Pien Tze Huang to Acquire Mingyuan Flavors for RMB 254 Million, Gaining Stake in Shuixian Pharmaceutical

On August 10, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. (hereinafter referred to as "Pientzehuang") issued an announcement stating that its wholly-owned subsidiary, Zhangzhou Pientzehuang Investment, intends to acquire 100% equity interest in Zhangzhou Mingyuan Flavor Co., Ltd. (hereinafter referred to as "Mingyuan Flavor") from Zhangzhou State-owned Assets Investment and Operation Co., Ltd. (hereinafter referred to as "Zhangzhou State Investment") for a consideration of RMB 254 million.

Since Zhangzhou State Investment was originally a subsidiary of Jiulongjiang Group, the controlling shareholder of Pientzehuang, and its equity was transferred out in February this year, this transaction constitutes a related-party transaction.

The company stated that this acquisition is based on comprehensive considerations to improve the upstream and downstream of the big health industry chain, further focus on its core business, leverage synergies, and cultivate new growth points.

Zhangzhou Mingyuan Flavor Co., Ltd. is a flavor manufacturing enterprise based in Zhangzhou City. Notably, the company itself has no actual business operations, with zero revenue recorded in 2023 and the first half of 2024. As of December 31, 2023, the audited book value of its total shareholders’ equity stood at RMB 143 million, representing a premium of 78.29% over the acquisition price.

The core asset under Zhangzhou Mingyuan Flavor Co., Ltd. is its 30% equity stake in Shuixian Pharmaceutical. Therefore, the primary reason for Zhangzhou Pientzehuang Pharmaceutical Co., Ltd.’s premium acquisition of Zhangzhou Mingyuan Flavor Co., Ltd. lies in the latter’s equity investment in Shuixian Pharmaceutical. It is understood that Zhangzhou Mingyuan Flavor Co., Ltd. holds a 30% equity interest in Zhangzhou Shuixian Pharmaceutical Co., Ltd. (hereinafter referred to as “Shuixian Pharmaceutical”), while Qingshan Paper holds the remaining 70%.

Narcissus Pharmaceutical is a company with over fifty years of history, being the first manufacturer of Fengyoujing (medicated essential balm) in China. It owns several well-known products, including Narcissus Brand Fengyoujing, Jinli Oil, and Wuji Ointment. The company’s core product, Narcissus Brand Fengyoujing, was the first bottle of Fengyoujing produced in China. Launched in the 1970s, it once became an essential household remedy for Chinese families. In the Fengyoujing market segment, Narcissus Brand maintains a strong position, with a market share as high as 50%. Last year, Narcissus Pharmaceutical sold a total of 58.9786 million bottles of Fengyoujing.

As of the valuation reference date of December 31, 2023, and under the going concern assumption, the book value of Shuixian Pharmaceutical’s owners’ equity was RMB 631 million. The assessed value using the income approach was RMB 956 million, representing an increase of RMB 325 million and a appreciation rate of 51.47%.

From 2022 to 2023, Shuixian Pharmaceutical’s operating revenue amounted to approximately RMB 283 million and RMB 308 million, respectively, while its net profit reached approximately RMB 35.0273 million and RMB 47.0082 million, respectively, demonstrating steady growth in performance. During these two years, the company distributed cash dividends of RMB 10 million and RMB 20 million, respectively. If the dividend distribution remains stable, it will generate annual cash dividend inflows of no less than RMB 3 million for Pientzehuang.

Regarding this acquisition, Pientzehuang stated that Shuixian Pharmaceutical’s core business involves the research and development, production, and sales of liniments, placing both companies within the pharmaceutical manufacturing sector. Upon completion of the acquisition, the two parties will engage in deep cooperation in areas such as brand promotion, product marketing, and channel expansion. By leveraging their existing management and brand advantages, they aim to achieve synergies, increase sales revenue, expand market share, enhance sustainable development capabilities, and further strengthen their competitive edge in the market.

In December 1999, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. was established through the restructuring of the former Zhangzhou Pharmaceutical Factory, which was founded in 1956. The company was listed on the Shanghai Stock Exchange in June 2003, raising a total of RMB 342 million in its initial public offering. In 2006, Pientzehuang Pharmaceutical was recognized by the Ministry of Commerce as one of the first batch of “China Time-honored Brands.” In 2011, the “Zhangzhou Pientzehuang Manufacturing Technique” was included in the third batch of the “National List of Intangible Cultural Heritage.”

Pientzehuang, also known as the "Moutai of medicines," has its formula and manufacturing process classified as a state secret, which has never been disclosed to this day. It is listed as a Class I national protected traditional Chinese medicine (TCM) product, representing the highest level of protection for proprietary Chinese medicines in China. In 2005, five ministries and commissions, including the State Forestry Administration, the National Medical Products Administration, and the State Administration for Industry and Commerce, jointly issued an announcement stipulating that only a few proprietary Chinese medicines, such as Pientzehuang, could continue to use natural musk, while other proprietary Chinese medicines not included in the announcement were prohibited from using natural musk, further enhancing the preciousness of Pientzehuang. Since July 1, 2005, each pill of Pientzehuang has been affixed with a uniquely numbered "Special Mark for China's Wildlife Management," and its production has been subject to quotas. In May 2023, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. announced a price increase, with the price per tablet reaching as high as 760 yuan, leading people to once compare it to gold.

The blockbuster success of its products has generated substantial revenue and also boosted sentiment in the secondary market. According to the company’s annual reports, over the ten-year period from 2014 to 2023, its operating revenue grew from RMB 1.454 billion to RMB 10.06 billion, while net profit attributable to shareholders of the parent company increased from RMB 429 million to RMB 2.797 billion. In 2023, the company’s operating revenue rose by 15.7% year on year, and net profit attributable to shareholders of the parent company increased by 13% year on year.

Despite annual revenues reaching tens of billions, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. must also consider how to sustain its growth momentum.

According to the semi-annual performance flash report disclosed by Zhangzhou Pientzehuang Pharmaceutical Co., Ltd., the company achieved an operating revenue of RMB 5.65 billion during the period, a year-on-year increase of 11.99%; net profit attributable to shareholders of the listed company amounted to RMB 1.72 billion, up 11.61% year on year. Although still in a growth phase, both revenue and profit growth for Pientzehuang in the first half of this year marked the lowest levels for the same period since 2016.

Pientzehuang noted that sales revenue from its core Pientzehuang series products and cosmetics achieved significant growth, but rising costs of key raw materials compressed profit margins. The continuous increase in the cost of critical raw materials for key products has become a persistent cost challenge for Pientzehuang in recent years.

It is understood that the medicinal ingredients primarily involved in the Pientzehuang product series include musk, bezoar, snake gall, and Panax notoginseng. According to a research report by Southwest Securities, natural musk and natural bezoar are the two core raw material costs for Pientzehuang, accounting for 90% of the total raw material costs. Recent data shows that the latest price of natural bezoar has climbed to RMB 1.65 million per kilogram, representing an increase of more than sevenfold compared to the price of RMB 200,000 per kilogram ten years ago. In terms of unit price, natural bezoar is now even more expensive than gold. The price of natural musk has also risen from RMB 450,000 per kilogram in June 2023 to RMB 600,000 per kilogram, marking a 33% increase.

As a “state-secret formula,” Pientzehuang relies heavily on such raw materials, with the current markets for musk and bezoar both experiencing supply shortages. According to a research report by Southwest Securities, China’s annual musk production is approximately 600 kg, against a demand of around 1,000 kg. The annual output of bezoar is less than 1,000 kg, while demand stands at approximately 5,000 kg. This supply–demand imbalance has led to sustained long-term price increases for both musk and bezoar.

In recent years, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. has also been striving to alleviate the difficulties in sourcing raw materials. According to its annual report, the company has invested in the establishment of forest musk deer breeding bases and collaborated on the construction of demonstration bases for poverty alleviation through the forest musk deer industry in Taibai County and Ningshan County in Shaanxi Province, as well as Bianba County in Tibet. However, due to the inherent nature of natural calculus bovis and natural musk, their scarcity makes it difficult for prices to decline significantly.

The continuous rise in raw material prices has also affected Pientzehuang’s gross profit margin. The company’s gross profit margin for liver disease medications was 81.79% in 2021, decreased to 80.9% in 2022, and further declined to 78.79% in 2023.

In the future, as healthcare cost containment measures advance, the costs of key raw materials rise, and competition among traditional Chinese medicine enterprises intensifies, Zhangzhou Pientzehuang Pharmaceutical Co., Ltd.’s profits may face further pressure. Therefore, this acquisition can be viewed as a new strategic initiative by Zhangzhou Pientzehuang Pharmaceutical Co., Ltd., driven by its confidence in the long-term profitability of Shuixian Pharmaceutical.

Following the completion of this transaction, it will be crucial for Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. to leverage the scarcity of its products and strategically deploy its inherent advantages to establish a second growth curve.

The M&A transactions of Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. are not an isolated case; the current traditional Chinese medicine industry is undergoing a development cycle, with substantial internal consolidation demands.

In recent years, the Chinese government has intensively rolled out a series of policies targeting the traditional Chinese medicine (TCM) industry and its upstream and downstream supply chains. As a result, TCM enterprises have gained greater market opportunities and room for development, with M&A transactions centered on resource integration becoming the new normal in industry growth.

On one hand, state-owned capital is actively seeking to bring major traditional Chinese medicine (TCM) enterprises under its umbrella. In March 2022, the State Council proposed in the "14th Five-Year Plan for the Development of Traditional Chinese Medicine" to "cultivate a batch of well-known brands and enterprises." Against this backdrop, large pharmaceutical companies in the TCM industry, such as Kunming Pharmaceutical Group and Conba, have all transitioned to state-controlled holdings.

On the other hand, following the State Council’s April 2023 issuance of the “Several Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of the Capital Market,” which encouraged listed companies to focus on their core businesses and improve development quality through comprehensive measures such as mergers and acquisitions (M&A) and equity incentives, listed traditional Chinese medicine (TCM) enterprises have increasingly sought out small and medium-sized enterprises (SMEs) with profitable or distinctive products. These strategic moves aim to further enrich their product pipelines, expand business scope and production capacity, and enhance market competitiveness. Meanwhile, the acquired pharmaceutical companies can gain access to greater financial resources and distribution channels to support their development.

Buoyed by supportive policies, the traditional Chinese medicine (TCM) industry has accelerated its development, with high-quality M&A targets continually emerging and merger and acquisition transactions among TCM enterprises growing increasingly vibrant.

In April 2024, Beilu Pharmaceutical, a company listed on China’s A-share market, announced its intention to acquire an 80% equity stake in Tianyuan Pharmaceutical for RMB 202 million. Also in April 2024, Xincheng Capital announced the completion of its acquisition of Guilong Pharmaceutical, a traditional Chinese medicine company specializing in throat health. In June 2024, Baiyang Pharmaceutical, another A-share listed company, issued an announcement stating its plan to acquire a 60.199% equity stake in the innovative drug enterprise Baiyang Pharma for RMB 880 million in cash, among other transactions.

Frequent transactions have primarily involved capital investors or listed companies seeking to enter the traditional Chinese medicine (TCM) industry acquiring established TCM enterprises, reflecting, to some extent, the industry’s optimistic outlook on the prospects of the TCM sector.

Through direct acquisitions of traditional Chinese medicine (TCM) enterprises, companies already established in the TCM sector can further expand their operational scale and market share, thereby achieving stronger economies of scale and gaining greater influence in the future. Meanwhile, companies without prior presence in this sector can rapidly enter the TCM market through M&A transactions, explore new business areas, and create new profit growth drivers. With complementary advantages, the acquired TCM enterprises will also achieve new performance growth.

In the coming period, such industry consolidation is likely to become the norm, with mergers and acquisitions continuing and transaction values repeatedly reaching new highs.