Ilsung Pharmaceuticals Co., Ltd. 003120
May 28, 2015 - 4:48pm EST by
genoa321
2015 2016
Price: 126,000.00 EPS 0 0
Shares Out. (in M): 1 P/E 0 0
Market Cap (in $M): 169,315 P/FCF 0 0
Net Debt (in $M): -101,249 EBIT 0 0
TEV ($): 68 TEV/EBIT 0 0

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  • Pharmaceuticals
  • Sum Of The Parts (SOTP)
  • South Korea

Description

 
Significant margin of safety
I think my downside is very well protected. Ilsung stock is trading at (a) 65% of estimated liquid NAV (cash plus Samsung C&T stake valued at market less all liabilities) of KRW 193,000 per share and (b) 52% of book value of KRW 242,000 per share.
 
At first glance, it’s easy to imagine investors labeling Ilsung as a potential “value trap” and moving on despite the significant discount to intrinsic value. I think this could be a mistake for several reasons. First, the company has repurchased about 50% of the outstanding shares over the last 10 years (note: these shares have not been retired and are listed as treasury shares so some data services may not be accurate). Second, the underlying business seems solidhas been consistently profitable and the company generates positive free cash flow which should reduce the risk of value destruction over time. Third, the simplistic Samsung C&T market-based valuation utilized above is likely conservative. Fourth, Samsung C&T will play a critical role in the Samsung Group restructuring.
 
Valuing Samsung C&T
Ilsung owns about 2% of Samsung C&T (000830 KS), which is worth around KRW 156,000 per Ilsung share if valued at market (KRW 63,600). However, the market significantly understates Samsung C&T’s intrinsic value which I estimate is around KRW 70-100,000 per share.
 
Samsung C&T, part of the Samsung chaebol/conglomerate, has E&C and trading operations as well as significant equity stakes in various Samsung entities. The largest equity stakes are in Samsung Electronics (005930 KS), which has been well covered on the VIC and I suggest you read the 3 write-ups posted since May 2014, and Samsung SDS (018260 KS), an IT services company. My sum-of-the-parts analysis values the equity stakes at 75-100% of market value but as discussed in the recent VIC write-ups, Samsung Electronics may be quite cheap.
 
 
 
On 5/26/2015, Cheil Industries announced it will merge with Samsung C&T. This transaction simplifies the Lee family’s holdings in the various Samsung entities and increases the family’s control over Samsung Electronics. If you’d like to learn more about the Lee family, I suggest that you read the Samsung Electronics VIC write-ups and recent news stories.
 
Ilsung’s Operating Business
Ilsung sells antibiotics, bone metabolism agents, ophthalmic agents and contrast media. The business is very small but has been consistently profitable. Over the last five years, Ilsung’s operating business has generated around KRW 65-70bn of sales (about US$60-65mm) at a low-to-middle single-digit operating margin.
 
Valuation
I estimate Ilsung is worth around KRW 228-330,000 per share.
 
 
Footnotes:
A. Samsung C&T valued at market.
B. Samsung C&T valued at market.
C. Samsung C&T valued at low-end of estimated value calculated above.
Operating business valued at 6x estimated normalized EBIT (discount to book value).
D. Samsung C&T valued at high-end of estimated value calculated above.
Operating business valued at 8x estimated normalized EBIT (discount to book value).
E. Excludes tax impact beyond what is included on balance sheet.
 
Notes:
  • Share ownership is fairly concentrated: the Yoon family owns around 600,000 shares and Li Lu’s Himalaya Capital owns around 180,000 shares.
  • Please note Ilsung does not file English language financials and I do not read Korean (I relied on Google Translate).
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

potential share repurchase

Samsung Group restructuring

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    Description

     
    Significant margin of safety
    I think my downside is very well protected. Ilsung stock is trading at (a) 65% of estimated liquid NAV (cash plus Samsung C&T stake valued at market less all liabilities) of KRW 193,000 per share and (b) 52% of book value of KRW 242,000 per share.
     
    At first glance, it’s easy to imagine investors labeling Ilsung as a potential “value trap” and moving on despite the significant discount to intrinsic value. I think this could be a mistake for several reasons. First, the company has repurchased about 50% of the outstanding shares over the last 10 years (note: these shares have not been retired and are listed as treasury shares so some data services may not be accurate). Second, the underlying business seems solidhas been consistently profitable and the company generates positive free cash flow which should reduce the risk of value destruction over time. Third, the simplistic Samsung C&T market-based valuation utilized above is likely conservative. Fourth, Samsung C&T will play a critical role in the Samsung Group restructuring.
     
    Valuing Samsung C&T
    Ilsung owns about 2% of Samsung C&T (000830 KS), which is worth around KRW 156,000 per Ilsung share if valued at market (KRW 63,600). However, the market significantly understates Samsung C&T’s intrinsic value which I estimate is around KRW 70-100,000 per share.
     
    Samsung C&T, part of the Samsung chaebol/conglomerate, has E&C and trading operations as well as significant equity stakes in various Samsung entities. The largest equity stakes are in Samsung Electronics (005930 KS), which has been well covered on the VIC and I suggest you read the 3 write-ups posted since May 2014, and Samsung SDS (018260 KS), an IT services company. My sum-of-the-parts analysis values the equity stakes at 75-100% of market value but as discussed in the recent VIC write-ups, Samsung Electronics may be quite cheap.
     
     
     
    On 5/26/2015, Cheil Industries announced it will merge with Samsung C&T. This transaction simplifies the Lee family’s holdings in the various Samsung entities and increases the family’s control over Samsung Electronics. If you’d like to learn more about the Lee family, I suggest that you read the Samsung Electronics VIC write-ups and recent news stories.
     
    Ilsung’s Operating Business
    Ilsung sells antibiotics, bone metabolism agents, ophthalmic agents and contrast media. The business is very small but has been consistently profitable. Over the last five years, Ilsung’s operating business has generated around KRW 65-70bn of sales (about US$60-65mm) at a low-to-middle single-digit operating margin.
     
    Valuation
    I estimate Ilsung is worth around KRW 228-330,000 per share.
     
     
    Footnotes:
    A. Samsung C&T valued at market.
    B. Samsung C&T valued at market.
    C. Samsung C&T valued at low-end of estimated value calculated above.
    Operating business valued at 6x estimated normalized EBIT (discount to book value).
    D. Samsung C&T valued at high-end of estimated value calculated above.
    Operating business valued at 8x estimated normalized EBIT (discount to book value).
    E. Excludes tax impact beyond what is included on balance sheet.
     
    Notes:
    • Share ownership is fairly concentrated: the Yoon family owns around 600,000 shares and Li Lu’s Himalaya Capital owns around 180,000 shares.
    • Please note Ilsung does not file English language financials and I do not read Korean (I relied on Google Translate).
     
     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    potential share repurchase

    Samsung Group restructuring

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