Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2015-11-02: Negatives likely priced in

Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2015-11-02: Negatives likely priced in 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: 
    1. upgrading of its marketing and sales network, 
    2. construction of Bozhou Industrial Park, and 
    3. 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 | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-02
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.40 Down 1.57