Tianjin Zhongxin

Tianjin Zhongxin: CIMB initiated research on Tianjin Zhongxin Pharmaceutical company (TIAN SP) with BUY call. TJZX is a time-honoured brand （老字号） in pharmaceutical manufacturing and distribution business in China. It is the manufacturing arm of Tianjin Pharmaceutical Group Corporation Limited, a wholly-owned company of State-owned Assets Supervision and Administration Commission (SASAC). TJZX is dual listed on SGX and SSE. The core products of TJZX are traditional Chinese medicine that fall under essential drugs category by China’s Ministry of Health classification. China’s MOH mandates essential drugs to be used by all primary medical institutions, and sales of essential drugs to form 40-50% and 25-30% of total drug sales in secondary and tertiary hospitals. The company has been benefitting from such policies, evidenced by 14.5% CAGR over the last five years, and should continue to benefit from the nation’s ageing population and growing medical demands. To finance the company’s upgrading of marketing network, logistics and to venture into complementary businesses, the management proposed a placement of 90m A-shares at CNY12.83 each on 27 June 2014. The proposal is subject to approval by China Securities Regulatory Commission (CSRC). Financial statements show healthy balance sheet ratios. Gearing is currently 33.4% and may be reduced further if placement is successful; interest coverage is close to 12. The company is currently trading at 16.3x CY14 P/E and 14.1x CY15 P/E, lower than peer average across China, Hong Kong and Singapore. CIMB targets US$1.46 from current price of US$1.08 (35% upside).