There’s no stopping the Genscript Biotech Corporation (SEHK:1548) growth train, with analysts forecasting high top-line growth in the near future. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
First, a short introduction to the company is in order. Genscript Biotech Corporation, an investment holding company, engages in the manufacture and sale of life sciences research products and services. Founded in 2002, it currently operates in China at a market cap of HK$43.65B.
The company is growing incredibly fast, with a year-on-year revenue growth of 33.04% over the past financial year . In the last five years, revenue has risen 20.45%, parallel with larger capital expenditure, which most recently reached US$29.20M. 1548 has been reinvesting more into the business, leading to expected return on investment of 11.31% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to US$38.07M in the upcoming year, and over the next five years, earnings are expected to grow at an annual rate of 25.01% on average, compared to the industry average rate of 19.63%. These numbers tell me that 1548 has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.
1548’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. With zero-debt on its balance sheet, 1548 doesn’t have to worry about maintaining a high level of cash to meet debt obligations and paying near-term interest costs. These constraints can be a burden for high-growth companies as it prevents them from reinvesting cash from operations back into the business to fuel further growth. The value of financial flexibility may outweigh the benefit of lower cost of capital for 1548, which debt funding usually provides compared to issuing new equity. However, the company has plenty of headroom for borrowing, and the expected growth, to have debt funding as an option in the future. 1548 has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like 1548 as a business is its low level of fixed assets on its balance sheet (17.33% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. 1548 has virtually no fixed assets, which minimizes its downside risk.
The current share price for 1548 is HK$25.10. At 1.74 billion shares, that’s a HK$43.65B market cap – which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 23.18% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$48.00M, the target price for 1548 is US$4.42. This indicates that the stock is currently priced at a large premium. Also, comparing 1548’s current share price to its peers based on its industry and earnings level, it’s overvalued by 413.51%, with a PE ratio of 210x vs. the industry average of 40.87x.
1548’s investment thesis is a positive one. I’m attracted to the company because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.