CSL Ltd: Going direct in China
About the author:
- Author name:
- By Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 24 June 2019, 1:45 PM
- Sectors Covered:
Going direct in China changes Albumin revenue recognition
CSL Ltd (CSL) is transitioning from a China third-party distributor to its own direct distribution model under a Good Supply Practice (GSP) License it obtained from the acquisition of Guangzhou Junxin Pharmaceutical in May-18.
Currently, CSL can only import Albumin into China (and has for more than 30 years) via a third-party distributor, with revenue recognised as the product leaves US/EU manufacturing facilities. While the transition to a direct distributor model is not expected to have any impact on patient supply, Albumin revenue recognition now changes to when the product leaves the distributor and thus, will be impacted by a multi-month supply chain process (i.e. shipment to China; quality release by regulators; contingency stock build; distribution to hospitals and pharmacies).
The process is slated to run 2QFY20-3QFY20.
Better control of destiny – lays foundation for expanded offering
In moving to its own distributor in China, CSL should more fully participate in the value chain for Albumin importation and eliminate intermediary expenses. Importantly, CSL can now interact with customers, effectively 'greasing the wheels' for its own domestic production via Wuhan Zhong Yuan Rui De Biologics ("Ruide"). However, we view this strategic presence in the key Chinese domestic plasma franctionation market as a longer-term opportunity (5-10 years), with CSL initially focused on increasing plasma supply.
One-off financial impact
In FY18, Albumin sales into China totalled more than US$500m (c55% of total Albumin sales; c6% of total revenue). We estimated FY20 Albumin sales into China of US$615m, but with the transition to direct distribution, have now reduced sales by US$355m (mid-point of US$340-370m guided impact). We estimate the net profit impact of this mid-point reduction cUS$155m (57% GPM; 10% opex; 24% tax), which shaves 5-10% off FY20 NPAT.
This effect should be temporary and a one-off adjustment, with cash flow not as impacted given current inventory coupled with improved collections (i.e. DSO falling from 180d to 60d). We also adjust for FX, with key changes including:
- AUD/USD – 72/72/72 to 72/71/72 in FY19/20/21
- AUD/CHF – 72/72/72 to 71/70/71 in FY19/20/21
- AUD/EUR – 63/63/63 to 63/62/61 in FY19/20/21
Waiting for a better entry point
Adjustments to Albumin revenue recognition re-sets FY20 earnings growth expectations into the low-single digit range (from Consensus at 10%+), effectively limiting the risk of a disappointing outlook when CSL reports FY19 results this August. While we continue to view CSL as best positioned to meet growing patient demand across its blood-plasma products, it remains well priced (1SD+, 34x FY20).
We upgrade our share price target but retain our Hold recommendation.
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