TIANJIN ZHONG XIN PHARM GROUP
Tianjin Zhongxin Pharmaceutical Group
T14.SI
Tianjin Zhongxin Pharmaceutical Group - Negatives likely priced in
- At 70% of our full year forecast, Tianjin Zhongxin’s 9M15 core net profit was slightly below our expectations, due mainly to lower contribution by associates.
- 9M15 headline net profit rose 30% yoy, boosted by one-off gains. Excluding oneoffs, 9M15 core net profit declined 3.9% yoy.
- We cut FY15-17F core EPS by 7-9% to reflect lower GPM due to the expected intensifying competition in the public tendering process for pharmaceuticals.
- Maintain Add, with lower DCF-based target price of US$1.40 (rollover to end-CY16).
9M revenue fell 1.2% yoy due to lower sales of Western medicine
- In 9M15, group revenue fell 1.2% yoy to Rmb5.03bn (9M14: Rmb5.09bn) due to the decline in sales of low-margin Western medicines (mostly owned by third-parties. As the group only has the distributorship, it earns lower margins on these products). As a result, the group’s overall gross margin (GPM) improved 0.7% pt to 31.0% in 9M15 (9M14: 30.3%).
- In 9M15, gross profit rose 1.1% yoy to Rmb1.56bn (9M14: Rmb1.54bn).
Net profit boosted by one-offs, offset by lower associate profit
- Headline net profit rose 30% yoy to Rmb337m in 9M15 (9M14: Rmb274m), boosted by one-off gains of Rmb116m from the disposal of its equity interests of 30% in Baxter Healthcare and 40% in Hualida Biotech but partially offset by lower contribution from the 25%-owned Sino-American Tianjin Smithkline & French Lab.
- Excluding the one-offs, the group’s core net profit declined 3.9% yoy to Rmb244m in 9M15 (9M14: Rmb254m).
Margins may be pressured by stiffer competition in FY15-17
- Management highlighted the uncertainty related to the government’s procurement policy for pharmaceuticals. Based on our rough estimates, c.50% of the group’s traditional Chinese medicine (TCM) sales in 9M15 came from generic products (more vulnerable to likely stiffer competition in the new public tendering process).
- We cautiously cut FY15-17 EPS by 7-9% to incorporate the expected downward pressure on margins.
Expansion projects on track
- The group raised Rmb814m via a placement in the A-share market in Jul 2015 to finance:
- upgrading of its marketing and sales network,
- construction of Bozhou Industrial Park, and
- development of vegetable beverage projects.
- To date, Rmb33m of the capital raised has been invested and the remainder is expected to be deployed in FY15-17. Based on management’s IRR guidance of 15-20%, we estimate that the investments will generate operating profit of Rmb120m-160m p.a. in FY18 onwards.
More compelling valuations than China and Hong Kong peers
- Tianjin’s S-share currently trades at 63% discount to its A-share. The S-share’s CY16 P/E of 14.6x is more compelling than the 16.7x average of its Hong Kong peers and 26.6x of its China peers.
- Organic earnings growth from the rising pharmaceutical demand in China is a key potential re-rating catalyst.
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2015-11-02
CIMB Securities
SGX Stock
Analyst Report
1.40
Down
1.57
