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Broker's take: UOB Kay Hian sees Tianjin Zhong Xin poised for 'stellar 2018' under new management

THE new bosses at Tianjin Zhong Xin Pharmaceutical Group have made analysts upbeat on the Chinese state-owned medicine maker's prospects in 2018.

UOB Kay Hian, in a report on Wednesday, stuck to its "buy" call on the stock and reiterated the target price of US$1.52, an upside of 57.5 per cent.

Stock watchers Edison Chen and Yeo Hai Wei pointed to the successful price hike for Tianjin Zhong Xin's flagship Su Xiao Jiu Xin heart medication.

The Singapore-listed group, which has close ties to China's Communist Party, was involved in several years of talks with the Chinese authorities over the simultaneous implementation of the price hike, as well as negotiations on social security reimbursements for the costlier pill.

Its average out-of-factory prices are set to rise closer to 30 yuan (S$6.14), from about 20 yuan before.

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Sales are also shifting to a contract model, which the analysts said "will likely drive a renewed impetus on increasing demand" and grow the market share.

"With the blockbuster drug's price hike now firmly set in motion, management expects a meaningful impact on 2018 profit and the full impact in 2019," wrote Mr Chen and Mr Yeo.

"This revelation reaffirms our estimate of a 19 per cent rise in earnings from pre-price hike levels to be reasonable and may even surprise on the upside."

The analysts also cited the company's under-utilised cash hoard, which the new management has said it will judiciously deploy.

"We note that the new management is more shareholder-friendly and interested in investor concerns," the analysts said, in the wake of a recent Tianjin Zhong Xin corporate roadshow here.

And there is potential for operational efficiency improvement from recent business consolidations, they said, noting recent mergers in the procurement process and sales forces of various units.

"While the presence of such 'low-lying fruit' highlights the existing slack, it also offers us a glimpse into the deep potential within the company.

"With so many operating levers to pull, management should maintain or improve margins going forward."

Management changes in October 2017 saw Li Li Qun appointed executive director, alongside Li Yong as chairman of the board of directors, Wang Lei as general manager, and Zhou Hong as deputy general manager and chief engineer.

This was ahead of its third-quarter earnings announcement, which saw profit drop by 8 per cent to 83.3 million yuan (S$17 million) on a 14 per cent fall in revenue, for the three months to Sept 30, 2017.

The board said at the time that it would look to boost its marketing, focus on research and development, and strengthen internal controls and management.

Tianjin Zhong Xin's price on the Singapore Exchange has put on 5.7 per cent in the year to date, as at Jan 9, the bourse operator noted in a Tuesday report on healthcare stocks on its investor education portal.

But the counter is still trading at "a huge 36.8 per cent discount to Hong Kong-listed peers", said Mr Chen and Mr Yeo, and "a whooping (sic) 60 per cent discount to its A-share price of US$2.32" on the Shanghai bourse.

Tianjin Zhong Xin was up by US$0.03, or 3.11 per cent, to US$0.995 as at 11.30am on Wednesday, on a turnover of 2.11 million shares.

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