Spending $254 Million on Empty Shells? National Investment Company's Acquisition of Mingyuan Spices and Shuixian Pharmaceutical is the Only Bright Spot!

Recently, Pien tze huang, known as "Chinese Mugwort", released an announcement that its wholly-owned subsidiary Zhangzhou Pien tze huang Investment Management Co., Ltd. plans to use about 254 million yuan of its own funds or raise funds. Zhangzhou State-owned Assets Investment and Operation Co., LTD. (hereinafter referred to as "State Investment Company") to wholly acquire Zhangzhou Mingyuan Spice Co., LTD. (hereinafter referred to as "Mingyuan Spices") all the equity.

It is worth noting that Mingyuan Spices' operating income for the full year 2023 and the first quarter of 2024 was zero. According to public information, Mingyuan Spices was established in 1980 with a registered capital of 14.07 million yuan. Its business scope covers the operation of traditional spice products and the cultivation of spice crops. In terms of performance, Mingyuan Spices from 2023 to the end of March 2024, the operating income was zero yuan, the net profit was about 13.94 million yuan and -0.07 million yuan, and the total debt was about 42 million yuan.

Despite Mingyuan Spices' poor performance, Pien tze huang valued the transaction at RMB254m, representing a 78.29 per cent premium to Mingyuan Spices' book value. The key factor in facilitating this transaction may lie in Mingyuan Spices' core asset, Zhangzhou Shuixian Pharmaceutical Co., LTD. (hereinafter referred to as "Shuixian Pharmaceutical"). Mingyuan Spices currently holds a 30% stake in Shuixian Pharmaceutics.

The announcement mentioned that Shuixian Pharmaceutical is a pharmaceutical enterprise integrating scientific research, development, production and sales, and is also one of the earliest enterprises producing Fengyouxian in China. Its main products include Narcissus brand wind essence, Wuji cream, butadiene cream, Anmailing, Manshan white, Sleeping Anning, etc., of which wind essence is the main profitable product of Shuixian Pharmaceutical.

Fengyou as a family medicine, according to the data show that it has anti-inflammatory, analgesic, cooling, itching and wind drive effect, suitable for the treatment of colds caused by headache, dizziness, as well as joint pain, toothache, abdominal pain and other discomfort symptoms, but also help relieve mosquito bites and motion sickness caused by discomfort. Market data show that the market share of Daffodil brand oil essence is as high as 50%.

In 2022 and 2023, Shuixian Pharmaceutical's operating income reached 283 million yuan and 306 million yuan respectively, and its net profit was 35,027,300 yuan and 47,008,200 yuan respectively. Pien tze huang noted that thanks to its solid operating conditions and increasing profitability, Shuixian Pharmaceutical's cash dividend remained stable, with a dividend of 10 million yuan in 2022 and 20 million yuan in 2023. Assuming that the dividend level is maintained at 10 million yuan after the acquisition, it will bring 3 million yuan of cash dividend income to Pien tze huang every year.

In the announcement, Pien tze huang mentioned that Shuixian Pharmaceutical's main business includes the research and development, production and sales of linimentum, which belongs to the pharmaceutical manufacturing industry with Pien tze huang. After the acquisition, the two companies will conduct in-depth cooperation in brand promotion, product marketing, channel expansion and other aspects, leveraging Pien tze huang's existing management and brand advantages to achieve synergies, improve the sales revenue, market share and sustainable development capabilities of both parties, and thus enhance market competitiveness.

The acquisition of Shuixian Pharmaceutical by Pien tze huang at a premium may be related to the increasing growth pressure it faces. On the evening of August 16, Pien tze huang announced the 2024 semi-annual report, which showed that the operating income in the first half of the year increased by 12% year-on-year to 5.651 billion yuan, and the net profit attributable to shareholders of listed companies was 1.722 billion yuan, an increase of 11.73%. However, from a product perspective, gross margins for liver drugs and cardiovascular and cerebrovascular drugs decreased by 5.32% and 25.04%, respectively. In addition, operating income in the second quarter increased by only 2.66 percent year-on-year, and net profit was 747 million yuan, down 3.13 percent year-on-year.

It can be seen that Pien tze huang's revenue growth rate has fallen back to the level of four years ago, and its revenue growth rate in the first half of 2020 is 12.16%. At the same time, the growth rate of net profit was also lower than the 17.23% in the same period of 2023. In its earnings statement, Pien tze huang noted that the rising cost of important raw materials had put pressure on its profit margin. The medicinal materials involved in Pien tze huang series mainly include musk, bezoar, snake gall, panax notoginseng, etc. Among them, musk and natural bezoar are the two medicinal materials with the highest cost ratio, accounting for about 90% of the total cost. Musk, in particular, needs to strictly comply with the relevant national regulations for procurement; The price of natural bezoar has risen rapidly from 570,000 yuan per kilogram to 1.4 million yuan from March to November 2023, and has stabilized at this price level since November 2023. In the past ten years, Pien tze huang has repeatedly increased product prices to promote performance growth, for example, in 2010, the price of Pien tze huang series products increased by 20 yuan, the corresponding sales revenue increased by 31.56%, and the net profit increased by 75 million yuan.

In May 2023, Pien tze huang implemented the largest price adjustment in nearly a decade, raising the domestic market sales price of Pien tze huang tablets from 590 yuan to 760 yuan per pill, an increase of 28.81%. However, the price increase did not bring the expected significant effect, 2023 Pien tze huang's operating income of about 10.058 billion yuan, an increase of 15.69%; The corresponding attributable net profit was about 2.797 billion yuan, an increase of 13.15%, and the overall growth was not significant.

Faced with the pressure of slowing performance growth, Pien tze huang is also seeking to transform its business, including entering the cosmetics and health products market, but it does not seem to have achieved satisfactory results so far. In the cosmetics business, its operating income has dropped from 905 million yuan in 2020 to 707 million yuan in 2023; In terms of health products, since 2022, Pien tze huang no longer discloses the performance of the health food business separately in its annual report.

In this case, Pien tze huang will set his sights on "wind oil essence", perhaps a new business expansion attempt.