Excerpts from analysts' report

roychen9.14williamtng4.14CIMB analysts
: Roy Chen (left) & William Tng, CFA (right)

Tianjin Pharmaceutical Group (TPG), the major shareholder of Tianjin Zhongxin, revealed that it intends to acquire up to 1% of the company’s total issued shares in Singapore over the next six months.

We think the rationale of this move is that TPG wants to buff up its stake in Tianjin Zhongxin to counter the potential dilution impact from the new A-share placement to the third parties, as well as to take advantage of the huge price gap between the A-and S-shares. We maintain our FY15-17 EPS estimates and reiterate our Add rating on Tianjin Zhongxin, with a CY15 DCF-based target price of US$1.45. Potential re-rating catalysts include organic expansion in pharmaceutical sales and S-share purchase by the major shareholder.


What Happened

On 2 Dec, Tianjin Zhongxin’s major shareholder, TPG, purchased 4.6m S-shares via open market transactions, increasing its stake in Tianjin Zhongxin from 44.043% to 44.665%. Shortly after, TPG revealed its intention to acquire up to 1% (translates to 7.4m shares, including the recently-acquired 4.6m shares) of Tianjin Zhongxin’s S-shares over the next six months.

What We Think

TianjinPharma_Suxiao7.14With RMB779 m in sales, Su Xiao pills were the best-selling product for the company last year. The pills are used for treating coronary heart diseases and angina pectoris. Photo: CompanyWe believe that: 

1) TPG intends to buff up its shareholding in Tianjin Zhongxin to counter the potential dilution effects from the company’s proposed new placement on the A-share market and to take advantage of the huge price gap between the company’s A- and S-shares.

2) This is only the start of TPG increasing its stake in Tianjin Zhongxin. The proposed 90m share placement on the A-share market would dilute TPG’s stake in Tianjin Zhongxin from 44.04% to 39.26%. If TPG wants to maintain its current shareholding level, it needs to acquire 5% of Tianjin Zhongxin’s total issued capital, i.e. c.40m shares, from the Singapore market over the next 2-3 years.

3) The potential share purchase would extend to common S-shareholders, as it is unlikely that Tianjin Zhongxin’s three major S-shareholders, which collectively own c.29.6m shares, would all relinquish their positions.

Apart from the share purchase, we expect Tianjin Zhongxin to benefit from the National Development and Reform Commission’s (NDRC) decision to lift the price cap on low-cost drugs. Under a blue-sky scenario, the company’s net profit could double in the next 2-3 years, driven by the sales and margin expansion of Su Xiao Jiu Xin Pills after the price ceiling is lifted.

What You Should Do

Add. The S-shares trade at 13.8x CY15 P/E versus its peer average of 22.2x.

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