Recently, the Global stock market has experienced significant fluctuations, while the Traditional Chinese Medicine industry has been less negatively impacted due to its internal circulation attributes.
At the same time, a Traditional Chinese Medicine decoction company is pursuing an IPO on the Hong Kong Stock Exchange.
According to news from Gelonghui, on April 3, Sichuan Xin Hehua Traditional Chinese Medicine Decoction Co., Ltd. (referred to as 'Xin Hehua') submitted its prospectus to the Hong Kong Stock Exchange, with GF SEC (Hong Kong) and Agricultural Bank International serving as joint sponsors.
Prior to this, Xin Hehua had attempted to enter the Capital Markets multiple times.
In March 2011, Xin Hehua submitted a listing application to the GEM of the Shenzhen Stock Exchange, but considering various factors (including the company's business and operational conditions at that time), the company voluntarily withdrew its initial A-share listing application in August 2012.
More than seven years later, in January 2020, Xin Hehua once again submitted a listing application to the GEM, but due to the market conditions at that time, the application was withdrawn again in April 2021.
In October 2023, Xin Hehua initiated guidance filing with the Sichuan Regulatory Bureau of the CSRC, intending to apply for a listing on the Main Board of the Shenzhen Stock Exchange.
However, considering future business strategic positioning and other factors, in April 2024, the company voluntarily terminated the guidance filing and decided to seek a listing on the Hong Kong Exchanges.
So, what is the operational situation of Xin Hehua? What is the outlook for the Traditional Chinese Medicine decoction pieces industry? Next, let's explore through the prospectus.
01
Alumni of Sichuan University are starting a business, focusing on the field of Traditional Chinese Medicine decoction pieces.
Xin Hehua was established in December 2001 and is headquartered in the High-tech Industry Development Zone of Chengdu, Sichuan Province.
Sixty-two years old this year, Jiang Yun is the founder, chairman, and executive director of the company. Currently, he controls a total of 47.1% of the voting rights through direct and indirect shareholding, making him the company's controlling shareholder.
Jiang Yun holds a master's degree in psychology from Sichuan University West China Medical Center, and has nearly forty years of experience in the pharmaceutical and Traditional Chinese Medicine fields. He has worked for Guojia Investment, Chengdu Guojia Pharmaceutical Co., Ltd., and Chengdu Guojia United Pharmaceutical Co., Ltd., and has also served as an executive director at Pharmesis Intl (Stock code: BFK), a listed company on the SGX.
Since its establishment, Xin Hehua's business focus has mainly been on Traditional Chinese Medicine decoction pieces. According to the revenue from Traditional Chinese Medicine decoction piece products in 2023, Xin Hehua ranks second in China.
Source: Prospectus
Many of Xin Hehua's products are authentic medicinal materials. Authentic medicinal materials refer to those produced in specific regions with high recognition, and compared to the same type of medicinal materials produced in other regions, authentic medicinal materials have better quality and efficacy. The most renowned authentic medicinal material producing areas include SiChuan Province, Zhejiang Province, Guangdong Province, and the western regions of China.
On the procurement side, Xin Hehua sources the necessary raw materials for production from many third-party suppliers in China, with over 400 suppliers of raw Chinese medicinal materials currently.
The company's revenue comes from the sale of over 770 categories and 4,900 specifications of medicinal slices.
In 2022, 2023, and 2024 (reporting period), the revenue share from common medicinal slices was 85.2%, 83.2%, and 86.2%, respectively, mainly including Chuan Bei Mu, Mai Dong, Chao Suan Zao Ren, Dang Gui, and Huang Lian; the revenue share from toxic medicinal slices was 14.8%, 16.8%, and 13.8%, mainly including Fa Ban Xia and Jiang Ban Xia.
From the perspective of products, the company's top five products are Chuan Bei Mu, Mai Dong, Fa Ban Xia, Chao Suan Zao Ren, and Jiang Ban Xia, with the total sales of these products accounting for approximately 32.7%, 31.3%, and 26.5% of the total revenue for the corresponding years.
From 2022 to 2023, as the company expanded its business network and deepened business relationships with key customers, the sales volume of these major products increased. From 2023 to 2024, the sales volume of Chuan Bei Mu, Fa Ban Xia, and Jiang Ban Xia remained relatively stable, while sales of other products like Mai Dong and new categories grew, driving overall revenue improvement. The average selling price of products fluctuated roughly in line with changes in raw material costs.
Revenue details by product type, source: prospectus.
02
Gross margin has been declining year by year, facing the risk of centralized procurement.
Driven by the sales of the above products, the revenue of New Lotus has increased.
During the reporting period, the revenue of New Lotus was 0.78 billion yuan, 1.146 billion yuan, and 1.249 billion yuan respectively, with profits of 77.395 million yuan, 0.104 billion yuan, and 89.112 million yuan for the year.
Key financial data, source: prospectus.
During the same period, the company's gross margins were 21.1%, 18.5%, and 17.1% respectively, showing a declining trend.
The main reason is the change in the proportion of different sales channels, specifically the increase in sales to medical trading companies; however, due to market competition, the profit margin for these types of clients is usually lower. Additionally, the gross margin can also be affected by the cost of raw materials for several major varieties.
The sales channels for New Hehua include Hospitals, trading companies, clinics, and pharmacies, and it is currently expanding into the retail market.
In terms of revenue contribution from various channels, hospitals and medical institutions, as well as medical trading companies, are quite important. In 2024, the revenue share from hospitals and medical institutions is 37%; the sales share from trading companies increased from 32.5% in 2022 to 35.5% in 2024, which is also an important reason for the decrease in the company's gross margin.
Additionally, in 2024, the shares of pharmacies and pharmaceutical companies as channels are 16.9% and 10.6% respectively.
Revenue details segmented by customer type, source: prospectus.
It is worth noting that New Hehua's Business may be impacted by the Traditional Chinese Medicine Alliance procurement plan.
The reason is that the company's clients are mainly hospitals and other medical institutions controlled by government departments; according to the Traditional Chinese Medicine Alliance procurement plan, public hospitals procure the required Traditional Chinese Medicine decoction pieces through province-level centralized drug procurement platforms.
In May 2023, 15 provincial governments including ShanDong and ShanXi formed an interprovincial alliance to begin bulk purchasing of 21 types of Chinese herbal medicine pieces that meet national pharmaceutical standards.
In 2024, the bulk purchasing plan for Chinese herbal medicine pieces has expanded to 45 varieties and all provinces in China, with the possibility of more provinces joining the interprovincial alliance for collective procurement in the future.
In future collective procurements, if the products of new lotus fail to win the bid, sales volume, revenue, and market share may be adversely affected. Additionally, even if successful in bidding, there may be significant price reductions or discrepancies between the expected and actual purchasing volumes outlined in the bidding documents.
At the end of each reporting period, the company's trade receivables were 0.407 billion yuan, 0.508 billion yuan, and 0.566 billion yuan, accounting for 52.18%, 44.33%, and 45.32% of revenue respectively.
In terms of cash flow, the net cash flow from operating activities for new lotus during the reporting period was 0.028 billion yuan, 0.075 billion yuan, and -467,000 yuan, with a net amount turning negative in 2024.
It is noteworthy that amid fluctuations in operating cash flow, new lotus declared dividends of 14.5 million yuan in May 2022.
03
The Industry is highly fragmented, with new lotus holding only a 0.4% market share in 2023.
Traditional Chinese Medicine is a unique health resource and economic strength rooted in Chinese culture, which has unique advantages in meeting the health needs of emerging economies globally.
According to relevant data, in China alone, driven by the increasing awareness of health and wellness as well as the application of digital technology and AI, the market size for Traditional Chinese Medicine reached RMB 451.6 billion in 2023, accounting for 27.9% of China's healthcare market. It is expected to reach RMB 599.3 billion by 2030.
In China's public hospitals, the revenue share of Traditional Chinese Medicine has steadily increased from 17.9% in 2019 to 20.5% in 2022, reflecting the growing acceptance of Traditional Chinese Medicine among the public and the investment from Institutions.
Estimated market size for TRAD CHI MED products in China from 2020 to 2030, source: prospectus.
TRAD CHI MED products include several major categories, including Chinese Patent Medicine, Traditional Chinese Medicine pieces, Traditional Chinese Medicine formula granules, Traditional Chinese Medicine injections, and Traditional Chinese Medicine health products.
Among them, Traditional Chinese Medicine pieces are standardized pre-processed products of medicinal materials, which can be directly used for dispensing or formulation under the guidance of Traditional Chinese Medicine theory in clinical practice.
There are three main classification methods for Traditional Chinese Medicine pieces. According to toxicity, they can be divided into toxic pieces and ordinary pieces; according to the source of raw materials, they can be divided into plant-based, animal-based, and mineral-based pieces; according to usage, they can also be divided into formula pieces and ingredient pieces.
As the most widely used form of Traditional Chinese Medicine, the market for Chinese Patent Medicine decoction pieces has rapidly grown: from 200.7 billion yuan in 2020 to 278.8 billion yuan in 2023, with a compound annual growth rate of 11.6%. It is expected to continue growing at a compound annual growth rate of 5.7% from 2023 to 2030, reaching 409.7 billion yuan by 2030.
From 2020 to 2030 (estimated), the market for Chinese Patent Medicine decoction pieces in China, source; prospectus.
Currently, the market for Chinese Patent Medicine decoction pieces is relatively fragmented, with most market participants operating on a relatively small scale and limited production capacity.
As of 2023, the total number of companies with production licenses for Chinese Patent Medicine decoction pieces in China has reached 2,334, but very few are large-scale manufacturers, with enterprises having an annual output value exceeding 1 billion yuan being exceptionally rare.
One major reason for this is the regional differences in sourcing raw materials and local market preferences. Moreover, some Chinese Patent Medicine decoction pieces need to be processed fresh at their place of origin to maintain their unique efficacy and quality.
The authenticity of Chinese Patent Medicine decoction pieces limits enterprises to regional constraints, with small enterprises typically only covering regional markets. The fragmented market indicates that, with support from capital investment and technological advancements, there is significant potential for large enterprises to rise through industry consolidation or organic growth.
In 2023, the market share of the top five market participants in Chinese Patent Medicine decoction pieces combined was only 2.7%, with Xin Hehua being the second-largest producer, holding a market share of 0.4%.
Currently, the companies listed that are involved in Traditional Chinese Medicine processing business mainly include Beijing Tongrentang, China Resources Sanjiu Medical & Pharmaceutical, Yunnan Baiyao Group, etc.
In 2023, by sales revenue, the market share of TRAD CHI MED processing in China; Source: Prospectus.
Overall, the Traditional Chinese Medicine processing sector where New Lotus is located belongs to the domestic demand market. In the current environment, external risks are not significant, but there may be challenges from centralized procurement in the future. Whether the company can continue to expand channels and maintain quality and cost control on the procurement side to achieve steady growth in performance will be closely monitored by Gelonghui.
