After privatizing for HKD 15.6 billion, where is TRAD CHI MED heading?

On the evening of February 21st, TRAD CHI MED (0570.HK) announced that its controlling shareholder, China National Pharmaceutical Group, plans to privatize it at a price of HKD 4.6 per share, with a premium of about 34%.

As a result of this news, TRAD CHI MED's closing price on February 22nd increased by 24.20%.

However, even before TRAD CHI MED was suspended from trading on February 8th, news of its privatization had already been released, causing the stock price to fluctuate. On February 7th, the closing price saw an increase of 9.94% with a trading volume of HKD 4.10 billion.

It is worth mentioning that TRAD CHI MED and another listed company under China National Pharmaceutical Group, TAIJI GROUP (600129.SH), are competitors in the traditional Chinese medicine industry.

In 2020, when China National Pharmaceutical Group acquired TAIJI GROUP, it promised to resolve the issue of competition between the two companies within five years.

As the five-year period approaches, after TRAD CHI MED completes its privatization and delisting, whether it will be injected into TAIJI GROUP will also be closely watched.

TradeWind01 reached out to TRAD CHI MED to inquire about its capitalization plan, but as of the time of writing, no response has been received.

Rumors Turned Reality

After 8 trading days of suspension, TRAD CHI MED finally made a major move.

On the evening of February 21st, TRAD CHI MED officially announced its privatization plan.

The announcement stated that China National Pharmaceutical Group, the controlling shareholder of TRAD CHI MED, plans to cancel 32.46% of its shares in TRAD CHI MED; at the same time, China National Pharmaceutical Group plans to cancel the remaining 67.54% of TRAD CHI MED's outstanding shares at a price of HKD 4.6 per share, totaling up to HKD 15.645 billion.

The transaction price for this privatization is a 34.4% premium over TRAD CHI MED's closing price on the day before the suspension (February 7th).

In response to this news, TRAD CHI MED's intraday increase on February 22nd has already reached 23.03%.

Regarding the reason for this privatization, TRAD CHI MED believes that due to limited trading volume in the secondary market, its function as a financing platform for listed companies is restricted. Privatization is beneficial in reducing the additional governance costs and management fees associated with maintaining its listed status.

"Due to the low trading price of shares and limited trading volume, our ability to raise funds from the capital market has been constrained, making it difficult to use equity financing as a viable source of funds to support our business development and strategic growth," TRAD CHI MED pointed out. "If successfully implemented, it will streamline our governance, corporate and equity structure, optimize our organizational layout, and avoid additional governance costs and management fees arising from compliance requirements and maintaining our listed status." According to Wind data, the average closing price and average trading volume of TRAD CHI MED in 2023 were HKD 3.77 per share and HKD 0.74 billion, respectively, over 243 trading days. For a listed company with a total market value of up to HKD 21.4 billion, this level of trading activity is indeed considered inactive.

It is worth noting that even before the trading halt, there were abnormal movements in the stock price of TRAD CHI MED.

In the two trading days before TRAD CHI MED's suspension on February 8th, the closing prices on February 6th and February 7th increased by 7.22% and 9.94% respectively, with trading volumes reaching HKD 1.20 billion and HKD 4.10 billion. In the 7 trading days prior to February 6th, the average price change and trading volume of TRAD CHI MED were only -0.60% and HKD 0.82 billion, respectively.

TradeWind01 noticed the other side of the stock price movement. On February 7th, there were media reports stating that "China Medicine is considering restarting the acquisition of TRAD CHI MED."

In response, TradeWind01 has emailed TRAD CHI MED's IR department to verify whether there are any issues with the management of insider information regarding its privatization, but as of the time of writing, no response has been received.

The stock price fluctuations before the trading halt, combined with market rumors coming true, have raised questions about TRAD CHI MED's information disclosure process.

Speculation on the Merger

Regarding this transaction, TRAD CHI MED believes that privatization can establish a more comprehensive cooperation with China Medicine Group to support the development of its existing business.

"After the successful implementation of the proposal, the Group will be fully owned by the offeror. With the rich experience of the controlling shareholder in the traditional Chinese medicine industry and the extensive network and resources owned by the investor group, as well as its state-owned background, the controlling shareholder and the investor group will establish a strategic partnership to further develop the Group's existing business and focus on its long-term growth," TRAD CHI MED pointed out.

In addition to TRAD CHI MED, China Medicine Group also has 8 listed companies under its umbrella, including China Medicine Holdings (1099.HK) and TAIJI GROUP (600129.SH).

Both TRAD CHI MED and TAIJI GROUP are primarily engaged in the traditional Chinese medicine sector.

TRAD CHI MED's business segments include the production and operation of Chinese medicinal materials, Chinese medicinal decoctions and granules, and Chinese patent medicines; while TAIJI GROUP's business extends beyond Chinese patent medicines and Western medicines to include pharmaceutical distribution and retail.

In other words, these two companies have potential overlapping competition in the same industry. TradeWind01 noticed that in October 2020, China National Pharmaceutical Group's wholly-owned subsidiary TRAD CHI MED Co., Ltd. (referred to as "China National Traditional Chinese Medicine") increased its capital to become the controlling shareholder of TAIJI GROUP.

When China National Pharmaceutical Group became the actual controller of TAIJI GROUP, both China National Pharmaceutical Group and China National Traditional Chinese Medicine acknowledged that some of their businesses were in the same industry as TAIJI GROUP. For example, both China National Traditional Chinese Medicine and TAIJI GROUP own products such as Angong Niuhuang Wan, Xiangsha Yangwei Wan, and Yinqiao Jiedu Pian.

Among them, Angong Niuhuang Wan, Yinqiao Jiedu Pian, and others are also products of TRAD CHI MED.

Due to this reason, in 2020, both China National Pharmaceutical Group and China National Traditional Chinese Medicine made commitments to resolve the industry competition issue with TAIJI GROUP in various ways within five years.

"Committing to resolving the industry competition issue with TAIJI GROUP Co., Ltd. within five years after the capital increase transaction, through methods including but not limited to asset swaps, asset sales, establishment of joint ventures, change of main business, asset injection, entrusted management, etc." China National Pharmaceutical Group and China National Traditional Chinese Medicine both made commitments.

As the five-year period approaches, whether TRAD CHI MED will be injected into TAIJI GROUP after privatization to completely resolve the internal industry competition issue of China National Pharmaceutical Group has also become a focus of market attention.

TradeWind01 reached out to TRAD CHI MED to inquire about its capitalization plan, but has not received a response as of the time of publication.

In terms of revenue scale alone, TRAD CHI MED is comparable to TAIJI GROUP. In 2022, TRAD CHI MED and TAIJI GROUP had revenues of 14.315 billion yuan and 14.051 billion yuan, respectively.

However, due to TAIJI GROUP's significant revenue coming from low-margin distribution business, TRAD CHI MED has a stronger overall profitability. The net profits of TAIJI GROUP and TRAD CHI MED are 339 million yuan and 764 million yuan, respectively.

From a fundamental perspective, TRAD CHI MED has demonstrated strong growth capabilities since 2023. Performance forecasts show that the net profit for the current period is expected to increase by 85% to 95% year-on-year.

"Thanks to the stable and positive macroeconomic situation in the country, the Group has taken multiple measures to promote business growth, continuously improve efficiency, and reduce non-recurring income and losses, leading to a significant increase in net profit for this period." TRAD CHI MED stated. After the outstanding performance of TRAD CHI MED in its privatization, the next move will be closely watched by the market.