WXIBF - WuXi Biologics: Recent Share Price Recovery Isn't Sustainable

2024-01-19 04:46:37 ET

Summary

• WuXi Biologics' Hong Kong-listed shares witnessed a strong rebound in recent days due to better-than-expected new project disclosures and continued share buybacks.
• But the stock's valuations are unappealing and the company's top line growth outlook is murky in my view.
• I rate WuXi Biologics as a Hold, as I don't think its shares have legs to run further.

Elevator Pitch

I assign a Hold investment rating to WuXi Biologics (Cayman) Inc. (WXIBF) [2269:HK]. My initiation article for the company was previously written on September 10, 2021, and I had referred to WuXi Biologics as one of the "leading biologics outsourcing companies in China and the world" in that write-up.

I think that WuXi Biologics' recent share price run is likely to come to a halt soon. Taking into account the stock's valuation multiples and the industry's prospects, my view is that the capital appreciation upside for WuXi Biologics is limited, which translates into a Hold rating for the stock.

Investors should take note that WuXi Biologics' shares can be traded in Hong Kong and on the Over-The-Counter market. The average daily trading values of the company's Hong Kong-listed shares and OTC shares were $120 million and $0.9 million (source: S&P Capital IQ ), respectively, for the last 10 trading days. Readers have the choice of buying WuXi Biologics' Hong Kong shares with US brokerages such as Interactive Brokers if they demand a higher level of trading liquidity.

Shares Rebounded On Latest New Project Disclosure And Recent Share Buybacks

WuXi Biologics' Hong Kong-listed shares rose by +11% from the 52-week trough of HK$25.85 registered during intra-day trading on January 8, 2024, to close at HK$28.75 at the end of the January 17, 2024, trading day as per S&P Capital IQ data. It is important to note that the company's Hong Kong shares are still down by -57.0% in the past one year.

I am of the opinion that there were two key factors supporting WuXi Biologics' stock price rebound in the past one week.

The first factor relates to the company's disclosures at the recent 42nd Annual JPMorgan (JPM) Healthcare Conference in the second week of January 2024.

In its investor presentation slides for the JPM investor event dated January 10, 2024, WuXi Biologics shared that the company delivered 71 new projects (a key operating metric for its business operations) in the final quarter of last year. In comparison, the company had only 61 new projects for the first nine months of 2023. This meant that WXIBF's cumulative number of new projects for 2023 was 132, which was slightly higher than its new project count of 124 and 127 (excluding non-recurring projects relating to COVID-19) for 2021 and 2022, respectively.

WuXi Biologics emphasized at the 2024 JPM healthcare investor conference (transcript sourced from S&P Capital IQ ) that the number of new projects for the company serves as a "very good, strong leading indicator for our revenue growth." The company highlighted at this recent JPM investor event that the "client sentiment is changing" for the better since November and December 2023, which it thinks could suggest that "weak biotech funding" is no longer a substantial headwind.

Looking ahead, the company raised its new project guidance for 2024 from 80 earlier to 110 now, implying that the management has an optimistic view of its top line prospects. As such, it is easy to understand why WuXi Biologics stock has performed well recently.

The second factor pertains to share repurchases which have provided support for its share price.

WuXi Biologics revealed on January 16, 2024, that it had spent close to HK$13 million ($1.7 million) buying back 428,500 of its Hong Kong-listed shares on the same day. In early December 2023, the company disclosed its plans to repurchase "shares in the open market from time to time at an aggregate price up to $600 million", which is equivalent to about 3.7% of its market capitalization. Between December 7, 2023, and January 16, 2024, WuXi Biologics allocated HK$1.02 billion or about $130 million to share buybacks.

In a nutshell, significant buybacks and a better-than-expected number of new projects have driven a recovery in WuXi Biologics' share price.

Positive Share Price Momentum Might Be Unsustainable Considering Valuations And Outlook

I am of the view that a meaningful rise in WuXi Biologics' stock price going forward is less likely, taking into account the stock's valuations and the biologics outsourcing industry's prospects.

WuXi Biologics' valuations remain unattractive despite the fact that the company's share price has more than halved in the last one year.

The stock is now valued by the market at a consensus next twelve months' normalized P/E multiple of 24.6 times. According to S&P Capital IQ data, WuXi Biologics' consensus FY 2024-2025 normalized earnings per share or EPS CAGR forecast in domestic currency or RMB terms is +24.6%. This implies that WuXi Biologics is fairly valued at a Price-to-Earnings Growth or PEG multiple of 1 times.

Separately, there are reasons to be skeptical about the top line growth outlook for WuXi Biologics in the short term.

It is worth noting that the sell-side analysts' consensus FY 2024 revenue projection for WuXi Biologics was revised downwards from RMB20,721 million as of January 9, 2024, to RMB20,238 million (source: S&P Capital IQ ) as of January 16, 2024, after the company's JPM healthcare investor conference on January 10.

Lonza Group AG (LZAGY) (LZAGF) is WXIBF's key peer, considering that an Asia Times news article had called WuXi Biologics the second largest player in the biologics outsourcing industry behind Lonza. This implies that Lonza's disclosures offer relevant read-throughs for WuXi Biologics and the biologics outsourcing market. Lonza also participated in the 42nd Annual JPMorgan Healthcare Conference in the earlier part of this month. Lonza wasn't overly optimistic about the industry's near-term outlook at the JPM event (transcript obtained from S&P Capital IQ ), noting that its "financial guidance is not expecting a recovery" in "early-stage (biotech) funding).

Specifically, Lonza expects its 2024 revenue to be roughly at the same level as what it delivered in 2023. In contrast, the current consensus estimates point to WuXi Biologics' top line expanding by +20.5% this year.

In summary, WuXi Biologics' shares are fairly valued and the company's actual revenue growth for FY 2024 could be slower than expected.

Final Thoughts

I think that WuXi Biologics' recent stock price rebound is unsustainable, and this explains why I think that the stock deserves a Hold rating. The stock's valuations are fair based on the PEG valuation metric, while it is uncertain whether the company is able to post a strong revenue recovery in FY 2024 that meets the market's expectations.

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