After 30 years of listing, Chinese traditional Chinese medicine will say "goodbye" to Hong Kong stocks, where will it go after privatization?

After 30 years on the list, Chinese traditional medicine will say "goodbye" to Hong Kong stocks.

On February 22, Hong Kong-listed China Traditional Chinese Medicine (00570. HK) shares closed at HK$4.26 per share, up 24.20%.

On the news side, on the evening of February 21, China Traditional Chinese Medicine, which has been suspended for nearly two weeks, announced that the controlling shareholder Sinopharm Group intends to privatize China Traditional Chinese Medicine at a cash price of HK$4.6 per share. Sinopharm's offer represents a 34.11% premium to the latest closing price of Chinese TCM, with the total consideration of Sinopharm's privatization proposal being approximately HK$15.45 billion.

Regarding the privatization, the reason given by China TCM is that the trading liquidity of the shares and the stock price continue to be low.

Fu Jian, director of Henan Zejin Law Firm, said in an interview with the China Times that the privatization price premium proposed by Sinopharm Group was about 34.11%, reflecting the controlling shareholder's confidence in the future development prospects of Chinese traditional medicine. After privatization, TCM can get rid of short-term performance pressures and have more flexibility to plan for long-term development, while also seeking to re-list in other markets, such as the A-share market, to obtain higher valuations.

On whether the company will consider going back to A listing after privatization and delisting, and whether it will cooperate with Taiji Group (600129. SH), the "China Times" reporter sent a letter to China Traditional Chinese Medicine, but did not receive a reply as of press time. The staff of the securities and investment department of Taiji Group told reporters that the announcement issued by China Traditional Chinese Medicine has no connection with the current production and operation activities of Taiji Group, and the company has not received a notice from the controlling shareholder.

Sinopharm privatized Chinese traditional medicine at a premium of 34%.

Affected by the news that the controlling shareholder Sinopharm Group intends to privatize the company at a price of HK$4.6 per share, the share price of China Traditional Chinese Medicine continued to rise the next day after the announcement, and as of the close of trading on February 22, the company's share price closed at HK$4.26 per share, an increase of 24.20%, with a market value of 19.805 billion yuan.

It is worth mentioning that as early as January 2021, China Traditional Chinese Medicine issued an announcement saying that its controlling shareholder, Sinopharm Hong Kong, was studying a plan to privatize it. However, in August 2021, Sinopharm Hong Kong notified that the privatization process would not be promoted. In the three years since, news that Sinopharm will privatize Chinese traditional Chinese medicine has circulated in the market three times. Every time news of privatization comes out, the share price of Chinese medicine will usher in a wave of gains.

In this regard, financial commentator Zhang Xuefeng said in an interview with the China Times: "The continuous rise in the capital market to the share price of Chinese medicine reflects the optimism and recognition of investors for the privatization plan. The increase in the share price indicates that the market has high expectations for the privatization plan, believes that the privatization is expected to bring higher returns, and expects the optimization of the corporate governance structure after the privatization. ”

According to the announcement, on February 9, Sinopharm Gongyu Co., Ltd. (hereinafter referred to as "Sinopharm Gongyu") asked its board of directors to submit a privatization proposal to the scheme shareholders, which, if approved, would lose its listing status on the Hong Kong Stock Exchange. The Board of Directors of Sinopharm has reviewed the proposal and agreed to present it to the scheme shareholders.

Sinopharm Group quoted a cancellation price of HK$4.6 per Scheme Share, representing a premium of approximately 34.11% and 40.24% to the closing price of HK$3.43 on the last trading day and the average closing price of HK$3.28 for 30 consecutive trading days up to and including the last trading day, with the total consideration of the privatization proposal being approximately HK$15.45 billion.

The trading liquidity of Chinese TCM shares has been at a low level for some time. Specifically, for 90 consecutive trading days up to and including the last trading day, the average daily trading volume of the shares was approximately 26.62 million shares per day, accounting for only about 0.53% of the shares as at the date of the joint announcement.

According to the company, the low trading liquidity of the shares may make it difficult for scheme shareholders other than the controlling shareholder to make an on-market sale without adversely affecting the share price. As the trading price of shares has been at a low level and the trading volume is limited, the Company's ability to raise funds from the capital market is restricted, resulting in difficulties in using equity financing to provide available sources of funds for the Company's business development and support the Company's development strategy.

Sinopharm believes that the successful implementation of this transaction will help streamline the company's governance, corporate and shareholding structure, optimize the organizational layout, and avoid additional governance costs and management expenses due to compliance needs and maintaining the company's listing status.

In addition, if the privatisation is successfully implemented, the Company will be wholly owned by the Offeror, and with the Controlling Shareholder's extensive experience in the Chinese medicine industry and the extensive network and resources of the Investor Group and its state-owned background, the Controlling Shareholder and the Investor Group will enter into a strategic partnership to further develop the Group's existing business and focus on the long-term growth of the Company.

In this regard, Zhu Keli, executive director of the China Information Association and founding president of the National Research Institute of New Economy, pointed out in an interview with the China Times: "The choice of Chinese medicine to privatize at a time when the performance is still good is obviously a deliberate decision. Privatization provides companies with greater flexibility and avoids the impact of short-term fluctuations in the public market on their business strategy. As the controlling shareholder, Sinopharm Group's privatization at a premium also shows its confidence in the future development of Chinese traditional medicine. In a volatile market environment, privatization will help China TCM to focus more on its long-term strategy, strengthen R&D investment, and enhance product competitiveness, thereby further consolidating its leading position in the TCM industry. ”

Zhang Xuefeng said that the current market value and share price of Chinese medicine are relatively low, and the privatization plan can provide Sinopharm with a more favorable acquisition opportunity, and the price premium is larger, which may make shareholders more willing to accept the privatization.

Expected to integrate with Tai Chi Group?

China Traditional Chinese Medicine has been listed on the Hong Kong Stock Exchange since 7 April 1993 and is principally engaged in the manufacture and sale of Chinese medicines and pharmaceutical products in the PRC, with a focus on Chinese medicine formula granules, Chinese patent medicines and Chinese medicine decoction pieces. Sinopharm Group is the parent company of Sinopharm Group Hong Kong Limited, the controlling shareholder of Chinese traditional medicine. At present, there are 9 listed companies in the Sinopharm Department.

In October 2020, when Sinopharm Group increased its capital to become the owner of Taiji Group, it made a commitment that "within five years after the completion of this transaction, it will gradually solve the problem of competition in the same industry through methods including but not limited to asset replacement, asset sale, establishment of joint ventures, change of main business, asset injection, entrusted management, etc." ”

In the announcement issued by Sinopharm, it was also stated that after the successful privatization, Sinopharm planned to review the business operations of Sinopharm and may identify and explore business opportunities to develop Sinopharm's existing business depending on Sinopharm's ability to obtain the necessary funds and the prevailing market conditions. Previously, on May 6, 2022, at the general meeting of shareholders of Taiji Group, Cheng Xueren, President of China Traditional Chinese Medicine, was elected as a director of Taiji Group.

Therefore, some market voices believe that behind all kinds of indications, the privatization of Chinese medicine may be related to its integration with Taiji Group.

Bai Wenxi, vice chairman of the China Enterprise Capital Alliance, told this reporter: "According to the commitment of Sinopharm Group to Taiji Group, another listed company in the traditional Chinese medicine sector, the problem of competition in the industry will be gradually solved in the next five years. Therefore, there is a willingness for Sinopharm to inject Chinese traditional Chinese medicine into Tai Chi Group. However, the specific operation needs to take into account a variety of factors, such as the market environment, regulatory policies, and the wishes of both parties. ”

Zhu Keli also believes that although there is no clear plan to inject Chinese traditional Chinese medicine into Taiji Group, it is not ruled out that Sinopharm Group will optimize its traditional Chinese medicine sector through resource integration in the future, which will help improve the operational efficiency and market competitiveness of the entire group.

As for whether it is possible to integrate with Taiji Group and whether to consider landing on A-shares in the next step, the reporter of this newspaper contacted China Traditional Chinese Medicine for verification. However, as of press time, no reply has been received.

In response to this news, a relevant person from the Securities and Investment Department of Taiji Group told this reporter that "I don't know very well". The person said that the current announcement issued by China Traditional Chinese Medicine has no connection with the current production and operation activities of Taiji Group, and the company has not received a notice from the controlling shareholder.

There are more privatization cases in Hong Kong stocks

In the annual report performance forecast released on January 28, the company expects net profit in 2023 to increase by 85% to 95% year-on-year. In 2021, 2022 and the first half of 2023, the net profit of Chinese medicine in China will be 2.12 billion yuan, 720 million yuan and 620 million yuan respectively. Except for the sharp decline in profits in 2022 due to the impact of the new crown epidemic and the new medical reform policy, the performance of Chinese traditional medicine is still good, but its stock price is only in the single digits. In contrast, Chinese medicine stocks have relatively high valuations and share prices in the A-share market.

Since last year, about 20 Hong Kong-listed companies, including Yashili, Dali Foods, COFCO Packaging, IMAX China and other companies, have launched privatization plans or have completed delisting.

"The difference in market valuation is an important factor in the obvious privatization trend of Hong Kong stocks since last year. Fu Jian pointed out to this reporter that many companies believe that the valuation in the Hong Kong stock market is lower than their intrinsic value, and the A-share market may provide a higher valuation. SOE reform could also be a driver, with privatization likely to introduce diversified investors and governance structures as part of mixed-ownership reforms.

Zhu Keli believes that since last year, the privatization trend of Hong Kong stocks has been obvious, mainly due to two reasons. First, the changes in the market environment have caused some listed companies to face valuation pressure, and privatization has become a means of value restoration; second, the controlling shareholder has returned high-quality assets to the group through privatization for strategic adjustment and resource integration. These factors have jointly promoted the intensification of the privatization trend of Hong Kong stocks.

Commenting on the future development of Chinese traditional medicine, Bai Wenxi said: "If the privatization plan is completed, the benefits will outweigh the disadvantages for Chinese traditional medicine. First, privatization will help companies focus more on their core business and strategic planning, improving operational efficiency and profitability, and second, privatization may give companies more autonomy and flexibility to better adapt to market changes and industry trends. ”

Regarding the impact of the proposed privatization and delisting of Chinese traditional medicine on all parties, Zhang Xuefeng pointed out that if the privatization plan is completed, it will have different impacts on all parties. For Sinopharm, it will take full control of China TCM, which is expected to achieve more flexible strategic deployment and resource allocation, and strengthen the overall competitiveness of the group; for China TCM shareholders, privatization may bring higher stock price returns, but also lose the opportunity to continue to hold shares; for China TCM itself, privatization may bring greater operational autonomy, but at the same time, it may also face the challenges and risks of independent operation.

Editor-in-charge: Xu Yunqian Editor-in-chief: Gong Peijia