Tianjin Zhongxin Pharma

Tianjin Zhongxin Pharma (TJZX): Tianjin Pharma (TPG) the major shareholder of TJZX revealed that it intends to acquire up to 1% of the co's total issued shares (7.4m shares) in SG over the next six months. This will lift its stake from 44.04% to 44.67%. CIMB notes that such a move would allow TPG to buff up its stake in TJZX to counter the potential dilution impact from the new A share placement to third parties, as well as to take advantage of the huge price gap between the A-and-S shares. Recall the proposed 90m share placement on the A share mkt would dilute TPG's stake in TJZX from 44.04% to 39.26%. If TPG wants to maintain its current sh/h level, it needs to acquire 5% of TJZX total issued capital, ie. 40m shares from the SG market over the next 2-3 yrs. Apart from the sh purchase, CIMB expects TJZX to benefir from the NDRC decision to lift the price cap on low cost drugs. Under a blue sky scenario, net profit could double in the next 2-3 yrs, driven by the sales and margin expansion of Su Xiao Jiu Xin Pills after the px ceiling is lifted. TJZX S-shares trade at 13.8x FY15e P/E vs the peer avg of 22.2x . The S-shares trade at a whopping 60% discount to the A-shares. CIMB reiterates its Add rating and TP US$1.45.