SINGAPORE (April 25): CIMB believes that Tianjin Zhongxin Pharmaceutical Group’s long-term growth potential is intact, despite a probe into its Long Shun Rong (LSR) factory by the China Food and Drug Administration (CFDA) after one of its export traditional chinese medicine products was found to be contaminated with paracetamol.
To date, there have been no reports of adverse reaction from consumers. Tianjin says the sales of the product was around RMB100,000 ($20,820) last year. This represents less than 0.03% of LSR’s 2015 sales of RMB400-500 million, and is even more miniscule when compared to the group’s 2015 sales of RMB7.1 billion. Nevertheless, CFDA has treated the issue as serious, and mandated LSR to cease manufacturing of the product.
CIMB reckons that the case is only a hiccup. Nevertheless, it factors in a scenario that LSR loses a half year of sales in FY16 and a quarter year in FY17 for rebuilding the brand. As a result, the broker’s FY16F and FY17F EPS are cut by 17.7% and 8.1% respectively, with FY18F EPS left intact. CIMB notes that any weakness in Tianjin’s S-share price only makes it more attractive, given that it is already at a 68% discount to its A-share. Its S-share trades at 10.7x CY17 P/E vs peers’ average of 14.1x.