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Brokers’ take

This article is more than 12 months old

Compiled by Navin Sregantan


APRIL 1 CLOSE: US$0.945 (S$1.30)


UOB Kay Hian, April 1

Tianjin Zhongxin Pharmaceutical Group's reported Q4 and full-year 2018 net profits came in at 158.7 million yuan (S$32 million), a 34.3 per cent increase year on year, and 561.7 million yuan (+18.0 per cent year on year) respectively.

Full-year performance represented 96.4 per cent of our estimate. Tianjin Zhongxin proposed a final dividend of 2.2 yuan for every 10 shares (+10.0 per cent year on year), bringing 2018's dividend yield to 3.2 per cent based on Bloomberg's 6.72 yuan/US dollar rate.

China has been focusing on reforming its pharmaceutical sector to drive down healthcare costs; reform policies had introduced volatility into 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 TCM (2016-2030), continue to provide tailwinds for the sub-sector.

As a result, China's TCM industry is expected to exceed 3.0 trillion yuan by 2020, representing a 20 per cent compound annual growth rate.

In its Shanghai Stock Exchange announcement, Tianjin Zhongxin management reiterated its 2020 strategic plan to "double in three years".

With growth in sales volume translating into Tianjin Zhongxin's solid top-line performance, we think the front-loaded nature of the company's distribution and marketing costs have already begun to pay off and we expect 25 per cent growth in other major products' sales volumes this year.

Management acknowledged the complicated and volatile external environment, which had exerted downward pressure on China's domestic market but shared that Tianjin Zhongxin's export business is relatively small and foreign tariffs on exports have a minimal impact.

We adjust our earnings estimates to 646 million yuan (-7.3 per cent year on year) and 690.4 million yuan (-7.7 per cent year on year) in 2019-2020 respectively.

We take into account changes to Tianjin Zhongxin's cost structure, which saw a higher-than-expected increase in distribution and marketing expenses and higher share of profits of associates.

We also introduce 2021 earnings estimate of 720 million yuan. Risk include tougher-than-expected competition, foreign currency volatility, and regulatory risk arising from negative impact from reforms.

Tianjin Zhongxin's S-shares trade at a discount of 61.6 per cent to its A-share price. We think Tianjin Zhongxin's S-shares will be lifted as investors begin to recognise its outlook.

Price catalysts for Tianjin Zhongxin include the announcement of a positive impact from relevant reforms, and the delisting of Singapore-listed shares.

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision.

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