CSL Ltd has acquired an 80% stake in Ruide, a small Chinese fractionator, for US$352 million, after an eight-year search for an entrée to the large market. At face value, it appears CSL has paid a high price, but this reflects the competition for Chinese plasma assets given the potential of the market.
China is the second-largest plasma market in the world, estimated at US$3.3 billion in 2016, with immunoglobulin sales expected to grow at circa 15% per annum. Given China’s import restrictions, ownership of domestic collections and capacity are required to fully access the market. In the medium term, CSL expects the current immunoglobulin supply shortage to expand, opening up a large opportunity, especially if CSL can successfully transfer its market-leading operating efficiencies to China.
By our estimates, the US$500 million-plus investment (including the earn-out for the remaining 20% and some US$75 million of capital expenditure) equates to more than 14 times the expected operating earnings if the current facility was operating at full capacity, which would require a three-fold rise in plasma collections. The price is clearly a high one, but CSL will be the first foreign group to gain full access to the fast-growing Chinese market.
Allowing for the acquisition of Ruide, we estimate CSL’s net debt to operating earnings ratio will be 1.2 in FY18E. This sits in the middle of the group’s target range of 1.0–1.5 times, hence we believe it is unlikely CSL will announce a further buyback in FY18. The current $500 million program will be completed.
The Ruide acquisition provides CSL an entry point into the high-growth, but highly regulated China market, without taking undue risk, in our view. The investment has a limited impact on our near-term earnings estimates. That said, we still expect overall group earnings growth of 24% in FY18 despite deal dilution, leading us to reiterate our Accumulate recommendation and our target price of $145.00.