Tianjin Zhongxin Pharmaceutical Group Corp - UOB Kay Hian 2019-05-02: 1Q19 Results In Line With Expectations

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TIANJIN ZHONG XIN PHARM GROUP (SGX:T14)

Tianjin Zhongxin Pharmaceutical Group Corp - 1Q19: Results In Line With Expectations

• Tianjin Zhongxin Pharmaceutical 1Q19 net profit of Rmb190m, coming in within expectations at 29.4% of our 2019 estimate. Revenue grew 8.6% y-o-y and net profit grew 9.6% y-o-y.
• As the Chinese government continues to advocate the use of TCM drugs, Tianjin Zhongxin Pharmaceutical will be a beneficiary.
• Maintain BUY and PE-based target price of US$1.70.

TJZX's 1Q19 RESULTS

1Q19 net profit of Rmb190m (+9.6% y-o-y), in line with expectations.

• TIANJIN ZHONG XIN PHARMACEUTICAL GROUP (SGX:T14) reported 1Q19 net profit of Rmb190m, representing 29.4% of our full-year estimate. Revenue grew 8.6% y-o-y to Rmb1.8b and gross profit rose 7.7% y-o-y.
• Share of profits of associates declined to Rmb42.0m (-23.7% y-o-y).

Operating margin expanded despite cost pressure.

• Rising raw materials prices, wages and energy costs have put cost pressure on the group’s operations. As a result, gross margin declined 0.3ppt y-o-y while operating expense increased 4.4% y-o-y, mainly attributed to higher administrative expense (+24.4% y-o-y) and marketing and distribution costs (+1.6% y-o-y).
• However, robust sales growth more than made up for these cost pressures.

STOCK IMPACT

Pharmaceutical sector in period of flux but TCM remains a bright spark.

• China has been focusing on reforming its pharmaceutical sector to drive down healthcare costs. The reform policies introduced volatility to pharmaceutical companies’ share prices. However, policies introduced with regard to traditional Chinese medicine (TCM), such as Healthy China 2030 and the Strategic Plan on the Development of Traditional Chinese Medicine (2016-2030), continue to provide the tailwind for the sector. As a result, China’s TCM industry is expected to exceed Rmb3t by 2020, representing a 20% CAGR.

Focus on major products set to pay off.

• With sales growing at high-single-digit, we think Tianjin Zhongxin Pharmaceutical’s distribution and marketing efforts have begun to pay off. Continued implementation of this strategy will likely see deeper product penetration into new retail channels and drive further growth.

EARNINGS REVISION/ RISK

• We maintain our 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

• Maintain BUY and PE-based target price of US$1.70, pegged to peers’ average of 13.6x 2019F PE.
• Going forward, we see share price upside as management focuses on growing its other major brands and continues to deliver on its 2020 strategic plan of doubling earnings in 3 years.

Valuation has not matched fundamentals yet.

• A renowned TCM pharmaceutical giant, Tianjin Zhongxin Pharmaceutical has tremendous brand equity with a new management set on unleashing the firm’s potential. We are expecting EPS CAGR of 8.2% in 2018-21. However, Tianjin Zhongxin Pharmaceutical is trading at a significant discount of 60.2% to its A-shares.
• We think share price will rise as investors see Tianjin Zhongxin Pharmaceutical’s outlook.

SHARE PRICE CATALYST

• Positive impact from relevant reforms, ie injection of private ownership, and the delisting of from Singapore.

Yeo Hai Wei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.700 SAME 1.700