Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2016-11-01: 3Q16 Bottomline saved by associates

TIANJIN ZHONG XIN PHARM GROUP T14.SI

Tianjin Zhongxin Pharmaceutical Group - 3Q16 Bottomline saved by associates

9M16 core net profit was above expectations, at 93% of our full-year forecast. The positive surprise was mainly due to strong contribution from associate companies.
Sales remained lacklustre, down 6% yoy in 9M16. We believe that the decline was due mainly to:
1. slower Western medicine sales, and
2. stiffer competition.

The group may potentially raise DPS to Rmb0.2 for FY16 (FY15: Rmb0.15), given its strong net cash position at end-9M16.
Maintain Add call and target price of US$1.30, based on CY17 DCF (WACC: 8.5%).

9M16 revenue came in below our expectations, at 68% of our full-year forecast.
On a yoy basis, group sales declined 6% to Rmb4.74bn or US$700m in 9M16 (9M15: Rmb5.03bn). We believe that the weakness in topline was mainly due to:
1. slower Western medicine sales (the group took steps to reduce exposure to lower-margin thirdparty products), and
2. stiffer competition under China’s new public tendering process for drug supply. GPM dipped 0.3% pt yoy to 30.7% in 9M16 (9M15: 31%).

9M16 core EBIT fell 14% yoy to Rmb248m (9M15: Rmb290m), making up only 68% of our full-year forecast. However, core net profit rose 25% yoy to Rmb304m in 9M16 (9M15: Rmb244m), comprising 93% of our full year forecast, due to strong contribution from associates (9M16: Rmb103m vs. 9M15: Rmb22m).
The swing in associate profit was due mainly to recovery in profitability of Sino-American Tianjin Smithkline & French Lab (FY15 net profit adversely affected by China tax authorities’ investigation).

The group has a strong balance sheet, with net cash position of Rmb871m, or Rmb1.13 per share (22% of Tianjin Zhongxin’s S-share price).
During the EGM on 24 Oct, shareholders approved the Board’s proposed interim DPS of Rmb0.1 for 1H16. Should the Rmb0.1 be sustained for FY16 final DPS, FY16 total DPS would amount to Rmb0.2, which translates into FY16 dividend yield of 3.4% (after deducting 10% withholding tax for S-shares). We compare this to the first and final DPS of Rmb0.15 in FY15.

Tianjin Zhongxin raised Rmb814m in the A-share market in 2015 to finance:
1. upgrading of its marketing and sales network,
2. construction of Bozhou Industrial Park, and
3. development of vegetable beverage projects.
Rmb90m of the total proceeds had been invested as at end-Aug 16 and we expect the rest to be deployed over the next two years.
Based on management’s IRR guidance of 15-20%, these projects could potentially lead to additional operating profit of Rmb120m-160m p.a. in FY19 onwards.

We cut FY16/17/18F revenue by 6%/3%/3% (resulting in core EBITDA cuts of 10%/9%/12%), but raise core net profit by 8%/4%/0% due to the recovery in profitability of Sino-American Tianjin Smithkline & French Lab (associate company).
Maintain Add, with unchanged TP of US$1.30, after we roll over DCF valuation to end-CY17 (WACC: 8.5%). Tianjin S-shares trade at 9.9x CY17 P/E vs Hong Kong peers averaging at 16.6x.
Organic profit growth is a potential re-rating catalyst; stiffer competition is a key risk.

Roy CHEN CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-01

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