AsiaPharm Group - Fishing for catalysts

We have lowered our six-month target price for AsiaPharm to S$0.33, from S$0.48, to factor in the reduced likelihood of another privatisation attempt this year. Our target price is based on a weighted average of the previous privatisation offer price for the company of S$0.725, and its valuation at the peer- average PER of 7.5x based on our 12-month EPS forecasts to June 2009. We have lowered the weighting for privatisation to 10%, from 50%, in view of the current soft market conditions.

We forecast AsiaPharm to record a net profit of Rmb23.9m for 4Q FY08, up 329.9% YoY, marking the recovery from the company’s transition in 2008. We see the possibility for positive surprises to arise from the continued strong sales growth of Lipusu, a cancer drug that has become the company’s top-selling drug, and better management of its distribution costs, which accounted for almost 50% of its sales from 4Q FY07 to 3Q FY08.

At the current share price, we believe that the market is pricing in more of its operating outlook and less of its privatisation prospects. A further reduction in AsiaPharm’s share price, coupled with continued top-line growth and signs of better cost management would be factors that might lead us to upgrade our rating for the stock.

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