SINGAPORE (Apr 2): UOB Kay Hian is keeping Tianjin Zhongxin Pharmaceutical Group at “buy” with a higher target price of US$1.66 ($2.17), pegged to peer average of 14.1 times FY18 earnings.
This comes after Tianjin Zhongxin Pharma exceeded expectations in 4Q17 due to a net profit surge, bringing full-year PATMI to RMB473.3 million, 4.5% above UOB’s full-year forecast on higher 4Q blended gross margin after factoring in a price hike for the group’s key product, “Su Xiao Jiu Xin” pills.
In a Monday report, lead analyst Edison Chen says Tianjin Zhongxin Pharma's stellar 4Q17 results are but only the beginning of a multi-year growth story for the group.
Chen has adjusted his FY18 and FY19 earnings estimates up by 4.4% and 3.5% to RM569.4 million and RMB670.6 million, respectively. This is after factoring in higher growth of the group’s other major products; the phasing out of lower margin accounts; and interest expenses as management continues to use low interest rate working capital loans to fund their operations.
In his view, other key products such as “Tong Mai” and “Wei Chang An” are fast becoming new star drugs that deepen penetration into new retail channels, thereby serving as key future profit drivers.
“Our 2020 estimates assume total revenue growth of 3.5% on the back of increased demand for Su Xiao, Tong Mai and Wei Chang An, and as costs efficiencies are reaped through the streamlining of organisations, thus leading to net income margin stabilising at 11.3%,” he elaborates.
The analyst also expects Tianjin Zhongxin Pharma’s consolidation of its overlapping business departments, and the cost savings resulting from it, to continue making up for the group’s revenue decline in its distribution business due to the Chinese drug industry’s recent “two-ticket system” reform.
Further, with the group’s parent company undergoing state-owned enterprise (SOE) reform, Chen suggests significant upside to UOB’s current profit forecasts – which are 8.6% and 8.2% below China A-share analysts’ for FY18 and FY19, respectively – should Tianjin Zhongxin’s new management remuneration scheme be aligned with the group’s financial or stock performance.
“In view of the favourable industry outlook, ongoing price hike for Tianjin Zhongxin Pharma’s key drug, and fresh initiatives by the new management team, we anticipate a stellar 2018 and beyond,” concludes the analyst.
As at 11.10am, shares in Tianjin Zhongxin Pharma are trading 6% higher at 97.5 US cents, or 0.95 times FY18 book value.
