Zai Lab

On the surface, Zai Lab Ltd appears cheap due to significant downward price pressure over the past year. To incorporate the risk associated with a potential value trap, we have capped its rating at 3 stars. The stock currently trades at a 30% discount to our quantitative fair value estimate of $36.55 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The company's balance sheet bolsters our valuation estimate. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. For example, the firm's EBITDA/interest coverage ratio of -32.9 sits in the bottom 10% globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be undervalued.

The firm's liquidity is an additional encouraging factor. Adequate liquidity allows a company to meet short-term obligations, enhancing financial stability and reducing distress risk. The firm's median trading volume over the past 60 days, for example, ranks in the top 20% compared with global peers. Trading volumes are high on shares, which may indicate increased institutional interest in stock ownership. This characteristic further promotes our favorable price/fair value ratio.

The company's quantitative economic moat rating of none suggests any excess returns could erode quickly as competition arrives. Additionally, the firm's moderate financial health score suggests it is acceptably positioned against adverse economic circumstances.