CIMB Securities 2015-08-17: Tianjin Zhongxin Pharmaceutical Group - An associate missed.


An associate missed 

  • At 50% of our full-year forecast, Tianjin Zhongxin’s 1H15 core net profit was deemed below our expectations as 2H is seasonally weaker. The miss was mainly due to the lower share of profit from the 25%-owned associate Sino-American Tianjin Smithkline & French Lab, whose contribution fell 78% yoy. 
  • We cut our FY15-17 EPS forecasts by 8-9% to provide for lower contribution from the associates. Together with an adverse FX translation due to the weakened Rmb against the US dollar, our DCF-based target price (WACC: 8.0%) is lowered to US$1.57. 
  • Maintain Add. Potential catalysts include 
    1. increasing pharmaceutical demand from China’s aging population and 
    2. higher sales and margins of Su Xiao Jiu Xin Pills. 

Steady core performance marred by a volatile associate 

  • Stripping off the contributions by the associates, Tianjin Zhongxin’s core net profit expanded 11.2% yoy to Rmb181m in 1H15 (1H14: Rmb163m), forming 58% of our full-year forecast. However, group core earnings growth was marred by the lower share of profit from Sino-American Tianjin Smithkline & French Lab, whose contribution fell Rmb20m or 78% yoy. Thus, group core earnings rose a subdued 2.6% yoy. The miss in revenue (at 44% of our full-year forecast) was mainly due to slower growth in the thin-margin pharmaceutical distribution segment, whose impact was more than offset by the growing high-margin manufacturing sales of Tianjin’s self-owned products. Group GPM rose 1.2ppt from 32.1% in 1H14 to 33.3% in 1H15. 

Completed the A-share placement 

  • The group completed the placement of 29.6m A-shares at Rmb28.28 (US$4.55) in Jul 15, raising proceeds of Rmb836.1m. The placement shares represent 4% of Tianjin Zhongxin’s prior share base (739.3m). 
  • The proceeds are earmarked for expansion projects, including the upgrading of marketing and sales network, a pharmaceutical material procurement and pre-processing centre as well as a wellness and functional vegetable beverage project. 
  • Based on the estimated IRRs of 15-20%, the investments could lead to an additional operating profit of Rmb120m-160m p.a. in the long term. 

Maintain Add 

  • The S-shares are trading at 68% discount to the A-shares (Rmb28.28). S-shares’ 16.1x CY16 P/E is compelling against peer average of 25.3x.

Roy CHEN | William TNG CFA | http://research.itradecimb.com/ CIMB Securities 2015-08-17
ADD Maintain ADD 1.57 Down 1.68