Core views

On August 4, the company announced that it plans to transfer 28% of its shares and 5% of the company's shares to China Resources 39 and Guoxin Investment respectively through an agreed transfer. After the transaction is completed, the controlling shareholder of the company will be changed from Tasik Group to China Resources 39. We believe that the company is a leading modern traditional Chinese medicine prescription enterprise focusing on the three major diseases of cardiovascular, digestive metabolism, and cancer. China Resources 39 is a scarce multi-brand successful operation platform in the field of self-diagnosis and treatment. This transaction will help the company to consolidate its position as a leader in traditional Chinese medicine innovation, enhance its core competitiveness, strengthen the traditional Chinese medicine industry chain more quickly by fully integrating the resources of both parties, give full play to the collaborative value of R&D, and enhance innovation and development capabilities. We are optimistic that innovation will lead the company's high-quality development.

occurrences

The company issued an announcement to transfer the company's shares

On the evening of August 4, the company announced that the controlling shareholder and its co-actors signed the “Share Transfer Agreement” and change of control. The controlling shareholder, Tianshili Group and its co-actors, Tianjin Heyue, etc. transferred 28% and 5% of the company's shares to China Resources 39 and Guoxin Investment respectively through an agreed transfer. The transfer price for each share was 14.85 yuan. The total transfer consideration was 6.212 billion yuan and 1.109 billion yuan respectively. After the transaction is completed, the controlling shareholder of the company will be changed from Tianshili Group to China Resources 39, and the actual controllers will be changed from Mr. Yan Xijun, Ms. Wu Naifeng, Mr. Yan Kaijing, and Ms. Li Weihui to China Resources.

Brief review

It is proposed to transfer the company's shares, and China Resources 39 becomes the controlling shareholder

On August 4, 2024, Tianshili Group, the controlling shareholder of the company, and its co-actors, Tianjin Heyue, Tianjin Kangshun, Tianjin Shunqi, Tianjin Shanzhen, Tianjin Tongming, Tianjin Hongxun, and China Resources 39 signed a “Share Transfer Agreement”. China Resources 39 plans to acquire 0.418 billion shares of the company held by Tianshili Group and its co-actors with 6.212 billion yuan in cash (accounting for 28% of the shares). After the transaction is completed, China Resources 39 will hold 0.418 billion shares of the company (accounting for 28% of the shares). The controlling shareholder of the company will be changed from Tianshili Group to China Resources 39, and the actual controllers will be changed from Mr. Yan Xijun, Ms. Wu Naifeng, Mr. Yan Kaijing, and Ms. Li Weihui to China Resources. In addition, the Tasley Group shall issue a written commitment to relinquish voting rights corresponding to 5% of its shares of Tianshi after the registration date, so that it controls no more than 12.5008% of voting rights. According to the “Administrative Measures on Reorganization”, this transaction is expected to constitute a major asset restructuring.

On the same day, Tianshili Group, the controlling shareholder of the company, signed a “Share Transfer Agreement” with Guoxin Investment, agreeing that Guoxin Investment would transfer 0.075 billion of the company's shares held by Tianshili Group, accounting for 5% of the company's total share capital. The transfer price was RMB 14.85 per share, and the transfer price was 1.109 billion yuan. As a state-owned capital operating company, Guoxin Investment will play a resource allocation function to promote the optimization of Tianshili's industrial layout and scientific and technological innovation.

China Resources joined forces to lead high-quality development through innovation

As a leading enterprise in the development of modern traditional Chinese medicine in China, the company's products are based on modern traditional Chinese medicine as the core, creating a modern biomedical industry cluster. The main products include modern traditional Chinese medicine series products represented by compound salvia drops and serum brain pellets (pills), biopharmaceutical products represented by Puyouke, and chemical drug series products represented by temozolomide capsules and silybin capsules. The treatment fields cover major diseases such as cardiovascular, anti-tumor, and metabolic diseases. In recent years, the company has actively continued to innovate R&D pipelines and actively expand new indications around the three major diseases of cardiovascular, cerebrovascular, digestive metabolism, and tumors. The traditional Chinese medicine sector is the main source of contribution to the company's performance.

China Resources 39 has consumer health products (CHC) as its core business. The prescription drug sector empowers the CHC business by cultivating brand depth and building professional academic capabilities, continues to promote the “brand+innovation” two-wheel drive business growth model, improve the CHC layout, and achieve high-quality global development. Both the company and China Resources 39 are leading enterprises in the traditional Chinese medicine industry. The strategic layout of the two parties is highly compatible. Both take the traditional Chinese medicine industry as the main development line, and are committed to the integrity, innovation, inheritance and development of traditional Chinese medicine. After the transaction is completed, the company and China Resources 39 will empower each other, making the company's innovation advantages more prominent and its position as an innovation leader more stable; at the same time, it will help China Resources 39 rapidly improve its innovation capabilities and promote China Resources 39 to become a leader in the Chinese medicine industry; it is expected that the two sides will use the synergy effects of the traditional Chinese medicine industry chain to strengthen the chain faster and enhance the competitiveness of the entire industry chain.

① The R&D pipeline progresses efficiently and continues to consolidate the leading position of modern traditional Chinese medicine: In recent years, the company has continued to increase R&D and innovation efforts, and the R&D pipeline is being promoted efficiently. Currently, it has a R&D pipeline covering 98 products under development, including 41 Class 1 innovative drugs, 36 of which are in clinical trials. Among the 26 innovative drugs that are already in clinical phase II and III research stages, including Anshen pills, Qingshu granules, back pain tablets, Andiwei granules, Suzu Pediatric cough tablets, Xia Yu Qi capsules, Lianxia tablets T89 Indications for treatment of chronic stable angina pectoris and Nine innovative traditional Chinese medicines, including T89 to prevent acute plateau syndrome (AMS), are in phase III clinical research; 2 other classic traditional Chinese medicines, loquat lung clearing drink and warm jing soup, have submitted production applications. In terms of international research and development, T89 is continuing to advance two international clinical trials for the treatment of chronic stable angina and the prevention of acute plateau syndrome (AMS). We believe that this transaction will help the company continue to improve its innovative drug research and development capabilities, promote the heritage of traditional Chinese medicine and the company's innovation and high-quality development.

② Focus on the layout of the entire traditional Chinese medicine industry chain and achieve a win-win situation: Starting with the standardization of the entire industry chain, the company built a quality management system for the cultivation, extraction, production and marketing of Chinese herbal medicines, as well as drug development and clinical trials. Combining the needs and standards of the international market, it has formed a competitive advantage with international standards throughout the entire industry chain, and has outstanding advantages in innovative R&D and medical channels. As a leading enterprise in the Chinese medicine industry chain, China Resources 39 continues to strengthen the construction of the traditional Chinese medicine industry chain, seize the two breakthroughs of standardized herbal medicines and intelligent manufacturing, take into account the balanced development of all aspects of the industrial chain, actively play the main support and integration driving role of central enterprises, and promote the modernization and industrialization of traditional Chinese medicine. We believe that this transaction will help the two sides develop the synergy effects of the Chinese medicine industry chain, empower each other in the fields of Chinese herbal medicine cultivation, innovative research and development, intelligent manufacturing, channel marketing, etc., enhance the core competitiveness of the entire industry chain, and accelerate the release of the performance potential of both parties.

The transaction consideration is reasonable, and the transaction still needs to go through a series of procedures

The transfer price per share in this transaction was 14.85 yuan, corresponding PS 2.56 times (corresponding to 23 years revenue); PE was 18.13/16.41 times (corresponding to the net profit of the 24/25 wind consistent forecast). Since it involves a transfer of control, this transaction has a certain premium, which is basically reasonable.

There is still some uncertainty about this transaction. The procedural matters that need to be implemented include, but are not limited to: 1) After the audit, evaluation, or valuation work related to the transaction is completed, the listed company once again meets the board of directors to consider and pass the relevant bill of the transaction; 2) approval of the shareholders' meeting/partner meeting of Tasley Group and its co-actors; 3) China Resources Pharmaceutical Holdings and China Resources reviewed and approved the transaction plan; 4) The state-owned assets supervision and administration department approved the transaction plan; 5) China Resources's 39th shareholders' meeting reviewed and approved the transaction plan; 6) China Resources's 39th General Meeting of Shareholders reviewed and approved the transaction plan; 6) The Antimonopoly Bureau of the State Administration of Market Supervision and Administration reviewed and approved the transaction plan; 6) The Antimonopoly Bureau of the State Administration of Market Supervision and Administration The transaction involved centralized review and approval by the operator; 7) Other necessary approvals or approvals required by relevant laws and regulations.

Profit forecasting and investment ratings

Since this share transfer constitutes a major asset restructuring of China Resources 39, related work such as audit, evaluation or valuation is still required, and approval from relevant approval agencies is required. There is still some uncertainty about this transaction, and we are temporarily maintaining the company's profit forecast for 2024-2026. Excluding the impact of non-recurring profit and loss events such as fluctuations in the company's asset prices, the company's main business operations remained steady. Looking forward to the future, the company will continue to innovate R&D pipelines and actively expand new indications around the three major disease fields of cardiovascular, digestive metabolism, and tumors. As the company accelerates the promotion of products such as Dandisan Network Indications, temozolomide for chemical injections, and benzafite sustained-release tablets, and the progress of the new indications of the biopharmaceutical Puyuk, it is expected that the company's main business performance will continue to grow steadily in the future. We expect the company to achieve operating income of 9.104 billion yuan, 9.651 billion yuan, and 103.0.2 billion yuan respectively from 2024 to 2026, and net profit to mother of 1.169 billion yuan, 1.285 billion yuan, and 1.419 billion yuan respectively, with year-on-year increases of 9.2%, 9.9%, and 10.4%, respectively, maintaining the “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment increases. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profit; 2) Product price reduction risk (product price reduction exceeds expectations due to interprovincial procurement alliances): Product price reduction due to collection and direct reduction in hospital market share, which in turn will directly affect the company's overall business situation and profit level; 3) Risk of price increase in raw materials and power costs: The cultivation cycle of traditional Chinese medicine is long, and fluctuations in the price of raw materials required by the company will cause costs to rise, which in turn will affect the company's overall profit; 4) The Chinese medicine policy environment is unstable: The relevant environment is not completely stable. If relevant policies are introduced in the future, it may cause the market to become chaotic and affect the company's business conditions.