Tianjin ZhongXin Pharmaceutical Group Corporation (TIAN SP) - UOB Kay Hian 2018-01-10: Highlights From Roadshow ～ Anticipating A Stellar 2018

TIANJIN ZHONG XIN PHARM GROUP T14.SI

Tianjin ZhongXin Pharmaceutical Group Corporation (TIAN SP) - Highlights From Roadshow ～ Anticipating A Stellar 2018

After several years of absence, Tianjin ZhongXin Pharmaceutical Group (TJZX) held its first corporate roadshow in Singapore last Thursday to highlight new developments. It reaffirmed the margin-positive reforms, provided details and reported on its progress.
TJZX also addressed investor concerns on Su Xiao Jiu Xin pill (速效救心丸).
Poised for a leap in profits, TJZX is trading at only 8.9x 2018F PE, a huge 36.8% discount to Hong Kong-listed peers. With the bright TCM industry outlook, reiterate BUY and target price of US$1.52.

In line with Tianjin ZhongXin Pharmaceutical Group Corporation’s (TIAN SP) earlier China investor plant trip where the new management acknowledged the slack and promised to awaken this sleeping giant, TJZX continued to share in its first corporate roadshow in Singapore the progress and details on its reforms and how they are going to set the stage for a stellar 2018.
We note that the new management is more shareholder-friendly and interested in investor concerns.

In the short five months since appointment, the new management consolidated departments and businesses which clearly show better operating effectiveness when together. For example, the procurement process at Bozhou Industrial Park, No. 6 Chinese Medicine Plant and Tianjin Chinese Medicinal Slices Co Ltd was merged to reap purchasing economies.
Also, the sales forces of Le Ren Tang (乐仁堂) and Long Shun Rong (隆顺榕) were consolidated to facilitate cross-selling to customers and promote best practices.

Management acknowledged the under-utilisation of financial resources at their disposal. In the interim, management’s philosophy is to grow its core products while leveraging its existing expertise to expand into complementary new businesses that will generate new growth.

Tianjin ZhongXin Pharmaceutical Group (TJZX) also answered investors’ concerns over key product, Su Xiao Jiu Xin pill (速效救心丸), particularly the price hike.
Su Xiao’s price hike took about three years of negotiations with 28 provinces and the Ministry of Human Resources & Social Security to ensure the price hike is implemented in all medical institutions across China. At the same time, approval was sought to increase social security reimbursement to ensure Su Xiao remains affordable and cost competitive for end consumers.
We note that while the process is long and laborious, it is not without benefit.

In the midst of negotiations, TJZX also proactively managed available inventory in the open market to about 1.5 months. This was a pre-emptive move to prevent any potential delay in implementation post-negotiation.
Active inventory management essentially forces inventory renewal by distributors at the higher out-of-factory prices and allows TJZX to reap the benefits of the price hike.

We are positive on management’s initiatives to drive operating efficiencies. While the presence of such ‘low lying fruits’ highlight the existing slack, it also offers us a glimpse into the deep potential within the company.
With so many operating levers to pull, management should maintain or improve margins going forward.

While the negotiations have been long drawn, management revealed the rise in Su Xiao’s average retail price across the country will lead to an attendant rise in out-of-factory prices from about Rmb20 to highRmb20s.
With the blockbuster drug’s price hike now firmly set in motion, management expects a meaningful impact on 2018 profit and the full impact in 2019. This revelation reaffirms our estimate of a 19% rise in earnings from pre-price hike levels to be reasonable and may even surprise on the upside.

With the implementation of higher prices across the country, management shared the new direction is to grow Su Xiao sales by relaxing available inventory in the open market from its current 1.5 months.
We also note that a shift to a contract sales model will likely drive a renewed impetus on increasing demand of Su Xiao which will work hand in glove with heightened supply to grow Su Xiao’s market share.

Reiterate BUY and PE-based target price of US$1.52 (at Rmb6.57/US$), pegged to peers’ average of 14.1x 2018F PE.
While Tianjin ZhongXin Pharmaceutical Group (TJZX) is smaller in market capitalisation, its ROE and yield are similar to peers’ average. The stock is currently trading (on the SGX) at a whooping 60% discount to its A-share price of US$2.32.
We think TJZX is poised for a major turnaround as this sleeping giant awakes from its slumber and this laggard will catch up with its peers.

Announcement of positive impact from relevant reforms, ie injection of private ownership, and the delisting of S-shares.

Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-10

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.520 Same 1.520