Tianjin Zhongxin Pharmaceutical Group Corporation - UOB Kay Hian 2018-10-31: 3Q18 Results In Line, Investment Thesis Intact

TIANJIN ZHONG XIN PHARM GROUP (SGX:T14) | SGinvestors.io TIANJIN ZHONG XIN PHARM GROUP (SGX:T14)

Tianjin Zhongxin Pharmaceutical Group Corporation - 3Q18: Results In Line, Investment Thesis Intact

  • In a typically weak quarter, Tianjin Zhongxin Pharmaceutical (TJZX)'s 3Q18 net profit rose 6.6% y-o-y to Rmb87.4m.
  • Top-line revenue recorded explosive growth of 20.7% y-o-y to Rmb1.6b. Gross profit rose in tandem (+22.5% y-o-y), coming in at Rmb614.8m. However, the solid revenue growth was offset by a lower share of associate profits which declined 82.6% y-o-y.
  • We believe our investment thesis of multi-year growth led by key drug Su Xiao(速效救心丸)’s ASP hike is intact and we reiterate BUY with a PE-based target price of US$1.59.



3Q18 RESULTS


3Q18 attributable net profit of Rmb87.4m (+6.6% yoy), in line with expectations.

  • Tianjin Zhongxin Pharmaceutical Group (TJZX) reported a 3Q18 attributable net profit of Rmb87.4m representing 14.8% of our estimate on a normalised basis. Revenue grew 20.7% y-o-y to Rmb1.6b. Gross profit rose in tandem with revenue and registered 22.5% growth y-o-y.
  • While the strong performance supports our investment thesis, a lower share of associates’ profits (-82.6% y-o-y) eroded much of the solid revenue growth. As a result, net profit margins declined 0.8ppt to 5.5%.


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. Moreover, 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.

Increasing competitiveness through mixed-ownership reform.

  • Following TJZX’s induction into China’s “Double Hundred” SOE reform list ( 国企改革“双百行动”), Tianjin Pharmaceutical Group Co. Ltd (parent company) has proposed to carry out a mixed-ownership reform. While the proposed reform is still in the planning stage, we believe the proposed mixed-ownership reform can have the effect of maximising TJZX’s full profit potential.
  • We read into the announcement by Tianjin Development Holdings Limited (882 HK) and believe any mixed-ownership reform will likely introduce a strategic shareholder that will enhance the commercial productivity of SOEs.


EARNINGS REVISION/RISK

  • No change to earnings estimates.
  • Risks include
    1. tougher-than-expected competition,
    2. foreign currency volatility, and
    3. regulatory risk arising from negative impact from reforms.


VALUATION/ RECOMMENDATION

  • Maintain BUY with a PE-based target price of US$1.59, 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.






Yeo Hai Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-31
SGX Stock Analyst Report BUY MAINTAIN BUY 1.590 SAME 1.590



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