Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2016-12-05: Benefiting from China's ageing population

Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2016-12-05: Benefiting from China’s ageing population TIANJIN ZHONG XIN PHARM GROUP T14.SI

Tianjin Zhongxin Pharmaceutical Group - Benefiting from China’s ageing population

  • Tianjin Zhongxin’s outlook is underpinned by the ageing population in China. Su Xiao Jiu Xin Pill may benefit from the removal of price ceiling for low-priced drugs.
  • Expansion projects could translate into an additional operating profit of Rmb120m- 160m from FY19 onwards.
  • S-share price of US$0.82 is at a heavy 68% discount to its A-share at US$2.59.
  • Maintain Add, with target price of US$1.30, based on CY17 DCF (WACC: 8.5%).

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, Le Ren Tang and Long Shun Rong, 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 cardiovascular ailments. Its sales achieved a double-digit CAGR in FY09-15.
  • We believe Su Xiao’s high growth is sustainable in the medium term given the anticipated rise in demand for cardiovascular treatment as the nation’s population ages. China’s age distribution currently peaks at 45-50 years, an inflexion point after which the incidence rate of cardiovascular disease will rise exponentially.

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’s (NDRC) removal of the price ceiling for low-priced drugs. 
  • Su Xiao Jiu Xin Pill, forming 25-30% of the group’s manufacturing sales, may see an increase in selling price given that its selling price has stagnated at the previous price ceiling set by NDRC years ago. 
  • We understand that management is actively monitoring the market for an opportunity to ramp up Su Xiao’s price.

Updates on expansion projects

  • 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.
  • We estimated that, based on management’s IRR guidance of 15-20%, these projects could translate into additional operating profit of Rmb120m-160m p.a. from FY19 onwards.

Strong balance sheet; S-share price at a heavy discount to A-share 

  • Tianjin Zhongxin had a net cash position of Rmb871m or Rmb1.13 per share (20% of Tianjin Zhongxin’s S-share price) as at end-3Q16.
  • Its S-share currently trades at a 68% discount to its A-share (price: US$2.59); the Sshare’s 10.7x CY17 P/E is also more compelling than Hong Kong peers’ average of 16.6x. Its FY16-18F dividend yield of 3.2% is higher than peers’ average of 1.1%.
  • Organic profit growth is a potential re-rating catalyst; stiffer competition is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.300 Same 1.300