Tianjin Zhongxin Pharmaceutical Group Corporation - UOB Kay Hian 2018-04-30: 1Q18 Results Outperform Expectations, Anticipating An Excellent 2018

Tianjin Zhongxin Pharmaceutical Group Corporation - UOB Kay Hian 2018-04-30: 1q18 Results Outperform Expectations, Anticipating An Excellent 2018 TIANJIN ZHONG XIN PHARM GROUP T14.SI

Tianjin Zhongxin Pharmaceutical Group Corporation - 1q18 Results Outperform Expectations, Anticipating An Excellent 2018

  • Tianjin Zhongxin Pharmaceutical Group’s (TJZX) 1Q18 results came in above our expectations, with profit outperforming by 9%. Top-line revenue growth of 10.3% y-o-y, coupled with gross margin expansion, flowed down into a 29.6% y-o-y growth in TJZX’s attributable net profit.
  • With key drug (速效救心丸) Su Xiao’s ASP hike only in its early innings, TJZX is a main beneficiary as the Chinese government continues to advocate the use of TCM drugs.
  • Maintain BUY with revised target price of US$1.72 pegged to peers’ average of 14.1x 2018F PE



RESULTS

  • 1Q18 net profit attributable of Rmb173.4m (+29.6% y-o-y) outperformed expectations. Outperforming our expectations, Tianjin Zhongxin Pharmaceutical Group’s (TJZX) 1Q18 profit represents 31.8% of our estimate on a normalised basis. Revenue growth coupled with gross margin expansion had come together to outstrip rises in marketing and distribution expenses (+30.7% y-o-y) and delivered strong growth to TJZX’s profit bottom-line (+29.6% y-o-y). Associates’ continued strong performance (+43.5%) also represents a welcome surprise.
  • Building up a cash hoard. The strong earnings performance reversed TJZX’s operating cashflow direction to an inflow of Rmb174.4m as compared with an outflow in 4Q17. As a result, TJZX’s cash balance rose by approximately Rmb194.0m, or 20% over the balance as at 31 Dec 17. TJZX net cash position is substantially strengthened while net cash to equity ratio is at 15.4%.


STOCK IMPACT

  • TJZX’s multi-year growth story led by Su Xiao. With Su Xiao’s (速效救心丸) price hike set firmly in motion, management expects a meaningful impact on 2018 profits while the full impact will be seen in 2019. Coupled with management’s new strategy to grow Su Xiao’s sales volume, we re-iterate our view that TJZX is on the cusp of a multi-year growth story.
  • Focus on major products set to pay off. Management’s strategy to focus on major products has started to pay off with its top 11 products groups’ revenue growing 12.31% to Rmb1.9b. Continued implementation of this strategy will likely see deeper product penetration into new retail channels and drive further growth.


EARNINGS REVISION/RISK

  • Upside adjustment for 2018-19 earnings. We tweak our 2018-20 net profit attributable to Rmb589.3m (+3.5%), Rmb 696.6m (+3.9%) and Rmb 748.5m (+4.5%) respectively. We factored in higher growth of TJZX’s medicine manufacturing business and its corresponding improvement in gross margins.


VALUATION/ RECOMMENDATION

  • Maintain BUY with a revised PE-based target price of US$1.72 (Rmb6.29/US$), pegged to peers’ average of 14.1x 2018F PE. While TJZX is smaller in market capitalisation, its ROE and yield are similar to peers’ average. We think TJZX is poised for a major turnaround as its blockbuster drug experiences a substantial price appreciation in the Chinese market.


SHARE PRICE CATALYST

  • Announcement of positive impact from relevant reforms, ie injection of private ownership, and the delisting of Singapore listed shares.
  • Continued profit growth as its Su Xiao drug price hike takes place.





Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-30
SGX Stock Analyst Report BUY Maintain BUY 1.72 Up 1.660



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