Daren Hall Sells "Cash Cow" Tianjin Sickle Equity

Recently, the leading traditional Chinese medicine company, Tianjin Pharmaceutical Daren Tang Group Co., Ltd. (600329.SH, hereinafter referred to as "Daren Tang"), announced that Daren Tang and its controlling shareholder, Tianjin Pharmaceutical Group Co., Ltd. (hereinafter referred to as "Pharmaceutical Group"), plan to transfer their respective holdings of 13% and 20% equity in Sino-American Tianjin SmithKline Pharmaceutical Co., Ltd. (hereinafter referred to as "Tianjin SmithKline") to Hileon (China) Co., Ltd. (hereinafter referred to as "Hileon China"), with transaction prices of 1.759 billion yuan and 2.706 billion yuan, respectively, totaling a combined consideration of over 4.4 billion yuan.

According to the announcement, preliminary calculations indicate that this transaction is expected to generate an investment income of approximately 1.7 billion yuan for Daren Tang.

Regarding the sale of equity in Tianjin SmithKline and the company's development plans, the reporter contacted Daren Tang by letter and phone, but had not received a response by the time of publication.

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Sale of Joint Venture Equity

It is understood that Daren Tang focuses on innovative traditional Chinese medicine, integrating the cultivation of medicinal materials, drug research and development, production, and operation. Its business covers a wide range of fields including the research and manufacturing of Chinese medicinal materials, traditional Chinese medicine, chemical raw materials and preparations, nutritional health products, medical commerce, and drug retail. The company owns several well-known Chinese time-honored brands such as Daren Tang, Longshun Rong, Leren Tang, and Jingwanhong. Daren Tang has 599 drug approval numbers across 22 dosage forms, including representative products such as the rapid-acting heart-saving pill and Jingwanhong ointment.

This acquisition will increase Hileon's (a joint term for Haleon UK Services Limited and Hileon China) holding in Tianjin SmithKline from 55% to 88%. According to the announcement, after the completion of this equity transfer transaction, Daren Tang's equity stake in Tianjin SmithKline will change to 12%.

Tianjin SmithKline was established in September 1984, based on the joint venture contract signed in April 1984 by the predecessors of Hileon, Daren Tang, and Tianjin Pharmaceutical Group. According to the announcement, the joint venture's term begins on the date of establishment and continues until June 30, 2025.

Hileon owns well-known brands such as Caltrate, Centrum, Sensodyne, Fenbid, and Voltaren. Hileon was formed by the merger of consumer health businesses from GlaxoSmithKline (GSK), Novartis, and Pfizer, and completed its spin-off from GSK in July 2022. According to Hileon's semi-annual report for 2024, in China, the group's over-the-counter (OTC) business accounts for approximately 40% of Hileon's total business in China.

According to the announcement, as of the assessment base date, Tianjin SmithKline's total asset book value is 2.74 billion yuan; total liability book value is 1.73 billion yuan; net asset book value is 1.01 billion yuan; the assessed value of shareholders' equity is 9.996 billion yuan, with an appreciation rate of 890.41%. Daren Tang's announcement shows that the transaction price is in line with market levels and has a 35% premium over the asset assessment value. Preliminary calculations by the company estimate that the transaction will affect the current period's investment income by approximately 1.7 billion yuan and is expected to increase the net profit after tax for the fiscal year of the transaction by approximately 1.44 billion yuan.

Tianjin SmithKline mainly operates in the OTC and health product business. According to the announcement, this transaction aligns with the company's development strategy of focusing on its core business, which is beneficial for increasing the company's cash inflow. The funds obtained from the transaction can be used for the company's business expansion, including but not limited to strategically significant merger and acquisition projects, research and development projects, new product development and market expansion projects, working capital, and general corporate purposes.In the semi-annual report for 2024, Daren Hall also indicated that in terms of revenue, the foreseeable enhancement of buyer's bargaining power represented by medical insurance payment, the potential increase in concentration among channel operators, and the competitive game among peers could all lead to a decline in profitability of products in the medical and OTC markets. The medical market may face a situation where the winning bid prices are difficult to increase; the OTC market may experience a weakening of bargaining power in the process of cooperation with large chains and pharmacy alliances, with profit margins being squeezed and the difficulty for pharmaceutical companies to control the market increasing. With the continuous implementation of new medical reform policies, the ultimate path of separating medicine from medical institutions becomes increasingly clear, and industry companies are intensifying their extension to retail pharmacy terminals. The competitive environment for drugs in retail channels becomes more intense, the online fourth terminal is developing rapidly, and the industry is facing the rethinking of re-distributing the value chain.

Under performance pressure, in September 2023, in response to questions about the current proportion of OTC, Daren Hall stated during the research: "We have a variety of products, 599 varieties, 122 exclusive, our main business in the medical and retail two major sectors is roughly 1:1, and the overall structure is reasonable."

In recent years, Daren Hall has taken a number of measures to "return to the main business". In 2022, the announcement by Daren Hall showed that in order to fully and accurately reflect the company's future strategic planning of "surrounding the construction of time-honored brand to keep the essence and innovate, and leading development with the company's brand resources", further strengthen brand construction, play the brand effect, and better promote the development of various businesses, the A-share securities abbreviation of the company was changed from "Zhongxin Pharmaceutical" to Daren Hall.

In the first half of 2024, Daren Hall achieved a total operating income of about 3.965 billion yuan, a year-on-year decrease of 3.02%; the corresponding net profit attributable to the company was about 658 million yuan, a year-on-year decrease of 8.97%. In the first half of 2024, the industrial income was 2.62 billion yuan, maintaining a 4.25% increase on the high base of the same period, and the commercial income was 1.58 billion yuan, a year-on-year decrease of 14.5%. The net profit attributable to the shareholders of the parent company was 658 million yuan, and the investment income from joint ventures such as Sichuan Ke decreased by 74 million yuan year-on-year, while Daren Hall's self-operated net profit was 530 million yuan, a year-on-year increase of 2%.

Since September, Daren Hall has been very active. On September 7, Daren Hall announced that as one of the shareholders of Tianjin Pharmaceutical Group Financial Co., Ltd., it plans to jointly increase its capital in proportion with all its shareholders according to the existing shareholding ratio. Daren Hall plans to increase its capital to the financial company with its own funds of 150 million yuan. The financial company is a non-bank financial institution that provides a financing platform, fund management, and settlement platform for Daren Hall.

On September 11, Daren Hall announced that it plans to inject all the equity of its wholly-owned subsidiary, Tianjin Zhongxin Pharmaceutical Co., Ltd., valued at 494 million yuan, into Jin Yao Taiping Pharmaceutical Co., Ltd., a wholly-owned subsidiary of the pharmaceutical group's controlling shareholder, in the form of capital increase. After the capital increase is completed, Daren Hall will hold 43.35% of Taiping Company's shares, and the pharmaceutical group will hold 56.65%.

According to the announcement by Daren Hall, the original scope of the company's consolidation was the pharmaceutical industry sector plus the pharmaceutical commerce sector, and the company's profit mainly came from the pharmaceutical industry sector, while the pharmaceutical commerce sector was in a loss state. This transaction has changed the scope of the company's consolidation, and the pharmaceutical commerce sector will be separated from the scope of the company's consolidation. After the pharmaceutical commerce sector is separated from the scope of the company's consolidation, the financial indicators of the scope of the company's consolidation will mainly reflect the data of the pharmaceutical industry sector, and the company's gross profit margin, net profit, and asset income and other indicators (net profit margin, return on net assets, etc.) will all show a synchronous increase, the company's cash flow level will be improved, the turnover efficiency of accounts receivable will be significantly improved, and the bad debt risk brought by the pharmaceutical commerce sector will be significantly reduced. The development logic of the company will be clearer, focusing on the core industry, which is conducive to improving the simplicity of the company's business, and the profitability of the company's core main business will be fully reflected. At the same time, since Daren Hall no longer holds a controlling stake in Zhongxin Pharmaceutical, the problem of competition in the same industry between Daren Hall and its controlling shareholder has been resolved.