Biosensors reported FY1Q14 revenue/EPS of USD77M/0.0069, lower than DBe

of USD95M/0.02. The company maintained 15% YoY revenue growth guidance

for FY14. Management attributed revenue weakness to inventory de-stocking

in China, as well as royalty decline. We model 7% and -11% revenue/EPS

growth respectively. We maintain a HOLD rating, and reduce our price target

to SGD1 from SGD1.15.

Growth deceleration due to China weakness and JP royalty decline

ICP revenue and royalty declined 7.3% and 33% YoY respectively in FY1Q14,

with total revenue declined 11% YoY. While management ascribed ICP

weakness to inventory de-stocking in China upon looming price cuts, we

remain perplexed as inventory de-stocking seems to be controlled by

distributors, not manufacturers. Management also anticipates CN growth to

recover in FY2Q14 to low single digit growth, in line with sector growth. Again,

we believe sector growth shall be much higher than this, as Boston Scientific

reported 75% YoY growth in its IC business in China in 2Q13. It is more likely

domestic manufacturers as a whole are growing at low single digit, with

significant market share loss to MNCs. Lastly, management expects royalty

income to remain stable for the rest of the year, which we think may be

unlikely as Abbott launched Xience Xpedition in Japan in July. As such, we

model a further decline of royalty income in FY14. The bright spot in FY1Q14

remains in EMEA/APAC region, with double digit growth according to the

company.

  Margins erosion as expected

The reported GM and OPM were 79% and 24% for FY1Q14 respectively, lower

than 85% and 39% for FY1Q13. Management ascribed it to: 1) increasing costs

in Japan 2) integration of acquired business 3) increased sales and marketing.

We expect this may improve as revenue growth recovers in FY2Q/2H14.

  Reduce PT to SGD1 from SGD1.15 risks

Our new price target of SGD1 is based on 13X FY15E EPS of USD0.061, vs.

previously PT of SGD1.15 using 14X FY14E EPS. With 8% FY15E EPS growth,

we think a 13X multiple is justified when compared with US-listed peers (16X

CY14E EPS with 8.8% growth). Due to poor earning visibility, we recommend

staying on the sidelines until the company resumes positive profit growth.

Downside risks include larger than expected price erosion, slower than

expected ramp up of new products. Upside risks include faster ramp up of

acquired assets and less price erosion.