Kunming Pharmaceutical Group announced that it plans to sign an equity transfer agreement with the controlling shareholder China Resources 39 to acquire 51% of China Resources Torch's shares held by China Resources 39 with its own or self-funded capital of 1,791 billion yuan. After the acquisition is completed, China Resources 39 will still hold 49% of China Resources Torch's shares. While solving competition issues in the industry, this transaction helps the company achieve integration and resource collaboration in the 37 7 industry chain, and helps KPC build a benchmark enterprise in the 37 industrial chain.

China Resources Torch's assets are of high quality, and it has completed the consolidated plan to resolve competition issues in the soft industry ahead of time. Prior to this acquisition, China Resources Torch was a wholly-owned subsidiary of China Resources 39. Its core products were Liwei Ace Blood Cetong softgels, as well as generic medicines such as xanthine softgels, silver sulfadiazine cream, and 37 freeze-dried products. From 2022 to 2023, China Resources Torch's revenue was 739/751 million yuan, and net profit was 2.01/203 million yuan. The operation was steady and maintained a high level of profit. The assessed value of China Resources Torch in this transaction was 3.512 billion yuan, corresponding to a net profit of 17.5 times PE in 2023. The company purchased 51% of the shares at a consideration price of 1,791 billion yuan and achieved a merger with Torch to resolve the issue of competition with China Resources 39 in advance.

Promote collaboration between the two major Huesaitong softgel products and enhance the company's position in the 37 industrial chain. According to CDE data, Shenghuli Luotai Hesketong softgels and Kunyao Luotai Hesketong softgels are currently the only ones approved for Hesseitong softgels on the market. After the acquisition is completed, Kunyao Group will also have 2 approvals for this drug, increasing the company's market share in the Hessetong series of preparations. This acquisition is also an important step to enable China Resources 39 to build a benchmark enterprise in the 37 industrial chain and achieve the goal of “doubling operating revenue and reaching 10 billion dollars in industrial revenue by the end of 2028” in the five-year strategic plan. It leverages the synergetic advantages of Liyi Wang Hesetong Softgel and Luotai Brand Hesetong Softgel in terms of brand, channel, and supply chain, and focuses on differentiated markets within and outside the hospital through top-level design to achieve the growth of the two brands in different key areas. The transaction also further integrates China Resources's 37 business, which will help KPC build a benchmark enterprise in the 37 industry chain and become a leader in Yinfa's economic and health industry.

Gradually resolve competition issues in the industry and focus on improving the quality and efficiency of the main business. After China Resources 39 became the controlling shareholder of the company in 2023, competition in the industry was mainly reflected in the industrial business and pharmaceutical business centered on Huesaitong softgels. As competition issues in the core pharmaceutical industry are resolved, and the pharmaceutical business actively optimizes its business structure to enhance profitability, the company further focuses on its main business to promote quality and efficiency.

Maintain a “Highly Recommended” investment rating. We believe that the company's acquisition of 51% of China Resources Torch's shares is not only a solution to competition issues in the industry, but also an important step in building a benchmark enterprise in the 37 industrial chain. Due to the uncertain timing of the follow-up schedule, we have temporarily maintained our previous forecast of 2024-2026 net profit of 5.6/7.1/9.1 billion yuan, yoy 25.3%/27.8%/28.3%, corresponding to PE 26/20/16 times, and maintain a “highly recommended” investment rating.

Risk warning: policy risk, market promotion falling short of expectations, R&D failure, raw material rise risk, etc.