Focus Media, Giant Interactive, 3SBio and Perfect World, today have a combined stock market value of more than USD 40bn compared with a combined value at delisting of less than USD 8bn.

The Wuxi mainland IPO announcement came on the same day that Qihoo 360, the largest ever Chinese ADR take private at USD 9.4bn, said it had mandated the same financial advisor to lead its A-share IPO. At the time of its take-private Qihoo had told potential mainland investors it could be valued at around USD 50bn on a mainland stock exchange. Reports have noted that the two near simultaneous IPO announcements indicate the Chinese securities regulator, which closely controlled the pace of IPOs and in the past 12 months has increased regulatory scrutiny of backdoor listings, has also recognised it needs to improve the quality of companies on its stock exchanges and allow firms such as Qihoo and Wuxi to jump the IPO queue. Yu pointed out said that the added attraction of Wuxi Apptech is that global pharma groups that utilize the services company do not need to have a manufacturing base in the country. According to one hedge fund, the China IPOs of Qihoo and Wuxi Apptech are eagerly anticipated not least because they could reignite the Chinese ADR delist/relist trend that has somewhat slowed due to China’s securities regulator’s (CSRC) crackdown on back door listings of low quality companies. While investors await the two Wuxi relistings, Ally Bridge itself is pressing ahead with its second buyout deal, which is the ongoing take private of Chinese pharmaceutical manufacturing, sales and

The listings of Wuxi Biologics in Hong Kong and the remainder of WuxiPharmatech‘s assets in China will benefit from their scarcity value, according to Frank Yu, founder of Ally Bridge, the firm that led the delisting the Shanghai-based Wuxi Pharmatech from New York in 2015. Wuxi Biologics, which was incorporated in Feb 2014 and has been a wholly owned entity of WuXi PharmaTech since, will open the book for its USD 300m Hong Kong IPO on 25 May, this news service has learnt. Wuxi Biologics, a specialist in discovery, development and manufacturing of biologics, filed in January an application to list on the mainborad of the Hong Kong stock exchange. Two months later Shanghai-based Wuxi Apptech said it had mandated Huatai United Securities, to lead its mainland initial public offering. Wuxi Pharmatech, which went public on NYSE in 2007, acquired US company Apptech in 2008. Wuxi Pharmatech then changed its name to Wuxi Apptech but remained listed as Wuxi Pharmatech on NYSE, according to a person briefed on the situation.  Yu, whose firm Ally Bridge invested more than USD 600m in the USD 3.3bn take private of Wuxi Pharmatech, which provides contract research outsourcing services, wouldn’t comment on possible IPO valuations or timing but said the biologics was worth around “10% to 15%” of Wuxi Pharmatech at the time of the delisting and noted the business’s value is enhanced due to “barriers of entry” in the sector. The lower end of the 10% to 15% range is in line with the biologics division’s revenue contribution to the group at end 2015. Based on Wuxi PharmaTech’s third-quarter 2015 report, it had total assets of USD 1,354.156m (CNY 8,593.61m based on the foreign-exchange rate on 1 Oct 2015). According to Wuxi Biologics IPO prospectus, its assets totaled CNY 601.112m as of 31 Dec 2015, roughly 7% of Wuxi Pharmatech’s assets as of end-2015, based on Dealreporter analytics.  The take-private of Wuxi Pharmatech, completed in December 2015, valued the company at 29x P/E (2015E), several notches higher than a selected contract research organization (CRO) peer group’s mean and median P/E multiple. According to Dealreporter analytics, peers Quintiles and Charles River were in 2Q15 trading with P/E multiples of 23.96x and 23.71x, respectively. Should the biologics IPO come first, then it could trade in line with the consensus forward 2018E P/E multiple of around 20x for peer 3Sbio, which was delisted in 2013 from the US at USD 369m (equity value) and is today worth HKD 27.7bn (USD 3.56bn) in Hong Kong, based on analysis by this news service. Last year this news service reported that Wuxi Biologics would look to raise USD 200m to USD 300m from the Hong Kong IPO and target a market value of around USD 1.3bn. This would require 2018 net income of around RMB 414m, which is around double its actual 2016 comparable figure. Wuxi Biologics draft financials indicate net income in 2016 grew around 200% from the previous year and this level of continued growth looks feasible based on the recent year-on-year earnings growth of peer 3Sbio. 3Sbio reported a net income of CNY 292m in 2014 on a revenue of CNY 1.1bn in revenue, compared with CNY 526m and CNY 1.7bn, respectively, in 2015. The biologics IPO will also provide some insight into the likely value for the future A-share company. Assuming the biologics unit trades post listing at around USD 1.2bn then a simple see-through calculation would value Wuxi Apptech at least USD 10bn on the A-share market.

This looks eminently possible purely based on the fact that other Chinese ADRs to have delisted from the US and relisted on the mainland or in Hong Kong, such as Focus Media, Giant Interactive, 3SBio and Perfect World, today have a combined stock market value of more than USD 40bn compared with a combined value at delisting of less than USD 8bn.

The Wuxi mainland IPO announcement came on the same day that Qihoo 360, the largest ever Chinese ADR take private at USD 9.4bn, said it had mandated the same financial advisor to lead its A-share IPO. At the time of its take-private Qihoo had told potential mainland investors it could be valued at around USD 50bn on a mainland stock exchange. Reports have noted that the two near simultaneous IPO announcements indicate the Chinese securities regulator, which closely controlled the pace of IPOs and in the past 12 months has increased regulatory scrutiny of backdoor listings, has also recognised it needs to improve the quality of companies on its stock exchanges and allow firms such as Qihoo and Wuxi to jump the IPO queue. Yu pointed out said that the added attraction of Wuxi Apptech is that global pharma groups that utilize the services company do not need to have a manufacturing base in the country. According to one hedge fund, the China IPOs of Qihoo and Wuxi Apptech are eagerly anticipated not least because they could reignite the Chinese ADR delist/relist trend that has somewhat slowed due to China’s securities regulator’s (CSRC) crackdown on back door listings of low quality companies. While investors await the two Wuxi relistings, Ally Bridge itself is pressing ahead with its second buyout deal, which is the ongoing take private of Chinese pharmaceutical manufacturing, sales and marketing company Shandong Luoxin [HKG:8058]. “They are both good but very different companies,” said Yu. “Wuxi is a world class CRO with scarcity value while Luoxin is very much a China focused pharmaceutical manufacturing, sales and marketing company.” The similarity is that both needed work done which was better carried out in a private setting, he added. Considering how hot the Chinese healthcare sector is right now, investors will be interested to hear that although “neither Wuxi or the ongoing Luoxin take private proposal were primarily driven with relistings in mind, we could relist Luoxin in Hong Kong further down the line, that is possible,” said Yu. by Ed Vinales in Hong Kong, with additional reporting by George Shen and analytics by Derek Li  marketing company Shandong Luoxin [HKG:8058]. “They are both good but very different companies,” said Yu. “Wuxi is a world class CRO with scarcity value while Luoxin is very much a China focused pharmaceutical manufacturing, sales and marketing company.” The similarity is that both needed work done which was better carried out in a private setting, he added. Considering how hot the Chinese healthcare sector is right now, investors will be interested to hear that although “neither Wuxi or the ongoing Luoxin take private proposal were primarily driven with relistings in mind, we could relist Luoxin in Hong Kong further down the line, that is possible,” said Yu. by Ed Vinales in Hong Kong, with additional reporting by George Shen and analytics by Derek Li

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