Celltrion rebuts JP Morgan’s heavy downgrade; shares rebound from sharp fall

South Korea’s Celltrion Inc. on Sept. 10 rebutted J.P. Morgan’s massive downgrade of its target price for the biopharmaceutical company. The stock plunged as much as 6% the previous day on the downward revision.

J.P. Morgan’s negative views on its stock are “questionable” and thus its rating on the company is unreliable, Celltrion said in a statement posted on its website.

“We suspect that its (J.P. Morgan’s) report is skewed to produce a negative conclusion of our companies against our rivals,” the statement said. “The reliability of the report is questionable.”



Shares of Celltrion fell 6.1% to close at 298,500 won on Wednesday, their biggest percentage drop in nearly three months. Foreign investors and institutional investors sold Celltrion shares worth a net 44.7 billion won and a net 56 billion won, respectively. Foreigners had previously been active buyers of Celltrion. Its marketing arm, Celltrion Healthcare Co., also fell 4.4% to 98,600 won on Wednesday.

On Thursday, however, Celltrion rose as much as 1.3% before closing flat. Celltrion Healthcare finished up 3.6% at 102,100 won.

Stock analysts say Wednesday's sharp declines were owing to J.P. Morgan’s report rating Celltrion ‘Underweight’ with a target price of 190,000 won until the end of 2021. That’s more than 40% below Celltrion’s closing price on Tuesday. The US investment bank also set Celltrion Healthcare’s target price at 70,000 won, 32% lower than its Tuesday price.

TERMINAL GROWTH RATE AT ISSUE

In the report, a J.P. Morgan analyst noted that the market share of Remsima, a an autoimmune disorder medication, has shrunk in the European market and that sales growth of Truxima, a blood cancer medication, has slowed.

Based on this, J.P. Morgan forecast that Celltrion’s annual net profit growth rate will peak at 54% this year and fall to 21% in 2021. The price-to-earnings ratio calculated by J.P. Morgan based on the net profit forecast for 2021 is 73 times, which is much higher than the global average, according to the brokerage.

J.P. Morgan said its target price of 190,000 won was based on a discounted cash flow (DCF) valuation with an estimated terminal growth rate of 4%. The terminal growth rate is a constant rate at which a firm’s expected free cash flows are assumed to grow indefinitely.

However, Celltrion said on Thursday that J.P. Morgan’s DCF-based valuation method could be misguided.

“In DCF valuation, a company’s share price varies considerably depending on the estimated terminal growth rate. We don’t agree with J.P. Morgan’s estimate of a 4% terminal growth rate for Celltrion, while it assigns 6% to our rival companies,” said the Korean biopharmaceutical company. Based on Celltrion’s own calculation, its shares are expected to rise above 400,000 won, it said.

LOCAL BROKERAGES MORE FAVORABLE

J.P. Morgan’s views are in stark contrast to target prices offered by local brokerages.

According to market tracker FnGuide, Korean brokerages’ average target price for Celltrion hovers around 371,800 won. In a recent report, Heungkuk Securities set its target price for Celltrion at 400,000 won based on a terminal growth rate of 5.8%.

“DCF valuations should be employed with care when calculating a company’s value because there are many variables an analyst can use, such as the terminal growth rate and cash flow discount rates,” said the head of research at a local brokerage.

Celltrion also rebutted J.P. Morgan’s claim in the report that the company’s growth in the European market has plateaued while inventories at Celltrion Healthcare have surged.

“Celltrion’s market share in Europe has been growing steadily. Besides, we are at an advantage in terms of productivity, costs and delivery time of key products. We are not concerned about growing competition in the market,” the company said.

Write to Bum-Jin Chun at forward@hankyung.com