Excerpts from UOB Kay Hian report

Analysts: Edison Chen & Yeo Hai Wei

TIANJIN ZHONGXIN PHARMACEUTICAL GROUP CORPORATION (TIAN SP)
Awakening Giant: Reforms Underway With Lucrative Targets 

TianjinPharma Suxiao7.14Tianjin Pharma's superstar product, Su Xiao Jiu Xin pills, will be priced higher.
Photo: Company
In its first-ever investor plant trip, TJZX’s new Chairman acknowledged the firm’s prior slack and promises to awaken the sleeping giant. Their target is to “double in three years” and we believe it is possible to double drug manufacturing profits by 2020.

The necessary reforms have been laid out and management interest will be profit-aligned due to a proposed profit-linked remuneration plan.

Given the TCM industry’s bright outlook, reiterate BUY with target price raised to US$1.52. 


WHAT’S NEW
• New management to revitalise SOE giant into vibrant profit-oriented firm, holds first-ever plant trip for investors. In Aug 17, four new members of TJZX’s top management took charge of the team (Figure 1) and have set out to revitalise the sleepy SOE into a vibrant profit-oriented firm.

Tianjin Zhongxin Pharma

Share price:
94.5 US c

Target: 
US$1.52

As TJZX’s new management carries out market-oriented SOE reforms, we were invited to their first-ever plant trip held for public investors to better understand the new management, their strategy to revitalise TJZX into a profit-oriented company and their resolve to do so.

• Acknowledging TJZX’s prior slack and promising to put resources to full use. We were particularly heartened when the new Chairman, Mr Li Li Qiang, acknowledged that TJZX had neglected the resources it had at its disposal. He referred not only to the potential of TJZX’s brands/drugs but also the inefficiency of the financial resources/capital structure (its huge cash hoard). He promises to put these resources to full use and unleash the full profit potential of the company.

• Target to double profits by 2020. Led by Chairman Li and General Manager Wang, the new management has a 2020 strategic plan to “三年倍增” (“double in three years”) and we believe it is possible to double internal drug manufacturing profits in three years. Other than the current ASP hike for superstar product Su Xiao Jiu Xin Pill, TJZX is also aiming for Tong Mai Yang Xin Pill (通脉养心丸) to achieve annual sales of Rmb500m by 2020, becoming the next growth pillar. 

• Management interest to be aligned with that of profit-oriented shareholders. As remnants of a planned economy, SOEs previously did not give profit maximisation the highest priority.

However, the landscape has changed and currently management remuneration is proposed to be linked to the profitability of TJZX. With State Council Document [2017]53 authorising board members to approve such remuneration schemes, TJZX’s new remuneration scheme is likely to be approved by 1Q18, allowing management interest to be closely aligned with that of profit-oriented shareholders.

• Target achievable given new management’s proven track record. We have reviewed GM Wang’s impressive track record and believe she has the capability to achieve her targets. Under her leadership, LeRenTang (乐仁堂, subsidiary of TJZX) grew market sales for Tong Mai Yang Xin Pill from Rmb8.16m in 2007 to around Rmb100m in 2010 and then subsequently to more than Rmb200m three years later. None of the new management members is “parachuted” in and are all promoted internal, so they should be familiar with TJZX’s potential and be able to boost profit.

Full report here.


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