Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2015-12-09: Capitalising on China’s ageing population

Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2015-12-09: Capitalising on China’s ageing population TIANJIN ZHONG XIN PHARM GROUP Tianjin Zhongxin Pharmaceutical Group T14.SI 

Tianjin Zhongxin Pharmaceutical Group - Capitalising on China’s ageing population 

  • Tianjin Zhongxin’s upbeat growth outlook is underpinned by the macro trend of an ageing population in China. 
  • Flagship product, Su Xiao Jiu Xin Pill, is likely to benefit from the authority’s removal of the price ceiling for low-priced drugs. 
  • Expansion projects may translate to an additional operating profit of Rmb120m- 160m in FY18 onwards. 
  • The S-share price of US$1.20 is at a 65% discount to its A-share price at US$3.40. 
  • Maintain Add, with target price of US$1.40 based on CY16 DCF. 

■ Long term outlook underpinned by China’s ageing population 

  • With its ownership of several of China’s most time-honoured traditional Chinese medicine (TCM) branches, e.g. Da Ren Tang and Le Ren Tang, Tianjin Zhongxin is geared to China’s increasing pharmaceutical demand from its ageing population. 
  • A number of Tianjin Zhongxin’s exclusive products are included in China’s national essential drug catalogue and are fully reimbursable by the nation’s medical insurance programme. 

■ Sustainable high growth for Su Xiao Jiu Xin Pill 

  • Tianjin Zhongxin’s flagship and exclusive product, Su Xiao Jiu Xin Pill, is a household name in China for the treatment of cardio-vascular ailments. Its sales achieved a fiveyear CAGR of 13% in FY09-14. We believe Su Xiao’s high growth is sustainable in the medium term given the anticipated rising incidence rate of cardiovascular diseases as the nation’s population ages (China’s age distribution currently peaks at 45-50 years). 

■ Benefit from NDRC’s removal of price ceiling for low-priced drugs 

  • We believe Tianjin Zhongxin is a key beneficiary of the National Development and Reform Committee (NDRC)’s removal of the price ceiling for low-priced drugs. 
  • Su Xiao JIu Xin Pill (c.30% of the group’s manufacturing sales) may see a boost in its price and hence margin, given that its selling price has stagnated at the previous price ceiling set by NDRC years ago. 
  • Under a blue sky scenario, the group’s bottomline could potentially double in the next 2-3 years, solely on the expansion of Su Xiao ASP and margin. 

■ Expansion projects on track 

  • The group raised Rmb814m via a placement in the A-share market in Jul 2015 to finance: 
    1. the 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 profits of Rmb120m-160m p.a. in FY18 onwards. 

■ More compelling valuations than China and Hong Kong peers 

  • Tianjin’s S-share currently trades at a 63% discount to its A-share. 
  • The S-share’s CY16 P/E of 14.7x is more compelling than the 16.7x average for its Hong Kong peers and 26.6x for its China peers. 
  • Organic earnings growth driven by 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/ 2015-12-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.40 Same 1.40