Company Profile

Tianjin Pharmaceutical Da Ren Tang Group Corp Ltd, formerly Tianjin Zhongxin Pharmaceutical Group Co Ltd, is a China-based company mainly engaged in the production, operation and scientific research of green traditional Chinese medicine. The Company's businesses cover the whole industry chain of traditional Chinese medicine, including the cultivation of Chinese medicinal materials, trade of Chinese medicinal materials, research and development （R&D）， production and sales of Chinese patent medicines, production and sales of Chinese herbal decoction pieces, pharmaceutical commercial logistics, pharmaceutical retailing, chemical raw materials and preparations, biomedicine and many other fields. The Company's products include cardiovascular and cerebrovascular medicines, respiratory medicines, spleen and stomach medicines, cold medicines, oncology medicines, gynecological medicines, pediatric medicines and other product groups. （Source:MarketScreener）

Event

Tianjin Pharmaceutical Da Ren Tang Group （“the company”） achieved impressive growth in the first half of 2023.

For H1, 2023, the company reported CNY4.088 billion in revenue, a year-on-year increase of 8.31%; CNY722 million in net profit attributable to shareholders, a year-on-year growth of 54.12%; and CNY712 million in net profit attributable to shareholders and excluding gains and losses from non-recurring items, up 53.41% YoY.

Specifically, the investment income was CNY199 million in H1, a year-on-year growth of 89%, mainly due to the rise in investment income from its member company Sino-American Tianjin SmithKline and French Lab., Ltd. Excluding investment income, the growth of after-tax net profit attributable to shareholders calculated at the effective tax rate was about 45% in H1.

For Q2, 2023, the company reported CNY1.934 billion in revenue, a year-on-year increase of 2.57%; CNY322 million in net profit attributable to shareholders, a year-on-year growth of 19.51%; and CNY317 million in net profit attributable to shareholders and excluding gains and losses from non-recurring items, up 19.28% YoY.

Specifically, the investment income was CNY97 million in Q2, a year-on-year increase of 71%. Excluding investment income, the growth of after-tax net profit attributable to shareholders calculated at the effective tax rate was about 7% in Q2. Considering that the company’s products were in short supply and grew strongly in the first quarter, the company was possibly digesting inventory in channels in Q2.

Comments

The company’s profitability improved; the costs were reduced; and management efficiency was enhanced.

The net profit margin in the first half of 2023 was 17.48%, a year-on-year growth of 4.81pps, showing significantly better profitability. The gross profit margin was 46.86% in H1, a year-on-year increase of 5.67pps, which could be related to the rise in the proportion of industrial revenue, lean production management, cost reduction and efficiency improvement.

The sales expense ratio was 26.07% in H1, a year-on-year rise of 3.39pps, which could be due to the change of the company’s business structure.

The management expense ratio was 3.84% in H1, down 0.82pps year-on-year, which could be due to better management quality and efficiency as well as the repurchase of restricted stocks and the offset of equity incentive expenses. The R&D expense ratio was 1.27%, down 0.19pps year-on-year, which was basically stable.

Earnings forecast and investment recommendation

We maintain our earnings forecast and estimate the company’s net profit attributable to shareholders at CNY1.109 billion, CNY1.379 billion and CNY1.702 billion for 2023, 2024 and 2025, respectively, a year-on-year increase of 28.7%, 24.3% and 23.5%, implying a PE ratio of 28.06x, 22.57x and 18.28x, respectively, based on the closing price on August 14, 2023.

We maintain the rating of “Outperform”。

Potential risks

Fluctuations in raw material prices; less-than-expected sales; intensified market competition; less-than-expected progress of integration and efficiency improvement; changes in group purchase or policies.