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Buy Chi-Med ahead of US listing

Hutchison China Meditech is a fast-growing Aim stock. It could be an even faster-growing Nasdaq stock, too
October 29, 2015

China-based pharmaceuticals developer Hutchison China Meditech (HCM) has had a quote on London's junior market, the Alternative Investment Market (Aim), for approaching 10 years. Now, management plans a listing on the US Nasdaq market, famed for its focus on technology, which includes the biotech sort. Data shows that the previous five European companies that got a Nasdaq listing - including major success stories GW Pharmaceuticals (GWP) and Pharmcyclics - have seen an average 179 per cent rise in their share prices from flotation to the present. Chi-Med is an attractive growth story in itself, yet its share rating has been sky high, deterring new investors - even large institutions - from buying into the stock. That view might have to be revised with the Nasdaq listing, rumoured to be before the end of the year, on the cards.

IC TIP: Buy at 2600p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points
  • Forthcoming listing on tech-friendly Nasdaq
  • Drug candidates in late-stage development
  • Lots of cash
  • Bright development pipeline
Bear points
  • Rising clinical expenditure
  • Chance of clinical failure

Chief executive Christian Hogg says there are four reasons for the additional listing. First, management wants to take advantage of the higher levels of investor interest in biotechs on Nasdaq. At the moment, only two analysts closely follow the stock in London, but Mr Hogg reckons this would change with an additional listing on a biotech-savvy market. Second, clinical expenditure on the group's new drug candidates is ramping up and Mr Hogg says US investors would be more willing to provide additional funding.

Chi-Med is hoping to enrol patients in four final-phase oncology trials before the end of 2015 to ensure several trials are running in parallel by the middle of next year. True, there is plenty of cash in the bank thanks to milestone payments from big-pharma partners, but access to biotech-friendly capital markets can't hurt.

 

 

Third, Mr Hogg wants to be "in the right place" once drug candidates reach the final stages of testing. Being in closer proximity to, and on more familiar terms with, the US drugs regulator, the FDA, should help. Finally, a listing on Nasdaq could improve the stock's liquidity. On London, there are just three market makers and the bid-offer spread is wide, which means that some institutional investors have found it difficult to build up decent-sized holdings.

Meanwhile, valuing Aim-traded favourites often leaves plenty to the imagination. Breaking Chi-Med into two parts is the most helpful way to do this. Some City analysts value the revenue-earning part of the business alone at $1bn, or 1,260p a share, based on a PE ratio of around 47 times 2016's forecast earnings. That looks acceptable since most Chinese biotech market valuations are typically between 30 and 50 times earnings. In addition, there is Chi-Med's product pipeline, which includes seven drugs that are the subject of 17 clinical trials and whose multi-application prospects are sufficiently attractive that their development is part-funded by pharma giants such as Eli Lilly (US:LLY) and AstraZeneca (AZN).

HUTCHISON CHINA MEDITECH (HCM)
ORD PRICE:2,600pMARKET VALUE:£1.47bn
TOUCH:2,520-2,600p12-MONTH HIGH:2,795pLOW: 1,145p
DIVIDEND YIELD:nilPE RATIO:150
NET ASSET VALUE:121pNET CASH:$49m

Year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
2012195.4 10.913.2nil
2013241.912.113.9nil
2014275.912.310.2nil
2015*361.523.722.9nil
2016*408.629.526.6nil
% change+13+24+16-

Normal market size: 500

Market makers: 3

Beta: 0.5 *Panmure Gordon estimates £1=$1.534