SINGAPORE (April 5): CIMB Research is maintaining its “add” recommendation on Tianjin Zhongxin Pharmaceutical Group with an unchanged target price of US$1.30 ($1.82) as it continues to like the S-share as a “cheap proxy for China’s growing pharmaceutical demand”.

In a Tuesday note, analysts Roy Chen and William Tng note that Tianjin Zhongxin’s S-share is trading at a heavy 63% discount to the group’s A-share, while also reporting the highest dividend yield of 3.4% for FY16 as compared to its peers.

Although the group’s FY16 revenue came in slightly below CIMB’s expectations at 95% of the research house’s full-year forecast, Chen and Tng point out that core net profit managed to grow 3.1$ on-year to RMB379 million for the full year, as the shortfall in the profitability of the group’s consolidated entities was more than made up for by stronger contribution from its associates.

“The swing in associate profit was mainly due to the profit recovery of Sino-American Tianjin Smithkline & French Lab, where FY15 net profit was adversely affected by the China tax authorities’ investigation,” they add.

Furthermore, Chen and Tng were “positively surprised” by the group’s final dividend per share (DPS) of RMB 0.15 declared for FY16, following its 1H16 interim DPS of 10 RMB cents.

The analysts point out that this translates into a payout ratio of 46%, in addition to a strong balance sheet with a net cash position of RMB577 million or 75 cents per share, which is 11% of Tianjin Zhongxin’s S-share price.

Meanwhile, they do not expect the group’s current expansion projects, such as the upgrading of its marketing and sales network and the construction of Bozhou Industrial park, to deliver any meaningful contributions for now – while stiffer competition also presents a key risk to their view.

Update: Shares of Tianjin Zhongxin closed 1 cent higher at 99 US cents on Wednesday night.