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The actual controller received two warning letters in a row.

Author | White Cat

Editor | Xiaobai

As the regulatory authorities’ policy orientation on “highlighting return requirements” becomes increasingly clear, some companies that previously had a weak sense of shareholder returns and were “dead pigs that are not afraid of boiling water” have experienced a “iron tree blooming”-like transformation, such as today’s protagonist - Tongce Medical (600763.SH), known as the “tightwad”.

In 2017, the China Securities Regulatory Commission said it would further strengthen supervision, study and formulate hard measures to deal with "tight-fisted" companies, and conduct regulatory interviews with companies that have the ability to pay dividends but do not.

In response to this, Tongce Medical, which had been listed through a backdoor listing for decades without paying dividends, immediately issued an "Announcement on the Change of the 2016 Profit Distribution Plan", paying out 38.477 million yuan in cash dividends for the first time, and then more than 9 million yuan in 2017, for a total of less than 50 million yuan in total.

(Source: Market Capitalization APP)

Five years later, under regulatory pressure, the company paid out a huge sum of 140 million yuan in dividends, with a cash dividend ratio of 28%.

(Source: Market Capitalization APP)

But investors seem to have been exhausted and have no expectations anymore. The company's stock price has long been reduced to its original level. From mid-2021 to the present, the company's market value has evaporated by nearly 90%!

(Source: Market Capitalization APP)

What exactly happened to the company?

Revenue growth stalled, and mid- to high-priced market competitiveness was weak

The company went public through a backdoor listing in 2006, and took advantage of the reform of public hospitals to rise. It has achieved rapid expansion with the development model of "regional headquarters + branches" and regional hospital groupization. From 2006 to 2021, the company's revenue CAGR is nearly 38%.

Of course, this is inseparable from the joint promotion of oral medical market demand, supply, policy and capital.

The oral medical service market has both medical and consumer attributes. As a new consumption in my country, it is still in the early stages of market development. According to the company's annual report data, the industry market size will grow at a compound annual growth rate of 9.6% from 2015 to 2020.

However, in 2022, the company's rapid growth came to an abrupt halt, and this year became a watershed for the company, with revenue declining. In 2023 and the first quarter of this year, revenue growth was only around 5%, with revenues of 2.85 billion and 710 million, respectively.

(Source: Market Capitalization APP)

Why is this?

The company's revenue comes from implants, orthodontics, pediatrics, restorations and comprehensive. The revenue distribution of these five major sectors is relatively stable throughout the year. The revenue share of the first four sectors is between 16% and 20%, and the remaining comprehensive sector is slightly higher, accounting for 28% of the revenue in 2023.

(Source: Tongce Medical Annual Report)

Judging from the number of outpatient visits and average customer spending, the company's high growth in the early stage came from increases in both volume and price, among which the increase in outpatient visits was the biggest driving factor.

The main reason for the slowdown in revenue growth in the past two years is that after the average order value peaked in 2021, it declined for two consecutive years in 2022 and 2023, with a decrease of 7% and 8% respectively.

(Source: Tongce Medical Annual Report Tabulation: Market Capitalization Storm APP)

The first direct reason for the decline in average order value is the impact of the standardization of the dental implant charging system.

In September 2022, the National Healthcare Security Administration issued the "Notice on Carrying out Special Governance of Oral Implant Medical Service Charges and Consumables Prices", which means that the nationwide centralized procurement of dental implants has officially started, and the charges for oral implant services will be simultaneously regulated and standardized.

According to Soochow Securities, the price of services has dropped by around 25%-50%.

(Source: Soochow Securities)

The centralized procurement policy for dental implants was fully implemented in April 2023. After calculation, the company's average unit price of dental implants dropped by about 27% compared with 2022. If compared with 2021, the decline is even greater.

The second fundamental reason is that the company’s competitiveness in the mid-to-high-priced market is not strong and its pricing power over customers has weakened.

The company said that it has obvious advantages in the mid-to-high-priced market, and in order to enter the low-priced market to achieve growth, it has launched low-priced projects one after another since 2021.

(Source: Tongce Medical 2023 Annual Report)

This statement seems to make sense and is also in line with the popular trend of the "Pinduoduo" model in the oral implant market.

(Source: Tongce Medical 2023 Annual Report)

However, as of the end of last year, the company had a total of 84 medical institutions and a market share of only 1.8%.If we can only go lower on such a low base, it fully demonstrates that the so-called high-price market advantage is not scalable and the pricing power over customers is not strong.

So, logically speaking, the company’s “story” is somewhat contradictory.

Although the company is the leader in domestic private oral medical services, according to the annual report of Ruier Group (06639.HK), the size of the domestic oral medical services market in 2023 will be approximately 150 billion yuan. Based on this calculation, the company's market share is only 1.8%, which is the same as in 2021, and there is not much gap with its peers.

The private market is highly fragmented, and expansion outside the province is difficult

When it comes to market structure, the private dental market is highly fragmented.

In 2022, the market share of the top ten private oral medical service providers only accounted for 13.6% of the private market, among which the top five were based in economically developed regions such as Zhejiang, Guangdong, Shanghai, Beijing and Jiangsu.

This is mainly because domestic private dental medical institutions are mainly composed of dental clinics, which have lower requirements for operation, supervision and capital. Therefore, private dental clinics are more widely distributed and more numerous than public institutions.

According to the prospectus of Ruier Group, in 2020, private dental clinics accounted for 52% of the total domestic dental medical services market.

The company's headquarters is in Zhejiang. After so many years of "land grabbing", the company has established itself in Zhejiang while continuously expanding outside the province.

Although the company has not disclosed the specific number of hospitals within and outside the province, from the perspective of expansion areas, the company has gradually expanded from Zhejiang to Jiangsu, Hubei, Shaanxi, Yunnan, Hunan, Hebei and other places. In 2023, it will have a total of 84 medical institutions, compared with 30 in 2018 and 60 in 2021.

(Source: Tongce Medical Annual Report Map: Market Capitalization Storm APP)

In contrast, for a long time, the company's revenue in Zhejiang Province accounted for more than 90%, and it was difficult to open up markets outside the province.

(Source: Choice Terminal Mapping: Market Capitalization APP)

First, it’s critical to understand why the company was successful in the first place.

One of the main reasons why Tongce Medical has been able to successfully expand in Zhejiang over the years is that it relies on the qualifications of an existing public hospital.Among them, Hangzhou Stomatological Hospital (hereinafter referred to as Hangzhou Stomatological Hospital) is the most typical and is the company's main source of profit.

(Main holding and shareholding companies, source: Tongce Medical 2023 annual report)

Hangkou Hospital was originally the largest public dental hospital in Zhejiang. Taking advantage of the opportunity of the public hospital restructuring at that time, Lv Jianming smelled a business opportunity in 2006 and bought 100% of the hospital's equity through Baoqun Industrial. After that, Hangkou Hospital became a wholly-owned private dental hospital under Tongce Medical.

To sum it up in one sentence: that is, reaping the benefits of the public hospital reform.

(Source: Tongce Medical 2018 Annual Report)

Later, the company also successively acquired the Ningbo Stomatological Hospital and Cangzhou Stomatological Hospital, which are both well-known in the local area. With such a high starting point, the company has continuously developed branches in the province by self-building with the reputation and resources of the main hospital, which is what the company calls the "regional main hospital + branch hospital" model.

I have to say, it is really good, and a lot of marketing expenses such as advertising have been saved. From the perspective of sales expenses, the company's sales expense rate is extremely low, around 1% all year round.

(Source: Market Capitalization APP)

However, this model is difficult to replicate in markets outside the province, mainly because it is difficult to overcome the huge obstacle of public institutions. Reform still depends on policy opportunities.

For many years, the company's external expansion has been carried out through self-construction. Considering the service radius of the dental industry (3-5KM) and the situation of full competition, the self-construction approach faces the problems of long cultivation cycle and slow return, making it difficult to exert influence.

Five or six years ago, the company established two large dental hospitals in Chongqing and Chengdu as bases for its development in the northwest. However, they were closed in 2023 after they ran out of money.

In terms of gross profit margin, the overall gross profit margin of business outside Zhejiang Province is 10-30 percentage points lower than that within the province.

(Source: Choice Terminal Mapping: Market Capitalization APP)

From "self-built" expansion to acquisition and franchising

The nature of dental craftsmen determines that capital needs to go through a long incubation period to enter the oral medical field. Dentistry is more dependent on high-quality dental resources. Technology and reputation are the key, but high-quality dental resources are scarce, so to a certain extent,Operation and expansion cannot be successful by simply replicating the chain。

From 2018 to 2021, the number of dental hospitals under the company doubled, and the number of outpatient visits also grew rapidly. However, from 2021 to 2023, while the number of dental hospitals increased by 40%, the growth in outpatient visits obviously failed to keep up.

The 14% increase in outpatient volume in 2023 is to a certain extent due to centralized procurement. The number of dental implants in the company has increased by 47%, which has greatly driven the growth in outpatient volume. This also shows that the growth rate of outpatient volume in other businesses is not as good as before.

(Source: Annual Report Map: Market Capitalization APP)

The company's actual controller, Lv Jianming, does not have a medical background, but started out in real estate development.

(Source: Company Annual Report)

With the growth model and pricing power under double pressure, Lu Jianming said that the development model of burning money and hiring people is no longer appropriate. In the future, external expansion will change from "self-construction" to "acquisition, merger and franchising", which means that the cost of future expansion will also increase, and good targets will inevitably be acquired at a premium.

(Source: Tongce Medical 2023 Annual Report)

Profits declined, and the actual controller received two warning letters in a row

The company's gross profit margin continued to decline from 2022 to 2023. The gross profit margin in 2023 was 38.5%, a decline of nearly 8 percentage points from 2021.

(Source: Market Capitalization APP)

The main reason behind the decline in gross profit margin is the decline in average order value mentioned above.

It is worth mentioning that due to the nature of dental craftsmen, labor costs account for about 55% of the company's total costs all year round. If the company needs to maintain relatively high-quality doctor resources, its bargaining power in the upstream will be relatively weak.

At the same time, the company's pricing power over downstream companies is also weakening, which is a major flaw the company is currently facing.

(Source: Annual Report Tabulation: Market Capitalization APP)

If the unsuccessful expansion and declining performance are just operational problems, then the frequently exposed misappropriation of non-operating funds, untimely disclosure of related transactions, and false disclosures are issues of integrity of the management!

Fengyunjun has emphasized more than once that you should not associate with untrustworthy management, even for one day, even once!

This year, due to the problem of misappropriation of funds by related parties controlled by the actual controller, Lv Jianming has received two warning letters from the CSRC. At the same time, the CSRC has recorded Tongce Medical, Lv Jianming, Chairman Wang Yi and other responsible parties in the integrity file of the securities and futures market.

As early as between October 19 and December 30, 2021, the 140 million yuan of investment that Tongce Medical made into the No. 1 Fund controlled by Lv Jianming was used to repay the bank by other entities controlled by Lv Jianming. After being discovered in 2022, Lv Jianming was "rewarded" with a fine of 1 million yuan by the regulatory bureau.

The reason for these problems is that, on a larger scale, the company is controlled by Boss Lu alone, who attempts to infringe on the interests of small and medium shareholders. On a smaller scale, it is due to a lack of internal independence. For example, in terms of fund management, the company has a situation where payments to related parties are approved by the company's financial personnel.

(Source: Choice Terminal)

What’s funny is that at the beginning of the annual report, Boss Lu always writes a heartfelt letter to shareholders. Among the thousands of words, Fengyunjun saw the following sentence: "As long as we stick to long-termism... Tongce Medical will live up to the expectations of shareholders."

When Boss Lu wrote these words, he really didn't feel embarrassed at all.

(Source: Tongce Medical 2022 Annual Report)

In February this year, the company announced a cancellation repurchase plan, with a planned repurchase amount of 30-50 million yuan. At the end of June this year, the company announced a plan to increase its holdings, and Fengyunjun thought it was a big deal. Oh no, the independent director increased his holdings by 96,000 yuan, and the announcement stated that it planned to continue to increase its holdings by 1-2 million yuan in the future. It was indeed a big deal.

(20240626 Tongce Medical: Tongce Medical Co., Ltd.'s announcement on the company's directors' shareholding increase and subsequent shareholding increase plan)

As of April 9, Tongce Holding Group controlled by Lv Jianming indirectly holds 33.8% of the company's shares.

(Source: Company Annual Report)

The hematopoietic ability is not bad, and the ROE is still above 10%.

From 2021 to 2023, the company's Tongce Medical's capital expenditure reached a peak in the past 10 years. Among them, it expanded against the trend from 2022 to 2023, rising year by year, totaling nearly 1.3 billion in three years.

(Source: Choice Terminal, Chart: Market Capitalization APP)

At the same time, the company's interest-bearing debt ratio has increased significantly to more than 20% since 2021. The company's hematopoietic ability is not bad, and it has been positive for many years. Although it has not raised funds since its backdoor listing, it has the ability to pay dividends but has not paid dividends for a long time.The cumulative dividends over the past 18 years are less than 200 million yuan.

(Source: Market Capitalization APP)

If you are interested in the reasons, you can read the two research reports quoted at the beginning of this article.

Due to the decline in asset turnover and net profit margin, the company's ROE will drop below 20% starting in 2022 and will be 13.5% in 2023.

As of the close of July 10, the company's PB was 4.5 times.

(Source: Market Capitalization APP)

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