Reforms Could Unlock Deep Value In TCM Giant

A renowned TCM pharmaceutical giant, TJZX presents a unique opportunity with

a deep discount between its A- and S-shares. The latest reforms could unlock

great value with delisting possible while its tremendous brand equity and R& D

efforts (851 patents) make it a winner in a growing TCM pie. We expect ASP hikes

to lead 14.9% 2016-19 profit CAGR with US$0.17/share 2018F net cash and 4.3%

2018F yield. Initiate coverage with BUY and US$1.66 target price, based on 15.5x

peer average FY18F PE.

 

SINGAPORE (April 5): CIMB Research is maintaining its &ldquo add&rdquo recommendation on Tianjin Zhongxin Pharmaceutical Group with an unchanged target price of US$1.30 ($1.82) as it continues to like the S-share as a &ldquo cheap proxy for China&rsquo s growing pharmaceutical demand&rdquo .

 

In a Tuesday note, analysts Roy Chen and William Tng note that Tianjin Zhongxin&rsquo s S-share is trading at a heavy 63% discount to the group&rsquo s A-share, while also reporting the highest dividend yield of 3.4% for FY16 as compared to its peers.

 

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Although the group&rsquo s FY16 revenue came in slightly below CIMB&rsquo s expectations at 95% of the research house&rsquo s full-year forecast, Chen and Tng point out that core net profit managed to grow 3.1$ on-year to RMB379 million for the full year, as the shortfall in the profitability of the group&rsquo s consolidated entities was more than made up for by stronger contribution from its associates.

 

&ldquo The swing in associate profit was mainly due to the profit recovery of Sino-American Tianjin Smithkline & French Lab, where FY15 net profit was adversely affected by the China tax authorities&rsquo investigation,&rdquo they add.

 

Furthermore, Chen and Tng were &ldquo positively surprised&rdquo by the group&rsquo s final dividend per share (DPS) of RMB 0.15 declared for FY16, following its 1H16 interim DPS of 10 RMB cents.

 

The analysts point out that this translates into a payout ratio of 46%, in addition to a strong balance sheet with a net cash position of RMB577 million or 75 cents per share, which is 11% of Tianjin Zhongxin&rsquo s S-share price.

 

Meanwhile, they do not expect the group&rsquo s current expansion projects, such as the upgrading of its marketing and sales network and the construction of Bozhou Industrial park, to deliver any meaningful contributions for now &ndash while stiffer competition also presents a key risk to their view.

 

As at 11.04am, shares of Tianjin Zhongxin are trading 1.54% lower at 1.5 cents