The shares of the former controlling shareholder are frozen, the "monopoly" status of the main business is not guaranteed, and it is difficult for Hongri Pharmaceutical to break the "increase in income without increasing profits"?

Economic Observation Network Yu Shiqi/Wen October 13, Hongri Pharmaceutical (300026. SZ) announced that its third largest shareholder, Tianjin Datong Investment Group Co., Ltd. (hereinafter referred to as "Datong Group"), was frozen by the court on October 11 and October 12 due to contract disputes. This is the fourth time that chase group shares have been frozen this year, and with the previously frozen shares, the 204 million shares held by chase group have all been frozen, accounting for 6.8056% of the total share capital.

The relationship between Hongri Pharmaceutical and Chase Group is not simple. In fact, for a long time, Chase Group was the largest shareholder of Hongri Pharmaceutical, holding 21.19% of its equity. According to media reports, Hongri Pharmaceutical introduced Chase Group due to a shortage of funds in the early stage of its business, and one of the conditions for the latter to invest in the shares was to control Hongri Pharmaceutical.

It was not until June 2018 that Chase Group issued a statement saying that it was relinquishing its position as the controlling shareholder of Hongri Pharmaceutical and recognizing the company's founder Yao Xiaoqing as the controlling shareholder and actual controller. Half a year later, Chase Group transferred its 11.45% stake to Xingcheng Group, a company under the State-owned Assets Supervision and Administration Commission of Chengdu, for a total consideration of 1.320 billion yuan. At this point, Chase Group became the third largest shareholder, and has since reduced its holdings several times.

Hongri Pharmaceutical said in the announcement that the freezing of shares held by Chase Group will not adversely affect the operation. However, the intricate relationship between the two still makes many investors have some doubts, especially the situation of Hongri Pharmaceutical in recent years is not good. At this juncture, the core shareholders also have problems.

After 2016, the revenue scale of Hongri Pharmaceutical increased from 3.867 billion yuan to 6.488 billion yuan, but the net profit did not increase but declined, and in 2018, it fell to a minimum of only 211 million yuan. Although there has been some recovery since then, it will only be 573 million yuan until 2020, which is still lower than the 659 million yuan in 2016. This company can be said to have fallen into the strange circle of "increasing revenue without increasing profits".

The reason for this situation has a lot to do with its main business. The revenue of Hongri Pharmaceutical is mainly composed of three blocks, namely Chinese medicine formula granules, finished drugs and medical devices. The Chinese medicine formula granules business is its largest business, contributing nearly half of its revenue and the vast majority of profits. The main body of the business is Kangrentang Pharmaceutical, and from 2017 to 2019, the net profit of Kangrentang accounted for 90%, 97% and 91% of the overall net profit, respectively.

But it is this piece of business that has been increasing revenue and not increasing profits in recent years. From 2017 to 2020, the revenue of the business rose from 1.272 billion yuan to 2.991 billion yuan, and the net profit fell from 515 million yuan to 406 million yuan year by year. In four years, revenue more than doubled, and net profit fell by 21.16%.

For the current situation of the business, Hongri Pharmaceutical has not explained much to the outside world, and it is constantly placing heavy bets. In March 2015, it raised RMB950 million through a non-public offering of shares for the automated production base project for traditional Chinese medicine products. At that time, it was expected that the project would add about 2.49 billion yuan in annual revenue and about 401 million yuan in net profit after tax. The above projects reached the intended state of use in June 2018, but by the end of the first half of 2020, the cumulative realized benefits were -9.72 million yuan.

In June this year, Hongri Pharmaceutical continued to start a new chinese medicine formula granule manufacturing base in Jinan, claiming to have planned to invest 750 million yuan. The previous production site did not meet expectations, and the new base began again.

What is more troublesome is that the policy environment is changing in a direction that is not conducive to Hongri Pharmaceutical. Before 2020, only 6 domestic enterprises of Chinese medicine formula granules have been approved for pilot production, and Hongri Pharmaceutical is one of them, and these 6 companies monopolize 80% of the Chinese medicine formula granules market.

However, in February this year, the State Food and Drug Administration and other four departments jointly issued the "Announcement on Ending the Pilot Work of Chinese Medicine Formula Granules", which ended the 20-year pilot work of Chinese medicine formula granules, and in the future, all Chinese medicine enterprises can produce Chinese medicine formula granules, implement the filing system, and no longer need to apply for approval.

The state of the original "monopoly" is no longer there, and competitors are also pressing forward step by step. According to relevant statistics, at least 60 enterprises nationwide have obtained the pilot qualification of traditional Chinese medicine formula granules and began to lay out related varieties. Hongri Pharmaceutical's competitors have suddenly increased by dozens of times, and the price war has become a high-probability event, and it is even more difficult to maintain "increasing revenue without increasing profits".

Finished drugs, the second largest business, are also shrinking, with revenue falling from 1.061 billion yuan in 2019 to 842 million yuan. Its root cause is that the core variety that contributes 80% of the income of the sector - Blood Bijing has continued to decline after entering the national medical insurance directory with a price reduction of nearly 50% in 2019.

And even in 2020, it was included in the "Diagnosis and Treatment Plan for Novel Coronavirus Pneumonia" and recommended to be included in the "three drugs and three parties" of anti-epidemic Traditional Chinese medicine, it did not stop the decline. The sales revenue of this variety in 2020 is only 504 million yuan, which is close to the waist cut compared with 2018.

In the past few years, the medical device business has been an important segment to carry revenue. Last year's revenue was 2.151 billion yuan, compared with 655 million yuan in 2019, a year-on-year increase of 228.31%, directly becoming the second largest source of revenue.

The outbreak of this business is to seize the sudden demand of the overseas epidemic, and the main force of performance growth is the subsidiary Chaosi Medical, whose core product pulse oximeter is an important monitoring product during the new crown pneumonia epidemic. The company's annual net profit last year was 204 million yuan, accounting for more than 30% of the total profit.

But before the epidemic, the business did not perform well. According to the financial report, because the net profit realization was lower than expected at the time of the acquisition, Hongri Pharmaceutical made a goodwill impairment provision of 100 million yuan every year from 2017 to 2019. After the epidemic, whether the business can continue to grow, or a question mark.

At present, Hongri Pharmaceutical has not landed too new plans. The three core business sectors are full of challenges, how to "break the game", and Will continue to pay attention to Itachi health.