Tianjin Zhongxin Pharmaceutical Group Corp - UOB Kay Hian 2020-04-21: 2019 Strong Finish To The Year

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TIANJIN ZHONG XIN PHARM GROUP (SGX:T14)

Tianjin Zhongxin Pharmaceutical Group Corp - 2019 Strong Finish To The Year

• Tianjin Zhongxin Pharmaceutical’s 2019 revenue (+10.0% y-o-y) and net profit (+11.9% y-o-y) are in line with our expectations, forming 100.3% and 99.1% of our forecasts respectively. This was supported by strong revenue growth from major products.
• Maintain BUY with a lower PE-based target price of US$1.35, based on peers’ average of 10.5x 2020F PE, and implies 89.3% upside from current price levels.

Tianjin ZhongXin's 2019 Results

Strong results in line with expectations along with higher dividends.

• Tianjin Zhongxin Pharmaceutical Group (SGX:T14) recorded solid growth in both top-line and bottom line for 2019. Revenue and net profit grew 10.0% y-o-y and 11.9% y-o-y respectively, forming 100.3% and 99.1% of our full-year estimates.
• Gross margin grew from 40.3% in 2018 to 41.2% in 2019.
• Total dividends declared increased 36.5% from Rmb2.20/10 shares in 2018 to Rmb3.00/10 shares in 2019.

Robust sales growth underpinned by strong sales of major products.

• The superb growth in revenue and net profit was supported by robust sales for its major core products. Accounting for 25.3% of 2019 total revenue, sales of its blockbuster cardiovascular drug (速效救心丸) grew 13.3% while sales of two other major products (胃肠安丸 and 清肺消炎丸) surged 24.4% and 31.7% y-o-y respectively.
• Looking forward, we expect revenue of these products to remain resilient as supportive healthcare policies and the ongoing Covid-19 epidemic will boost demand for healthcare products.

Covid-19 impact.

• Management said the extent of impact from Covid-19 would depend on the duration and control of the pandemic. As China’s total number of cases have started to plateau along with the easing in the lockdowns, we reckon the Covid-19 impact on Tianjin Zhongxin Pharmaceutical would be minimal in 2020.

TCM used as alternative treatment for Covid-19.

• As China battles the ongoing Covid-19 pandemic, traditional Chinese medicine (TCM) has been used as an alternative treatment to the infectious disease. Backed by the Chinese government, TCM was added into the official Covid-19 treatment guidelines along with standard western medicine to relieve respiratory symptoms caused by Covid-19.
• According to China’s Ministry of Science & Technology, more than 60,000 patients in China had received herbal remedies along standard antivirals. Although the efficacy of herbal treatments has not been proven, the boost in demand for TCM may help TCM companies such as Tianjin Zhongxin Pharmaceutical whom respiratory products account for roughly 10% of its total medicine manufacturing revenue.

EARNINGS REVISION / RISK

• We adjust our 2020-21 earnings estimates slightly to account for the uncertainty brought about by Covid-19. We also introduce earnings forecast for 2022.
• We raise our Tianjin Zhongxin Pharmaceutical's 2020 revenue estimate from Rmb7,229m to Rmb7,391m (+2.2% y-o-y) but trim net profit estimate from Rmb728m to Rmb702m (-3.6% y-o-y). We also raise our 2021 revenue estimate from Rmb7,697m to Rmb7,927m (+3.0%yoy) but trim net profit estimate from Rmb839m to Rmb803m (-4.2% y-o-y).
• We believe ongoing government policies such as Healthy China 2030 and the Strategic Plan On The Development of Traditional Chinese Medicine (2016-30) would help boost demand and sales in China’s TCM industry.
• Risks include:
  1. tougher-than-expected competition,
  2. foreign-currency volatility, and
  3. additional regulatory reforms.

VALUATION/ RECOMMENDATION

• Maintain BUY with a lower PE-based target price of US$1.35 (from US$1.40), pegged to peers’ average of 10.5x 2020F PE.
• Tianjin Zhongxin Pharmaceutical is trading at a huge discount of 63% to its A-shares (600329 CH). Thus, we believe there is still plenty of upside for Tianjin Zhongxin Pharmaceutical as current share price does not match the company’s good fundamentals.
• See Tianjin Zhongxin Pharmaceutical Share Price; Tianjin Zhongxin Pharmaceutical Target Price; Tianjin Zhongxin Pharmaceutical Analyst Reports; Tianjin Zhongxin Pharmaceutical Dividend History; Tianjin Zhongxin Pharmaceutical Announcements; Tianjin Zhongxin Pharmaceutical Latest News. 

SHARE PRICE CATALYST

• Deregulation of TCM and delisting from SGX.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-21

SGX Stock Analyst Report BUY MAINTAIN BUY 1.35 DOWN 1.400