Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2016-04-08: A decent end to FY15

Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2016-04-08: A decent end to FY15 TIANJIN ZHONG XIN PHARM GROUP Tianjin Zhongxin Pharmaceutical Group T14.SI 

Tianjin Zhongxin Pharmaceutical Group - A decent end to FY15 

  • Tianjin Zhongxin’s FY15 core net profit beat our estimate, at 114% of our forecast; the surprise was from the lower-than-expected marketing and distribution expenses. 
  • Sales were flat yoy in FY15; gains in traditional Chinese medicine (TCM) sales were largely offset by slower western medicine sales. 
  • Slight dip in GPM within expectations; further downside risk should be limited. 
  • A household brand name owner trading at merely 10.5x CY17 P/E (Hong Kong peer average: 14.0x); S-shares at 67% discount to A-shares; Maintain Add. 

■ Expanding bottomline 

  • Tianjin Zhongxin’s FY15 headline net profit rose 25.6% yoy to Rmb450m in FY15 (FY14: Rmb358m), helped by one-off gains from the disposal of associates, partially offset by impairment losses on trade and other receivables. 
  • Core net profit rose 9.8% yoy, due mainly to the yoy decline in marketing and distribution expenses. 
  • The group maintained its DPS of Rmb0.15 (subject to a 10% tax) for FY15, representing a payout ratio of 25%. 

■ Gains in TCM sales offset by slower western medicine sales 

  • Group sales were largely flat yoy in FY15, at Rmb7.08bn. Sales of TCM (+4.7% yoy) and auxiliary products (+10.1%) continued to rise in FY15, but the gains were negated by the slower western medicine sales (-10.4%), as the group took steps to reduce its exposure to the lower margin third party products. 
  • The group’s topline should resume growth in FY16 as the sales of western medicine stabilises. 

■ Slight dip in GPM not unexpected; further downside is limited 

  • The 0.8% point dip in GPM (from 29.7% in FY14 to 28.9% in FY15) was within our expectations. 
  • We believe further downside to GPM to be limited, as Tianjin’s strategic focus on its exclusive products could help fend off major competition pressure. The risk is further mitigated by a possible price ramp-up of Su Xiao Jiu Xin pill; management is actively monitoring the market to potentially raise the price. 

■ Expansion projects to fuel long term growth 

  • The group raised Rmb814m 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 Rmb48m has been invested and the rest would be deployed in FY16-18. Based on management’s IRR guidance of 15- 20%, these projects could potentially lead to additional operating profit of Rmb120m- 160m p.a. from FY19 onwards. 

■ Maintain Add 

  • Tianjin Zhongxin’s is geared to the rising pharmaceutical demand from China’s ageing population; its flagship product Su Xiao Jiu Xin pill is a household name for treatment of cardiovascular ailments in China. 
  • We raise our FY16-17F EPS by 5.4% and 3.3% to reflect better cost discipline. 
  • Our TP of US$1.42 is based on CY16 DCF (WACC: 8%). 
  • Tianjin Zhongxin’s S-share currently trades at 67% discount to A-share. The S-share’s CY17 P/E of 10.5x is more compelling than the 14.0x average of its Hong Kong peers. 

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-04-08
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.42 Up 1.40