CIMB Research, July 2
BEING a time-honoured brand name with a number of exclusive products under China's national essential drug catalogue, Tianjin Zhongxin is in a privileged position to capitalise on China's ageing population. Its flagship product, Su Xiao Jiu Xin pill, is well recognised for its efficacy in treating cardio-vascular diseases. We initiate coverage with an "add" rating and a target price of US$1.46 that is based on CY2014-DCF (WACC: 8 per cent, g: 3 per cent).
China's Ministry of Health requires all primary medical and health institutions to use essential drugs. Sales of essential drugs should form 40-50 per cent of total sales in secondary hospitals and 25-30 per cent of total sales in tertiary hospitals.
A number of Tianjin Zhongxin's exclusive products fall under the essential drugs catalogue, allowing it to capitalise on the vast customer base while having some economic moats to fend off downward pricing pressure from the open tendering procurement.
Produced exclusively by the company, the Su Xiao Jiu Xin pill is a cardio-vascular drug that is well recognised for its fast efficacy in body and lack of side-effects. Sales have been growing rapidly at 14.5 per cent CAGR over the last five years. We think its high growth is sustainable, given the sharply rising incidence rate that correlates with China's ageing population.
The price gap between S- and A-share has been narrowing over the last five years (from 80 per cent to 56 per cent discount). The company recently proposed a private placement of 90 million A-shares, at the price of 12.83 yuan (S$2.58) per share, to finance the upgrading of marketing network, logistics as well as forays into other complementary businesses.
Given the huge disparity in pricing, S-share investors are entitled to the economic benefits from these investments, at only half the cost for potential subscribers of the A-share placement.
ADD
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