[This Week's Industry Insight] Samba, Benefiting from US-China Conflict Amid CDMO Growth... Anticipation for the 'Samba Dance'

First in Domestic Industry with Annual Operating Profit of 1 Trillion KRW
Global CDMO Market Expected to Grow 6% Annually
Superplant Strategy Playing Key Role in Creating Ultra-Gap
Constructing 5th Plant Following Incheon Songdo 4th Plant
Plans to Build 6th Plant by 2027
Positive Analyst Outlook... Recent Stock Price Uptrend

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In an online environment flooded with unrefined information, Asia Economy aims to be your hands, feet, eyes, and ears by delivering accurate information about companies. Each week, we focus on companies that ranked high in stock inquiries from the financial information provider FnGuide, delivering everything from basic information to analyses of related companies such as partners, clients, and investors. We will explain companies' financial conditions, performance status, and future value in an easy-to-understand manner. We bring you this week's stocks of interest, under the name 'This Week's Key Stocks.'

Last year was a meaningful year for Samsung Biologics. Not only did it achieve the milestone of 'operating profit of 1 trillion KRW' for the first time in the domestic industry, but its pharmaceutical development subsidiary Samsung Bioepis, which had previously hindered the parent company due to opaque performance, also achieved sales of 1 trillion KRW. Given that the pharmaceutical and bio sectors were notably sidelined amid the secondary battery, semiconductor, and IT cycles last year, expectations grew that the stock price would bottom out and rebound. Additionally, CDMO competitor Lonza's announcement that "antibody demand will continue for four years" and the revelation of the U.S. Congress's proposal of the 'Biosecure Act' are seen as opportunity factors for the company.

Last year's operating profit 1.1137 trillion KRW... Order amount 3.5 trillion KRW

Samsung Biologics announced on the 24th that it recorded consolidated sales of 3.6946 trillion KRW and operating profit of 1.1137 trillion KRW last year. An annual operating profit of 1 trillion KRW is the first in the domestic pharmaceutical and bio industry. Sales also grew by 23% following the historic first annual sales of 3 trillion KRW in 2022. This figure exceeds the initial target of '20% sales growth.' The operating profit margin was maintained at 30%, significantly surpassing the domestic peers whose operating profit margins are typically in the 10% range. On a separate basis excluding subsidiary Samsung Bioepis, operating profit was recorded at 1.2042 trillion KRW.

Last year, the company signed large-scale contract manufacturing agreements with big pharma companies such as Pfizer and Novartis, achieving an annual order amount of 3.5009 trillion KRW. This is the highest order record on an annual basis. The cumulative order amount is approximately 12 billion USD. Samsung Biologics secured 14 out of the global top 20 pharmaceutical companies as clients, proving its competitiveness in orders.

Samsung Biologics expects to continue steady growth through stable business expansion in 2024, announcing a sales forecast 10-15% higher than the previous year. In fact, the U.S. global research firm Grand View Research projected the global CDMO market to grow at a compound annual growth rate of 6.1%, from 135.85 billion USD in 2022 to 232.59 billion USD by 2030.

The previously criticized opaque subsidiary performance is also becoming visible. Samsung Bioepis recorded sales of 1.0203 trillion KRW and operating profit of 205.4 billion KRW last year, surpassing 1 trillion KRW in sales for the first time since its establishment. Sales increased by 8% year-on-year, while operating profit decreased by 11% due to a base effect from milestone (R&D fee) receipts last year. Samsung Bioepis plans to focus on expanding product sales in the global market in 2024, while timely completing the development of follow-up biosimilar pipelines and preparing for a full-scale leap into future businesses such as antibody-drug conjugate (ADC) research.

The so-called 'super plant,' part of Samsung's 'super-gap strategy,' is also playing its role. Samsung Biologics stated, "The secret to our 2023 performance was the reflection of sales from the 4th plant and improved plant operation efficiency." The company held the completion ceremony for the 4th plant in Songdo, Incheon, on July 11, 2022, attended by Samsung Electronics Chairman Lee Jae-yong (then Vice Chairman). With the world's largest production facilities, it symbolizes Samsung's intention to dominate the bio sector globally through a super-gap strategy, similar to its semiconductor and electronics sectors. Since April last year, the company has been constructing the 5th plant, aiming for completion in April 2025. The 5th plant is designed by integrating the best practices from plants 1 to 4. Its production capacity will be 180,000 liters, increasing total production capacity to 784,000 liters after completion. The 6th plant is planned for construction by 2027.

However, the super plant is also a 'money pit' requiring massive investment. Researcher Jung Yoo-kyung of Shin Young Securities forecasted that while sales will increase in 2024, operating profit margin will decline. The main reasons are amortization of purchase price allocation (PPA) due to Humira launch, depreciation of Module A in the 4th plant, and increased selling and administrative expenses due to pre-hiring about 500 personnel for the 5th plant operation starting April 2025.

Recovered to 800,000 KRW range in 5 months... Investor sentiment boosted by Lonza and WuXi

The recent stock price rise is thanks to the positive industry outlook presented by Swiss CDMO company Lonza. Samsung Biologics closed at 800,000 KRW on the 29th. This is the first time since August 11 last year that it recovered to the 800,000 KRW range. Lonza provided 2024 guidance, expecting sales to remain flat without significant changes. However, it projected an EBITDA margin of 27-29%. Excluding Moderna sales, it anticipated high single-digit sales growth. Particularly, it forecasted 11-13% sales growth from 2024 to 2028 as mid-term guidance, expecting continued growth in commercial CDMO. Lonza, a competitor of Samsung in the commercial antibody CDMO sector, gave a positive evaluation of the industry, which is expected to benefit Samsung Biologics as well. During its investor relations (IR) presentation, Lonza emphasized "very strong antibody demand" and expressed confidence that "demand will continue for four years."

The U.S.-China conflict, which has brought a favorable breeze to the domestic pharmaceutical and bio market overall, is also a hot topic among investors. On the 25th (local time), the U.S. House of Representatives introduced the 'Biosecure Act,' a bill to curb Chinese bio companies. It stipulates banning transactions with Chinese bio companies that cooperate with their military and intelligence agencies, threatening U.S. security. Following this, shares of Chinese company WuXi Biologics plunged 23.8% over two trading days. WuXi clarified that its business does not pose security risks to any country, but the market seems unwilling to accept this explanation.

Contrary to the rosy market expectations, securities firms gave a sober assessment that the company is unlikely to gain significant windfall benefits. Researcher Wi Hye-ju of Korea Investment & Securities said, "Even if this bill is enacted, it is difficult to expect short-term performance windfall benefits for Samsung Biologics," pointing out that "the business models, personnel, and plant scales of the two companies differ." Researcher Kim Seung-min of Mirae Asset Securities noted, "Although this bill is still a draft and might be considered a false alarm, it is true that U.S.-China conflicts are expanding into the bio industry and occurring more frequently." He added, "Currently, it is hard to see WuXi and Samsung Biologics as direct competitors in core businesses, but considering potential competition in early-stage CDMO or commercial CDMO in the future, Samsung Biologics' valuation is in an improving phase."

There is also analysis that Samsung Biologics' stock price is undervalued based on its own performance. Researcher Wi said, "Samsung Biologics demonstrated solid performance growth focused on commercial antibody production and differentiated order achievements in 2023, but its stock price declined due to the de-rating of peer companies." She emphasized, "This recent rise is influenced by the possibility of peer companies' re-rating, but if Samsung Biologics' 2024 performance growth and future sales growth are reflected, there is still ample room for further increase."