Tianjin Zhongxin Pharmaceutical Group - Increased dividend is a positive surprise
- FY16 core net profit was above our expectations at 108% of our full-year forecast.
- Core net profit rose 3.1% yoy in FY16 due to strong associate contributions.
- Revenue fell 13% yoy due to slower sales of Chinese and Western medicines.
- Strong balance sheet with Rmb577m net cash (Rmb0.75 per share) at end-FY16.
- The group declared final DPS of Rmb0.15, raising FY16 full-year DPS to Rmb0.25 (FY15: Rmb0.15); this translates into 3.4% FY16 yield based on the current price.
- Maintain Add call and FY17 DCF-based target price of US$1.30.
- Tianjin Zhongxin Pharmaceutical Group (Tianjin)’s FY16 revenue came in slightly below our expectations at 95% of our full-year forecast.
- Group sales fell 13% yoy to Rmb6.2bn in FY16 (FY15: Rmb7.1bn) on the back of lower sales of both Chinese and Western medicines. We believe that the slower sales were the result of
- the group taking steps to reduce its exposure to lower-margin thirdparty products, and
- stiffer competition under China’s new public tendering process for drug supply.
- GPM rose 2.6% pts to 31.5% in FY16 (FY15: 28.9%).
Core net profit rose 3.1% on strong associates contribution
- Despite the yoy lower revenue, group core net profit managed 3.1% yoy growth to Rmb379m in FY16 (FY15: Rmb367m) as the shortfall in the profitability of the group’s consolidated entities was more than made up by stronger associates contribution (FY16: Rmb118m vs. FY15: Rmb34m).
- The swing in associate profit was mainly due to the profit recovery of Sino-American Tianjin Smithkline & French Lab, where FY15 net profit was adversely affected by the China tax authorities’ investigation.
Increased full-year dividend is positive surprise
- We are positively surprised by the group’s final DPS of Rmb0.15 for FY16 (FY15: Rmb0.15), following its interim DPS of Rmb0.10 declared for 1H16 (1H15: none). This raised the group’s FY16 full-year DPS to Rmb0.25 (FY15: Rmb0.15), translating into a payout ratio of 46% and FY16 dividend yield of 3.4% (after deducting 10% withholding tax for S-shares).
- Its balance sheet remains strong, with net cash position of Rmb577m or Rmb0.75 per share (11% of Tianjin Zhongxin’s S-share price).
Update on expansion projects
- Tianjin Zhongxin raised Rmb814m via placement in the A-share market in 2015 to finance several expansion projects, such as
- the upgrading of its marketing and sales network,
- the construction of Bozhou Industrial Park, and
- the development of functional vegetable beverage projects.
- We note that most of these projects are behind schedule (only c.Rmb120m deployed as at end-FY16); management is working on the issues and we do not project meaningful contribution from these projects for now.
Cheap proxy for China’s growing pharmaceutical demand
- We maintain our Add call on Tianjin Zhongxin’s S-share and our FY17 DCF-based target price of US$1.30 (WACC: 8.5%).
- We like Tianjin Zhongxin’s S-share as a cheap proxy for China’s growing pharmaceutical demand. The S-share trades at a heavy 63% discount to the group’s A-share. Its 11.5x FY18F P/E is also lower than its Hong Kong peers’ average of 16.4x and China peers’ of 24.7x.
- In addition, the S-share has the highest dividend yield (FY16: 3.4%) among peers. Stiffer competition is a key risk.