My Thoughts on Frontage and XIRR Update

 


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Frontage Holdings is a CRO providing integrated, science-driven, product development services throughout the drug discovery and development process to enable life science companies to achieve their drug development goals. Its stock price has increased close to 30% since 1st December 2020 till now(one and a half month).

Frontage Holdings is a subsidiary of Tigermed(3347 HK), a Chinese domestic CRO giant. It is an important layout of Tigermed in preclinical CRO. The two form a strong complement in the field of drug development. The past performance and excellent management of Frontage Holdings have shown high growth potential. The past 5 years. Frontage Holdings' revenue has increased from US$40 million in 2015 to US$100 million in 2019. Net profit increased from US$4.5 million to US$18.43 million in the same period. The compound growth rate is as high as 30%.

Having operations in both the United States and China (the two largest markets for CRO services in the world) creates synergies and are well placed to capture growth opportunities in both markets. “Two Countries, One System” approach is integral to high quality standards. This approach assures their customers the same quality standards, operating procedures and systems in both China and the United States, whilst also providing their customers with a detailed and highly experienced understanding of the regulations and requirements for drug discovery and development in both countries. This approach enables them to be a partner of choice for companies with multinational requirements or companies that need support for parallel submissions with the US FDA and China FDA.

Frontage is a good company, with good management in a good sectorial track. Since 2015, policies related to the pharmaceutical industry have undergone many major changes. The regulatory approval system is becoming stricter. The country is vigorously encouraging the development of innovative drugs. 

At present, China's economic volume is second only to the United States. But the innovative drug industry still has a long way to go. With the development of the national economy, coupled with the aging of the population and the rising prevalence of chronic diseases, higher and higher requirements for drug quality and innovation are put forward. CRO industry will have huge development potential in China. According to Frost & Sullivan’s estimates, China's CRO market will continue to grow at a compound annual growth rate of 28.3% in the next 5 years. Expected to reach 19.2 billion U.S. dollars in 2023. 

The Covid19 pandemic poses no small challenge to the work of Frontage Holdings. While affecting revenue, the cost side has also expanded due to the response to the epidemic and expansion of production capacity, leading to a decline in the performance of the 2020 interim report.

On a valuation basis, it is cheap. Frontage's 80 times PE TTM is not its true PE. Because its affected by the one time predicament of the pandemic and hence non recurring. If we let Frontage return to normal, assuming normal conditions, even if there is no growth in 2020, calculate the static PE based on the net profit of HK$142 million in 2019 performance. It can be concluded that Frontage's 2019 performance static PE is 66 times(at current price). If we compare the static PE of other CRO companies with the same caliber:

Frontage Holdings 66x times static PE valuation is obviously underestimated. Frontage also has 1.36bil HKD of net cash which works out to be HK$0.67 per share of net cash. The nature of preclinical CRO is cash generative coupled with relatively low capex. It has been free cash flow positive since inception.

Full disclosure, I have vested interest in Frontage Holding and it is currently up 21%.

Snap shot of my portfolio performance as of today: Total profit for 2021: S$14,705.21 mainly due to 12% rise in Frontage today


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