Dawnrays Pharmaceutical (Holdings) Limited (‘Group’) is in the business of manufacturing and selling non-patented pharmaceutical medicines - including a) intermediate pharmaceutical and bulk drugs (22% of sales); and b) finished drugs (78% of sales). It generates 90% of its sales within China and exports the rest primarily to Russia, Turkey, and Pakistan.
The group also has an investment in a joint venture to research and develop biopharmaceutical products and technologies (currently loss-making).
Covid-19 reduced patient visits to hospitals and intake of the group’s drugs. The group also suffered supply bottlenecks as some production had to be suspended.
However, the major varieties of its products are sold via centralized procurement by the state – for which it won several bids. This stabilized revenues and reduced production costs arising from enhanced scale.
The group reported ttm sales of $1.05b (2019: $1.08b), ebitda of $433m (2019: $462m) and net profits of $260m (2019: $290m).
The financial position was strong with net cash of $985m and a healthy working capital position. (The cash included wealth management products issued by banks that promise principal preservation with floating rates.) The capital employed (excluding goodwill) was $2.03b.
The key to competitiveness in this industry appears to be scale – and the group is exploring/committed to several large investments in production facilities throughout China after the latest financial report.
Though margins have reduced slightly over the last five years, volumes are likely to increase in the future. Therefore, it is likely that the group can earn around $350m/year (which it surpassed in 2018 and 2015).
This represents an attractive return on tangible assets of 33%/year implying high attractiveness for the growth resulting from cash deployed.
The stock is selling for $1.68b (assuming dilution of 16m options below market price – see below), which represents a multiple of 5x normal earnings.
Management has rewarded shareholders well in the recent past - with the mix tilting towards repurchases over dividends in the last year. Management paid out $166m via dividends and repurchases yielding over 8% at market.
The fly in the ointment is the constant issue of share options to management and employees at ever lower share prices – the most recent one being the issue of 16m options at $0.90/share. However, this is offset by continual share repurchases.
Overall, this appears to be a cheaply priced stock of a well-managed company with decent shareholder rewards.