Incidents:

On July 31, 2024, the company issued a suspension notice announcing that the controlling shareholder was planning a change in control; on August 4, 2024, the company issued a notice to resume trading, announcing that the controlling shareholder signed the “Share Transfer Agreement”. According to the agreement, Tianshili Group, the controlling shareholder of the company, and its co-actors intend to transfer approximately 0.418 billion shares to China Resources 39, accounting for 28% of the company's total share capital. The transfer price is 14.85 yuan/share, and the transfer price is about 6.212 billion yuan. After this change in equity, the Tianshili Group and its co-actors held a total of 0.261 billion shares of the company, accounting for 17.50% of the company's total share capital. At the same time, they promised to relinquish the voting rights corresponding to 5% of the shares and reserve the voting rights corresponding to 12.50% of the shares. The controlling shareholder of the company will change from Tasley Group to China Resources 39. At the same time, Tasly Group plans to transfer approximately 0.075 billion shares to Guoxin Investment, accounting for 5% of the company's total share capital. The transfer price is also 14.85 yuan/share, and the transfer price is about 1.109 billion yuan.

The company's status will be changed to a state-owned enterprise, so it is recommended to focus on key time points.

After the transaction is completed, the controlling shareholder of the company will be changed to China Resources 39, the actual controller of the company will be changed to China Resources Group, and the company status will be changed to a state-owned enterprise. We believe that this transaction plan is similar to China Resources 39's transaction plan to acquire Kunyao Group in 2022. Reviewing the entire process of China Resources 39's acquisition of Kunyao Group, announcing the asset restructuring on May 8, 2022, receiving approval from the State Assets Administration Commission on December 22, 2022, completing equity transfers and business changes on December 30, 2022, completing the board of directors and supervisors election on January 3, 2023, and then starting the 100-day integration, one-year integration, and three-year integration plan. The board of directors reviewed and approved the “Company” on March 20, 2024 “Strategic Plan (2024-2028)”. On June 7, 2024, the acquisition and integration of China Resources Torch was completed to resolve competition in the industry. Drawing on China Resources 39's experience in acquiring Kunming Pharmaceutical Group, we suggest that the first phase focus on catalysing important events such as approval by the State Assets Administration Commission, equity transfers and commercial changes, and the re-election of the board of directors and supervisors, while the second phase focuses on key issues such as integration plans, long-term development strategies, and industry competition.

Joining hands with China Resources 39, we are optimistic that multi-dimensional empowerment will improve quality and efficiency.

China Resources 39 is a leading domestic OTC enterprise, good at brand marketing and retail channel sales. Tianshili is a leading modern Chinese medicine company in China, good at innovative traditional Chinese medicine research and development and prescription market sales. We are optimistic that the two companies will join forces. For Tianshi, we are optimistic that China Resources 39 will be empowered to improve quality and efficiency in multiple dimensions after entering the market:

(1) Empowering retail channels

China Resources 39 has a market-leading “39 Commercial Road” retail system. The company has extensive and in-depth cooperation with the best dealers and chain terminals in the country, covering more than 0.4 million pharmacies across the country.

Tianshili's core varieties, such as compound salvia pills, serum brain pellets (pills), astragalus ginseng, and silybin capsules, are mostly prescription drugs and are good at in-hospital prescription market sales. At the same time, most of these varieties are drugs for chronic diseases and require long-term use. Sales through retail channels are mostly driven by in-hospital prescriptions. The addition of China Resources 39 is expected to further enrich Tianshili's sales model in the retail market, increase the coverage and popularity of Tianshili's core products in retail channels, and enhance the convenience for patients to purchase medicines.

(2) Focus on core business

Tianshili's main business includes modern traditional Chinese medicine, chemicals, biopharmaceuticals, pharmaceutical products, etc. Among them, modern traditional Chinese medicine accounts for the highest proportion, has the strongest profitability, and contributes the most to the company's performance. The overall profitability of other businesses is weak, and there are losses in some business lines. Clearing up “two capital” and “two countries” is an important direction of state-owned enterprise reform. We believe that after China Resources 39 takes over the company, it is expected to focus on the core assets of modern traditional Chinese medicine and expand the profitability of its main business.

(3) Improve operational efficiency

By the end of 2023, Tasley had a sales team of 5,169 people and a R&D team of 1,388 people. Both R&D and sales capabilities are in a leading position in the industry, and there is room for improvement in R&D efficiency and sales efficiency. The State Assets Administration Commission attaches great importance to the operating efficiency of central enterprises and proposes a “one profit, five rate” target management system. As a model for market-based management, China Resources 39 has been selected as a “model enterprise for scientific reform” for state-owned enterprise reform. We believe that after China Resources 39 takes over the company, the overall operating efficiency of Tianshili is expected to improve.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 9.092 billion yuan, 9.73 billion yuan, 10.479 billion yuan, and net profit to mother of 1.271 billion yuan, 1.443 billion yuan, and 1.634 billion yuan, respectively. The corresponding PE valuations are 16.5 times, 14.6 times, and 12.9 times, respectively. We gave the company a buy-A investment rating, with a target price of 17.00 yuan for 6 months, which is equivalent to a dynamic price-earnings ratio of 20 times in 2024.

Risk warning: Asset restructuring progress falls short of expectations, risk of price reduction in proprietary Chinese medicine collection, risk of failure in new product development.