WuXi Biologics: Geopolitical risks grab investors' attention (OTCMKTS:WXXWY)

elevator pitch

My investment rating in WuXi Biologics (Cayman) Inc. (OTCPK:WXXWY) [2269:HK] Stock is on hold.

I previously wrote about WuXi Biologics in an article published on September 10, 2021. “Other countries” was one of the major risk factors for equities.

Recent events have prompted me to provide an update on my thoughts on WuXi Biologics as a potential investment candidate. On the downside of things, Biden’s new executive order puts the company’s geopolitical risks in the spotlight. On the positive side of things, WuXi Biologics is diversifying its geographic footprint, recently announcing a share buyback that signals management’s view of the stock’s undervaluation. In conclusion, we believe that WuXi Biologics’ hold valuation is fair.

Readers should note that WuXi Biologics is traded on both the OTC market and the Hong Kong Stock Exchange. His OTC shares in WuXi Biologics, which has the ticker WXXWY, are moderately liquid, averaging about $2 million in daily trading over a three-month period. Investors seeking higher trading liquidity can consider trading shares of Hong Kong-listed WuXi Biologics under his 2669:HK ticker. Readers can trade shares listed on the Hong Kong Stock Exchange directly with select US brokerages such as Interactive Brokers.

New Biden Executive Order

The White House released a statement on Sept. 12, 2022, highlighting that “President Biden signed an executive order launching the National Biotechnology and Biomanufacturing Initiative.” According to a White House press release, the purpose of this new Biden executive order is to “ensure that anything invented in the United States can be made in the United States.”

The announcement had a negative impact on WuXi Biologics’ stock price. His OTC shares in the company have fallen -23% from his $16.99 on Sept. 12, 2022 to his $13.12 as of Sept. 13, 2022. Trading day 13 September 2022. As of October 6, 2022, the final trading prices of his WuXi Biologics shares traded on the OTC market and the Hong Kong Stock Exchange were $12.66 and HK$49.75 respectively. In other words, the company’s stock price has not recovered to its original level. Ahead of the announcement regarding the new Biden Executive Order.

It is reasonable to assume that the new executive order Biden signed on biomanufacturing specifically targets China. In August 2022, the CHIPS and Science Act will also take effect, with White House media his release specifically stating that the act is intended to “counteract China” by promoting semiconductor production in the United States. clearly stated. Although China is not mentioned in his September 2022 White House press release on biomanufacturing, this new Biden executive order signed in September could serve a similar purpose to CHIPS and the Science Act. very high in nature.

In particular, a September 12, 2022 White House statement emphasized the United States’ “overreliance on foreign materials and “There is a need for measures to mitigate the risks posed by

In a previous article in September 2021, we said, “WuXi Biologics is China’s largest biologics outsourcing company and one of the top three companies in the world’s industry.” WuXi Biologics earned more than half or 54% of its revenues in the first half of 2022 from the North American market (segmented based on where customers operate), as disclosed in its interim financial report . In other words, WuXi Biologics’ future financial performance could be adversely affected if the United States decides to limit and restrict its outsourcing of biomanufacturing activities to China.

A key mitigating factor for WuXi Biologics is that the company is building manufacturing sites in overseas locations outside of China, including the US, as highlighted in the chart below. This should help mitigate some of the geopolitical risk and potential impact of Biden’s new executive order.

WuXi Biologics Overseas Supply Chain Expansion Plan

However, this is not a perfect solution for two main reasons. First, it will take time for WuXi Biologics to migrate its chain of supply chain combinations outside of China in any meaningful way. Meanwhile, WuXi Biologics’ U.S. rival may be able to gain market share at the expense of the company, assuming current North American customers turn to local companies with greater manufacturing capacity in the U.S. Second, it is difficult for WuXi Biologics’ operations outside of China to generate the same level of profitability as its operations in China. This is due to cost differences (in the Chinese and European/US markets) and lack of scale (early stage). supply chain mix) in overseas markets.

Wuxi Biologics share buyback

WuXi Biologics made an announcement on September 26, 2022, stating that it plans to “repurchase its shares (listed in Hong Kong) on ​​the open market from time to time for an aggregate value of up to US$300 million.”

There are a few things investors should pay attention to regarding the company’s share buyback announcement.

First, the timing of this stock buyback announcement is about two weeks after the new Biden executive order was signed. Therefore, it is very likely that WuXi Biologics made the decision to undertake a share buyback given the company’s weak share price, which has been highlighted by geopolitical risks.

Second, in a late September announcement, WuXi Biologics made it clear that “the current trading price of the shares does not reflect their intrinsic value or the Group’s actual business prospects.”street S&P Capital IQ WuXi Biologics is currently trading at a consensus forward of 34.3x normalized next 12-month P/E multiple, according to valuation data. By comparison, sell-side analysts see WuXi Biologics delivering a solid final CAGR of over +30% over the period 2022-2025 based on consensus financial projections. If geopolitical tensions don’t impact the company’s future business prospects, the company’s current P/E ratio appears reasonable after considering its growth prospects.

Third, the company’s target of buying back as much as $300 million is appropriate, representing about 1% of its market capitalization. It is important to note that WuXi Biologics may repurchase up to 10% of its outstanding shares under its current share repurchase obligations. In other words, the company has the option to execute a larger share buyback (over $300 million) if it so desires.

At the end

My review of WuXi Biologics is pending. Geopolitical issues suggest a potential downside to the company’s future earnings and earnings. Meanwhile, WuXi Biologics’ stock price may be supported in the short term by the company’s ongoing share buybacks.