TIANJIN ZHONG XIN PHARM GROUP
Tianjin Zhongxin Pharmaceutical Group
T14.SI
Tianjin Zhongxin Pharmaceutical Group - Catching a small cold
- Tianjin Zhongxin’s Long Shun Rong factory is being investigated by CFDA as one of its export TCM products was found contaminated with a Western drug ingredient.
- While there were no reports of adverse reaction, CFDA treats the issue as serious, and mandated Long Shun Rong to cease manufacturing to rectify all misconducts.
- Despite the negative implications on earnings in the near term, we believe Tianjin’s long-term growth potential (underpinned by China’s ageing population) is intact.
■ Traces of Western drug found in a TCM
- Hong Kong’s Department of Health announced on 19 Apr that one batch of the Yin Qiao Jie Du Tablet (a popular traditional Chinese medicine [TCM] for treating colds and flu) produced by Tianjin Zhongxin’s Long Shun Rong Pharmaceutical Factory (LSR) was found to contain traces of Paracetamol (a widely-used Western medicine for treating pains and fever), which is not listed in Yin Qiao’s authorised prescription.
■ CFDA launches an investigation into Long Shun Rong
- The China Food and Drug Administration (CFDA) has since launched an investigation into the issue. According to CFDA, the 31 cartons of Yin Qiao involved were solely exported to Hong Kong.
- CFDA believes the traces of Paracetamol were caused by contamination during the production process, as LSR failed to clean up its tableting machine properly after producing the “Fined” Yin Qiao Jie Du Tablet, a similar product that includes Paracetamol as an ingredient.
■ LSR’s earlier damage control voided by dealer’s actions
- In fact, LSR’s in-house testing had detected the contamination as early as Nov 14, according to CFDA. In Dec 14, LSR requested its 3 rd -party dealer Hong Kong Ming Wah Company to cease the sale and destroy the relevant products. However, after another round of testing initiated by Ming Wah, the dealer decided the batch was clean and continued with their sales without notifying LSR.
■ Just a small hiccup but treated very seriously by CFDA
- To date, there have been no reports of adverse reaction from consumers. Tianjin said the sales of the involved product was c.Rmb100k in 2015; this is equivalent to less than 0.03% of LSR’s 2015 sales (est. Rmb400m-500m), and even more miniscule when compared to the group’s 2015 sales of Rmb7.1bn.
- Nevertheless, CFDA has treated the case as a violation of GMP, and has mandated that LSR cease manufacturing to rectify all misconducts.
■ Maintain Add, with a lower TP of US$1.30 based on CY16 DCF
- LSR is one of China’s most time-honoured TCM brands. We believe the Yi Qiao case is only a hiccup.
- Nevertheless, we factor in a scenario that LSR loses a half year of sales in FY16 and a quarter year in FY17 for rebuilding the brand. As a result, our FY16F and FY17F EPS are cut by 17.7% and 8.1% respectively, with FY18F EPS left intact.
- Already at a 68% discount to its A-share, any weakness in Tianjin’s S-share price only makes it more attractive.
- S-share trades at 10.7x CY17 P/E vs peers’ average of 14.1x.
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2016-04-25
CIMB Securities
SGX Stock
Analyst Report
1.30
Down
1.42
