The giant Sinopharm is leading a consortium to acquire China Traditional Chinese Medicine (China TCM), which is listed in Hong Kong, in a € 2.7 billion transaction. It already has 32%, and along with the other two major shareholders, adding an additional 18%, it offers at least HK $ 5.10 per share, a 27% premium. The operation values the company at more than 7 times the expected EBITDA for 2021.
The purchase of the remainder could give a boost to the state-owned company of 5,800 million euros. Changes in drug purchasing and pricing policies have reduced margins for wholesalers and retailers such as Sinopharm. New players, such as online JD Health, have stepped up the competition. In January-June, China TCM posted a net profit margin of 17%, compared to 2.4% for Sinopharm.
The traditional Chinese medicine market also looks attractive. It’s controversial – many products haven’t been rigorously tested, and he has an unscientific passion for endangered animals. But according to Daxue Consulting, sales in the country are expected to reach EUR 26 billion in 2024, up from 13 billion in 2017.
Xi Jinping once referred to traditional medicine as a treasure of Chinese civilization, but the government has gone beyond rhetoric: it’s included in the national insurance plan alongside Western medicines. They have also been touted for Covid and a bill has been proposed to criminalize criticism.
For Sinopharm, going back to the stock exchange may pay off in the long run. Valuations on the mainland can be much richer than in Hong Kong. For example, Shanghai-listed Zhangzhou Pientzehuang Pharmaceutical is worth $ 24 billion. It is known for a treatment formulated 500 years ago, according to the company, made from deer navel and snake gall secretions. The stock is trading at more than 60 times the expected EBITDA for this year. That would be even better for the health of the buyer.
The authors are columnists for Reuters BreakingviewsOpinions are yours. The translation of Carlos Gomez down, it is the responsibility of Five days