Tianjin Zhongxin Pharmaceutical Group Corp - UOB Kay Hian 2020-08-19: 1H20 Soft Results Due To COVID-19; Expect A Strong Recovery In 2H20

TIANJIN ZHONG XIN PHARM GROUP (SGX:T14)

Tianjin Zhongxin Pharmaceutical Group Corp - 1H20 Soft Results Due To COVID-19; Expect A Strong Recovery In 2H20

Tianjin Zhongxin Pharmaceutical’s 1H20 revenue (-6.9% y-o-y) and net profit (-6.7% y-o-y) were slightly below expectations, forming 44.5% and 46.1% of our full-year forecasts respectively. Demand for traditional Chinese medicine fell in 1H20 due to COVID-19 lockdown measures. We expect a strong rebound in 2H20 as China’s economy recovers and reopens.
Maintain BUY on Tianjin Zhongxin Pharmaceutical with a lower PE-based target price of US$1.25, based on peers’ average of 9.9x 2020F PE.

Tianjin Zhongxin Pharmaceutical (SGX:T14) recorded declines in both top-and bottom line for 1H20. Revenue and net profit dropped 6.9% y-o-y and 6.7% y-o-y respectively, forming 44.5% and 46.1% of our full-year estimates. This was largely due to the COVID-19 lockdown measures in China which disrupted supply lines and curbed consumer consumption.
Looking forward, we reckon the successful containment of COVID-19 in China will help spur demand and help Tianjin Zhongxin Pharmaceutical record decent revenue and earnings growth for 2H20.

The declines in 1H20 revenue and net profit were largely due to a drop in demand in the traditional Chinese medicine (TCM) segment. Accounting for 60-66% of total annual revenue, 1H20 TCM revenue fell 11% y-o-y while the the Western medicine and other segments were flat y-o-y. Furthermore, 1H20 revenue from China dropped 7% y-o-y but overseas revenue increased 10% y-o-y, reflecting the impact of China’s lockdown measures on Tianjin Zhongxin Pharmaceutical’s domestic revenue.
As China’s economy starts to recover along with the easing of lockdown measures, we reckon Tianjin Zhongxin Pharmaceutical will experience strong growth from 3Q20.

Accounting for the underwhelming 1H20 results, we lower our Tianjin Zhongxin Pharmaceutical's 2020-22 revenue estimates to Rmb7,004m (-5.2% y-o-y), Rmb7,460m (-5.9% y-o-y) and Rmb7,970m (-6.4% y-o-y) respectively. We also trim our 2020-22 net profit estimates to Rmb671m (-4.4% y-o-y), Rmb751m (-6.5% y-o-y) and Rmb840m (-6.2% y-o-y) respectively.
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 going forward.
Risks include tougher-than-expected competition, foreign-currency volatility and additional regulatory reforms.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-19

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