Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2017-04-04: Increased dividend is a positive surprise

Tianjin Zhongxin Pharmaceutical Group - CIMB Research 2017-04-04: Increased dividend is a positive surprise TIANJIN ZHONG XIN PHARM GROUP T14.SI

Tianjin Zhongxin Pharmaceutical Group - Increased dividend is a positive surprise

  • FY16 core net profit was above our expectations at 108% of our full-year forecast.
  • Core net profit rose 3.1% yoy in FY16 due to strong associate contributions.
  • Revenue fell 13% yoy due to slower sales of Chinese and Western medicines.
  • Strong balance sheet with Rmb577m net cash (Rmb0.75 per share) at end-FY16.
  • The group declared final DPS of Rmb0.15, raising FY16 full-year DPS to Rmb0.25 (FY15: Rmb0.15); this translates into 3.4% FY16 yield based on the current price.
  • Maintain Add call and FY17 DCF-based target price of US$1.30.

Lacklustre topline 

  • Tianjin Zhongxin Pharmaceutical Group (Tianjin)’s FY16 revenue came in slightly below our expectations at 95% of our full-year forecast. 
  • Group sales fell 13% yoy to Rmb6.2bn in FY16 (FY15: Rmb7.1bn) on the back of lower sales of both Chinese and Western medicines. We believe that the slower sales were the result of 
    1. the group taking steps to reduce its exposure to lower-margin thirdparty products, and 
    2. stiffer competition under China’s new public tendering process for drug supply. 
  • GPM rose 2.6% pts to 31.5% in FY16 (FY15: 28.9%).

Core net profit rose 3.1% on strong associates contribution 

  • Despite the yoy lower revenue, group core net profit managed 3.1% yoy growth to Rmb379m in FY16 (FY15: Rmb367m) as the shortfall in the profitability of the group’s consolidated entities was more than made up by stronger associates contribution (FY16: Rmb118m vs. FY15: Rmb34m). 
  • The swing in associate profit was mainly due to the profit recovery of Sino-American Tianjin Smithkline & French Lab, where FY15 net profit was adversely affected by the China tax authorities’ investigation.

Increased full-year dividend is positive surprise 

  • We are positively surprised by the group’s final DPS of Rmb0.15 for FY16 (FY15: Rmb0.15), following its interim DPS of Rmb0.10 declared for 1H16 (1H15: none). This raised the group’s FY16 full-year DPS to Rmb0.25 (FY15: Rmb0.15), translating into a payout ratio of 46% and FY16 dividend yield of 3.4% (after deducting 10% withholding tax for S-shares). 
  • Its balance sheet remains strong, with net cash position of Rmb577m or Rmb0.75 per share (11% of Tianjin Zhongxin’s S-share price).

Update on expansion projects 

  • Tianjin Zhongxin raised Rmb814m via placement in the A-share market in 2015 to finance several expansion projects, such as 
    1. the upgrading of its marketing and sales network, 
    2. the construction of Bozhou Industrial Park, and 
    3. the development of functional vegetable beverage projects. 
  • We note that most of these projects are behind schedule (only c.Rmb120m deployed as at end-FY16); management is working on the issues and we do not project meaningful contribution from these projects for now.

Cheap proxy for China’s growing pharmaceutical demand 

  • We maintain our Add call on Tianjin Zhongxin’s S-share and our FY17 DCF-based target price of US$1.30 (WACC: 8.5%). 
  • We like Tianjin Zhongxin’s S-share as a cheap proxy for China’s growing pharmaceutical demand. The S-share trades at a heavy 63% discount to the group’s A-share. Its 11.5x FY18F P/E is also lower than its Hong Kong peers’ average of 16.4x and China peers’ of 24.7x. 
  • In addition, the S-share has the highest dividend yield (FY16: 3.4%) among peers. Stiffer competition is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-04
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