Tianjin Zhongxin Pharmaceutical Group (TIAN SP) - UOB Kay Hian 2018-01-03: Awakening Giant ~ Reforms Underway With Lucrative Targets

TIANJIN ZHONGXIN PHARMACEUTICAL GROUP CORPORATION (TIAN SP) - UOB Kay Hian 2018-01-03: Awakening Giant ~ Reforms Underway With Lucrative Targets TIANJIN ZHONG XIN PHARM GROUP T14.SI

TIANJIN ZHONGXIN PHARMACEUTICAL GROUP CORPORATION (TIAN SP) - Awakening Giant ~ Reforms Underway With Lucrative Targets

  • In its first-ever investor plant trip, Tianjin Zhongxin Pharmaceutical Group (TJZX)’s new Chairman acknowledged the firm’s prior slack and promises to awaken the sleeping giant. Their target is to “double in three years” and we believe it is possible to double drug manufacturing profits by 2020. 
  • The necessary reforms have been laid out and management interest will be profit-aligned due to a proposed profit-linked remuneration plan. 
  • Given the TCM industry’s bright outlook, reiterate BUY with target price raised to US$1.52.



WHAT’S NEW


New management to revitalise SOE giant into vibrant profit-oriented firm, holds first-ever plant trip for investors. 

  • In Aug 17, four new members of TJZX’s top management took charge of the team and have set out to revitalise the sleepy SOE into a vibrant profit-oriented firm. 
  • As TJZX’s new management carries out market-oriented SOE reforms, we were invited to their first-ever plant trip held for public investors to better understand the new management, their strategy to revitalise TJZX into a profit-oriented company and their resolve to do so.

Acknowledging TJZX’s prior slack and promising to put resources to full use. 

  • We were particularly heartened when the new Chairman, Mr Li Li Qiang, acknowledged that TJZX had neglected the resources it had at its disposal. He referred not only to the potential of TJZX’s brands/drugs but also the inefficiency of the financial resources/capital structure (its huge cash hoard). He promises to put these resources to full use and unleash the full profit potential of the company.

Management interest to be aligned with that of profit-oriented shareholders. 

  • As remnants of a planned economy, SOEs previously did not give profit maximisation the highest priority. However, the landscape has changed and currently management remuneration is proposed to be linked to the profitability of TJZX. 
  • With State Council Document [2017]53 authorising board members to approve such remuneration schemes, TJZX’s new remuneration scheme is likely to be approved by 1Q18, allowing management interest to be closely aligned with that of profit-oriented shareholders.

Target to double profits by 2020. 

  • Led by Chairman Li and General Manager Wang, the new management has a 2020 strategic plan to “三年倍增” (“double in three years”) and we believe it is possible to double internal drug manufacturing profits in three years. 
  • Other than the current ASP hike for superstar product Su Xiao Jiu Xin Pill, TJZX is also aiming for Tong Mai Yang Xin Pill (通脉养心丸) to achieve annual sales of Rmb500m by 2020, becoming the next growth pillar.

Target achievable given new management’s proven track record. 

  • We have reviewed GM Wang’s impressive track record and believe she has the capability to achieve her targets. Under her leadership, LeRenTang (乐仁堂, subsidiary of TJZX) grew market sales for Tong Mai Yang Xin Pill from Rmb8.16m in 2007 to around Rmb100m in 2010 and then subsequently to more than Rmb200m three years later.
  • None of the new management members is “parachuted” in and are all promoted internal, so they should be familiar with TJZX’s potential and be able to boost profit.

Reforming HR, Sales, R&D and Manufacturing with market-oriented measures to achieve target. 

  • Going beyond setting top level targets, management has also shared with us how they intend to achieve those targets. They will reform HR, Sales, R&D and manufacturing with market-oriented measures and bring in world-class manufacturing technology as well as optimise TJZX’s capital structure and financial resources.

Reforming HR to revitalise company with profit-driven meritocracy. 

  • HR changes will be implemented throughout the company. Other than bringing in “younger blood” to revitalise TJZX, the seniority-based system will be replaced with a meritocracy with KPI rewards being performance-driven to motivate staff and produce measurable results.

Using big data to focus sales resources and harness brand equity to drive revenue. 

  • TJZX will restructure its subsidiaries and merge their marketing departments in order to create sales efficiencies and synergies by creating major promotional platforms such as Direct Selling/E-commerce, Expert Recommendation, Distributorship, Geographic, Consumer and Conferences to drive sales revenue. 
  • TJZX will also relook its brand value and fully harness and develop the potential of its century-old brands and 858 patents. To achieve all this, TJZX will be utilising big data analytics to understand the market and develop appropriate strategies.


R&D to develop profitable and market-driven products that make financial sense.

  • Big data will also be used for R&D purposes. Amid the reform, R&D will be restructured and carried out with two major factors in mind: market demand and future profitability.
  • R&D will now develop products that are in demand and can generate sustainable returns.

Introducing world-class manufacturing and production through US partner.

  • TJZX will partner one of the US’ largest drug makers to harness world-class cutting-edge manufacturing technology (TJZX will provide TCM content/knowledge/IP while the foreign partner will provide manufacturing technology and western medicine R&D). This will see TJZX employ more automation/robotics in its manufacturing process to increase the efficiency of its production lines.


STOCK IMPACT


The giant is awakening with huge profit potential. 

  • Some of these reforms seem straightforward, which underscore TJZX’s prior sluggishness and the scope for improvement. 
  • With a new management that is driven and profit-oriented, we are optimistic TJZX will be able to significantly improve its revenue and double its profits for its drug manufacturing business by 2020.

Bright TCM outlook. 

  • In the recent 6th State TCM Reform Forum held on 9 Dec 17, the deputy director of the National Health and Family Planning Commission and the head of the State Administration for TCM discussed the revitalisation of TCM in accordance with the 19th Nation Congress of China, and pointed out that President Xi and the state place great emphasis on TCM and highly value the industry’s future development. 
  • In view of policies and plans like Healthy China 2030 and the Strategic Plan on the Development of Traditional Chinese Medicine (2016-2030), the outlook for TCM is bright. While this may intensify competition in the TCM arena, we believe TJZX with its time-tested and proven brands will have a significant advantage.

M&A likely on the table as Chairman Li looks to optimise capital structure.

  • Chairman Li is relooking TJZX’s current capital structure to maximise company and shareholder value and has sought the advice of finance professionals such as investment bankers. 
  • To utilise its cash hoard, one likely solution will be earnings accretive/strategic M&As. Barring a mega acquisition, the huge cash hoard and healthy cash flow would mean current dividend levels are still sustainable.

Smooth ASP hike for superstar product. 

  • While there was some worry of a delay in ASP hike for Su Xiao Jiu Xin Pill, we are heartened by the final hike of factory output prices in two out of the 28 provinces last month. The delay was due to the clearance of old inventories and the need to wait for retail prices to be out in all 28 provinces before TJZX can raise factory production prices. 
  • Management expects the ASP hike to have a meaningful impact on 2018 profit while 2019 should see the full impact.


EARNINGS REVISION/RISK


Earnings revised upwards. 

  • We revise our 2017-19 earnings upwards to Rmb455.4m (+3.3%), Rmb545.4m (+3.8%) and Rmb647.7m (+10.4%). 
  • We incorporate new growth assumptions for Tong Mai Yang Xin Pill while conservatively maintaining our assumptions of an ASP increase for Su Xiao Jiu Xin Pill.


VALUATION/RECOMMENDATION

  • Reiterate BUY with a 2018F PE-based target price of US$1.52 (6.57 Rmb/US$), pegged to a peer average of 14.1x 2018F PE. 
  • While TJZX is smaller in terms of market capitalisation, its ROE and yield are similar to the peer average. At its current price, the stock is trading at only 1.0x 2018F P/B, a whopping ~70% discount to the peer average. 
  • We think TJZX is poised for a major turnaround as this sleeping giant awakes from its slumber and catch up with its peers.


SHARE PRICE CATALYST

  • Positive news related to the newly proposed remuneration plan or good full year results with an attractive dividends.




Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.52 Up 1.500



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