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There is only a difference between 0 and 1 when it comes to deception. There has never been an internal control system in the world that can control a boss who is all-powerful but does not follow the rules.

Author | White Cat

Editor | Xiaobai

In April this year, the new "Nine National Regulations" were issued, which clearly stated that the access to issuance and listing should be strictly controlled, including raising the listing standards for the main board and the Growth Enterprise Market and expanding the coverage of on-site inspections. Under the impact of the regulatory wave, according to statistics, the IPO market cooled down significantly in the first half of this year, with a total of 44 new A-shares listed, a year-on-year decrease of nearly 75%.

At the same time, for companies that have already "got on board", poor performers have always been the focus of regulatory authorities, especially those companies that initially successfully IPOed with impressive transcripts but whose performance "changed" in the second year after listing.

For example, the company that Fengyunjun noticed - Weican Pharmaceutical (300878.SZ), is one of the first 18 companies under the GEM registration system, and the only modern Chinese and Western medicine pharmaceutical company among them. The five words "listing is the peak" are tailor-made for it, and it even suffered losses in 2023.

(Source: Market Capitalization APP)

When I opened the company's annual report, I was almost blinded by the words "little giant", "most popular", "highest brand", and "star product".

(Source: Weikang Pharmaceuticals 2023 Annual Report)

Fengyunjun believes in a saying: when the tide goes out, you will see who is swimming naked.

“Illness” in the market: supplier issues

Weican Pharmaceutical was founded in 2000. It made its first attempt to be listed on the ChiNext in 2016. After its review was terminated, it changed its sponsor and submitted its application again in 2019. It was listed on the ChiNext of the Shenzhen Stock Exchange in August 2020.

The company is a family-owned enterprise in Lishui, Zhejiang. The controlling shareholder and actual controller is 63-year-old Liu Zhongliang, and the second largest shareholder is Liu Zhongjiao, who are siblings. As of the latest, the two directly hold 67.7% of the shares, of which the actual controller directly holds 60.9%.

(Source: Market Capitalization APP)

As a pharmaceutical company, drug safety and quality control should be a sword hanging over the company's head. However, Weican Pharmaceuticals did not get its act right when it came to supplier selection.

At the earliest stage, in 2016, the largest supplier under the company's pharmaceutical manufacturing segment (all suppliers mentioned below belong to this segment) was Anhui Jisongtang Chinese Medicine Pieces Co., Ltd. (hereinafter referred to as "Jisongtang"), accounting for 33% of the company's total procurement that year.

(Source: Prospectus for the Initial Public Offering of Zhejiang Weikang Pharmaceutical Co., Ltd. on the Growth Enterprise Market 2019-06-28)

This is a company that has been "honorably listed" on the regulatory blacklist many times. In 2015, it was investigated and punished by the Anhui Provincial Food and Drug Administration for illegal production, and its pharmaceutical GMP certificate was revoked.

In 2017, a new company suddenly emerged - Anhui Qiangzheng Chinese Medicine Pieces Co., Ltd. (hereinafter referred to as "Qiangzheng Chinese Medicine") and became the company's largest supplier.

Fengyunjun searched on Qichacha and found out that Ji Songtang just changed his name and vest to continue serving Weican Pharmaceutical. At least until 2019, Qiangzheng Chinese Medicine was still the company's third largest supplier.

(Source: Qichacha)

In 2023, the Anhui Provincial Drug Administration revoked the drug production license of Qiangzheng Chinese Medicine. Qichacha showed that Qiangzheng Chinese Medicine had long been a dishonest debtor.

(Source: Anhui Provincial Food and Drug Administration, Previous: 20150327 Next: 20230515)

In addition, a company called Haozhou Huayun Chinese Medicine Pieces caught Fengyunjun's attention. Huayun Chinese Medicine was established in 2012 and became the company's third largest supplier in 2018.

In June 2019, the supplier was convicted of producing and selling counterfeit drugs.

Not only did the company "not avoid suspicion", it even increased its purchases in 2019. Huazhong Yunyao became the largest supplier, accounting for 32% of the company's total purchases that year.

In March 2020, Huazhong Yunyao’s drug production license was revoked, and the company disappeared from the top five supplier list that year.

(Source: Anhui Provincial Food and Drug Administration)

I thought Weican Pharmaceuticals was distancing itself from the company, but the script repeated itself, and the approach was still crude.

The beneficial owner of Anhui Jiahe Traditional Chinese Medicine Technology Co., Ltd., the largest supplier that emerged in 2020, is the legal representative of Haozhou Huayun Traditional Chinese Medicine.

(Source: Qichacha)

(Source: Weikang Pharmaceuticals' prospectus for issuing convertible corporate bonds to unspecified objects 2022-12-05)

As to whether Weican Pharmaceuticals and this pair of "Crouching Dragon and Phoenix" have any shady secrets in private, Fengyunjun does not know, but it is obvious that these facts are contrary to common sense, which fully demonstrates that the company unintentionally or deliberately looks for suppliers with no bottom line when selecting suppliers.

Judging from the feedback, regulators require the company to explain the situation of its suppliers, including the quality control measures and mechanisms for raw materials.

(Source: Feedback on the application documents for the initial public offering of Zhejiang Weikang Pharmaceutical Co., Ltd. on the Growth Enterprise Market 20200207)

However, the company simply copied some internal control systems to get away with it, and I did not see any more detailed response on the public disclosure website.

Performance changed drastically after listing, and internal control was in chaos

From the performance point of view, the company's performance changed as soon as it went public. In 2019, the company's revenue was 640 million, and then it began to fall into a downward trend. By 2023, the company's revenue was 520 million. In the first quarter of this year, the revenue was 200 million, a slight increase of 2.2%.

(Source: Market Capitalization APP)

In terms of product structure, the company's prescription drug revenue accounts for a large proportion, and prescription drugs are mainly sold through the distribution model. In 2020, the revenue under the distribution model was 330 million, accounting for 54%.

In 2022, due to the fact that some of the company's products were gradually removed from the medical insurance catalogs of many provinces, coupled with the implementation of policies such as centralized volume procurement, and the continuous promotion of drug prices and procurement credit evaluation, the company's prescription drug revenue dropped significantly. In 2023, it was only 120 million, a decrease of 64% from 2020. This is the main reason for the company's revenue decline.

At the same time, in the OTC market, the company's performance was mediocre. OTC drugs were mainly sold through the direct supply model. From 2020 to 2023, the CAGR of revenue under the direct sales model was less than 7%.

In terms of profits, the company has experienced three consecutive declines since 2021. In 2022, the company's net profit attributable to shareholders was less than 50 million yuan, and in 2023 it suffered a loss of more than 8 million yuan.

(Source: Market Capitalization APP)

Therefore, the Shenzhen Stock Exchange sent it annual report inquiry letters for two consecutive years, requiring it to analyze in detail the reasons for the continuous decline in net profit since the year after its listing.

Judging from the inquiry letter, on the one hand, the revenue from the high-gross-margin prescription drugs mentioned above has dropped significantly, and the company has lowered its sales unit price to cope with competition. On the other hand, the company's fundraising project - the first phase of the big health industry park project did not achieve the expected benefits, and depreciation was not effectively allocated.

In 2023, the company's comprehensive gross profit margin was 50.4%, a decrease of 25 percentage points from 2018.

(Source: Market Capitalization APP)

What’s funny is that during the period when the performance changed, or to be more precise, before the performance change was fully exposed, the company wanted to take the opportunity to reap another wave of profits.

On December 5, 2022, the company's application for the issuance of convertible bonds to unspecified objects was officially disclosed. The first phase project has not been settled, and a second phase project has come up, with an intended fundraising of 680 million yuan. If successful, together with the IPO fundraising, the total amount will be 1.51 billion yuan. The company's appetite for raising money is indeed huge.

(Source: Weikang Pharmaceuticals' prospectus for issuing convertible corporate bonds to unspecified objects)

Note that the time when the company is rushing to issue convertible bonds is a critical period. The financial data in the filing is the audited 2019-21 and the unaudited January-September 2022. Judging from the annual report, the key point for the company's performance to change is the fourth quarter of 2022.

On January 20, 2023, the company announced its earnings forecast. On March 27, 2023, the company's convertible bond application was approved by the China Securities Regulatory Commission.

On April 17, 2023, the company stated that due to the large difference between the 2022 performance forecast and the audited net profit, it was necessary to revise the 2022 performance forecast.

According to calculations, the net profit attributable to the parent company after the revision decreased by 34%-57% compared with that before the revision. The company also received a regulatory letter, and the actual controller and relevant persons in charge received a warning letter.

(Source: Weikang Pharmaceuticals 2022 Annual Performance Forecast Revised Announcement)

(Source: Weikang Pharmaceuticals 2022 Annual Report)

At the same time, it did not escape the subsequent annual report inquiries. It was really Wang Xiaoer's New Year - each year was worse than the last. After a few months, the 2023 annual performance forecast was "difficult to deliver" again.

As the one-year validity period for the registration consent for the convertible bond issuance was about to expire, on February 7 this year, the company announced its decision to terminate the issuance of convertible corporate bonds to unspecified objects.

(Source: Weikang Pharmaceuticals' announcement on obtaining the registration approval from the China Securities Regulatory Commission for the issuance of convertible corporate bonds to unspecified objects)

The company said that it terminated the issuance due to comprehensive consideration of factors such as the macroeconomic environment, capital market environment and the company's development plan. As to how much water there is in this statement and whether it is to maintain the last bit of dignity, please let the readers figure it out for themselves.

However, with the intervention of the CSRC's on-site inspections, the company exposed more and more major internal control deficiencies.

For example, the company's trading business was not accounted for in accordance with the substance of the business. Due to the lack of an effective revenue recognition mechanism based on logistics receipts, there were problems such as insufficient basis for recognition of drug sales revenue and early recognition of revenue for three consecutive years, which led to inaccurate disclosure of the company's relevant annual financial data. From 2017 to September 2023, the company also had problems with the illegal use of personal bank accounts for fund collection and payment.

There are too many to count!

The company is a typical example of a company that went public with problems. It has only been listed for four years, but it has received a lot of warning letters, regulatory letters and inquiry letters. The actual controller has received three warning letters and was included in the integrity file of the securities and futures market twice.

(Source: Weikang Pharmaceuticals' announcement on receipt of the Zhejiang Securities Regulatory Bureau's administrative supervision measures decision letter 20240419)

(Source: Weikang Pharmaceuticals' Announcement on its Reply to the Shenzhen Stock Exchange's Inquiry Letter on the 2023 Annual Report)

The actual controller misappropriated the raised funds, and the 20 million fundraising project was delayed for 3 and a half years

In 2020, the company raised nearly 730 million yuan in net funds, including 190 million yuan in over-subscription.

However, the company's capacity utilization level has been low all year round. In 2019, except for the 90% capacity utilization rate of tablets, the average capacity utilization rate of hard capsules, drip pills and soft capsules was only 56%.

(Source: Weikang Pharmaceuticals prospectus)

The reason for the low capacity utilization is that the company's extraction capacity in the production process cannot keep up.

(Source: Weikang Pharmaceuticals prospectus)

The company disclosed that 22% of the net proceeds will be used to replenish cash flow, and 63% will be used to invest in the first phase of the Pharmaceutical and Health Industry Park project - Chinese herbal medicines and extraction, R&D center, and storage center projects to enhance Chinese herbal medicine extraction production capacity.

At the same time, 3% of the net proceeds will be used to expand the marketing network to solve current problems such as uneven sales capabilities and low coverage of target terminals.

However, both projects were delayed for a long time. They were originally expected to be completed by the end of 2020, but were later postponed to the end of 2021. Finally, the big health project was delayed until the end of June 2022 to be usable. By the end of 2023, the benefits achieved were just over 8 million, far from expectations.

The expected investment for the marketing network construction project was only more than 20 million yuan, but the annual report showed that it had been postponed to July 1 this year. Every time the company postponed the project, it used the excuse that "new requirements for the marketing network layout, sales team planning and configuration have been put forward to adapt to the changes, which resulted in the project failing to meet the planned progress."

My friends, who knows, is it because they are incapable of doing it, or is there some other hidden story?

(Source: Weikang Pharmaceuticals 2023 Annual Report)

It turns out that Boss Liu no longer had the heart to run the company diligently, and had been thinking about how to "naturally" transfer the company's money to his own piggy bank. It was all because it was too easy to raise money through financing in the stock market, so what was wrong with me, Boss Liu, taking some of it?

From the fourth quarter of 2020 to 2023, Liu Zhongliang was found to have misappropriated 140 million yuan of the company's funds by falsely paying for engineering equipment, including 19.59 million yuan of raised funds, which he said were mainly used for Liu Zhongliang's (including his sister Liu Zhongjiao) external investment, borrowing from friends, and repayment of personal loans.

This resulted in the company's fixed assets and projects under construction in 2022 being overstated by more than 130 million yuan.

(Source: Tianjianshen [2024] No. 4636, the certification report on the correction of important prior period errors of Weikang Pharmaceutical)

In response, Boss Liu said that he had realized his mistake and had returned the money with interest.

(Source: Tianjianshen [2024] No. 4636, the certification report on the correction of important prior period errors of Weikang Pharmaceutical)

However, the company (actual controller) did not provide the annual auditor with further audit evidence related to the specific whereabouts of the funds, relevant loan agreements, and other matters related to the use of funds. Therefore, the accounting firm issued an audit report with a qualified opinion for the company.

Feng Yunjun was also stunned: this was discovered by the Securities Regulatory Bureau during the on-site inspection, then if it had not been discovered, wouldn’t the siphoned funds not have to be repaid?

This is too wild! Fengyunjun always believes that there is only a difference between deception and 1. There has never been an internal control system in the world that can control a boss who is all-powerful but does not follow the rules.

(Source: Tianjianshen [2024] No. 4636, the certification report on the correction of important prior period errors of Weikang Pharmaceutical)

The largest single product has a market share of less than 3%, focusing more on marketing and less on R&D

After reading this, I’m sure you are all curious about what outstanding products the company has.

The pharmaceutical sector accounts for the bulk of the company's revenue. Its products mainly include Chinese patent medicines such as Yinhuang Pills, Motherwort Soft Capsules, Motherwort Dispersible Tablets, and Western medicines such as Roxithromycin Soft Capsules. In addition, the company also operates distribution businesses such as retail chains of pharmaceutical commercial products.

Yinhuang Pills are mainly used for clearing heat, detoxifying and anti-inflammatory effects, and are used for acute and chronic tonsillitis, acute and chronic pharyngitis and upper respiratory tract infection. Roxithromycin Soft Capsules are a macrolide antibiotic product, suitable for pharyngitis and tonsillitis caused by Streptococcus pyogenes. Motherwort products have the effect of promoting blood circulation and regulating menstruation, and are products in the field of gynecology.

Among them, Yinhuang Pills is the company's largest single product, and other single products have not reached 10% of the company's revenue since 2020. According to the prospectus, the company's Yinhuang Pills revenue in 2018 was less than 90 million, and its share of the Chinese patent medicine market for throat diseases was only 2.8%.

The second is roxithromycin soft capsules. In 2018, the company's roxithromycin revenue was less than 70 million yuan. According to the prospectus, the company's market share in this type of antibiotics was 2.1% that year. During the same period, the company's motherwort product revenue was just over 100 million yuan, and its total market share of motherwort Chinese patent medicine in public medical institutions and urban retail pharmacies was 10.3%.

(Source: Prospectus)

In general, the company's main products are common drugs with relatively common indications, and the fierceness of market competition can be imagined. The company's main problems are small scale and market share, low visibility, and poor risk resistance.

(Source: Weikang Pharmaceuticals prospectus)

From the perspective of sales and R&D investment, the company has always focused on marketing and neglected R&D before going public. After going public, the company began to pay attention to the R&D of new drugs, and the R&D expense rate increased significantly, but it mainly relied on third parties to complete the R&D, that is, commissioned R&D. It is really hard to see what innovative advantages the company has in R&D.

(Source: Weikang Pharmaceuticals' Announcement on its Reply to the Shenzhen Stock Exchange's Inquiry Letter on the 2023 Annual Report)

(Source: Market Capitalization APP)

Free cash flow is always green, and ROE is falling sharply

Obviously, the factories and equipment built by the company over the years have not added value but have instead added a lot of dust, and the free cash flow has been in the green all year round.

(Source: Market Capitalization APP)

The company has been listed for four years and has achieved a cumulative net profit attributable to shareholders of 270 million yuan and a cumulative dividend of 160 million yuan, with an average cash dividend rate of 59% over the past three years. A simple calculation shows that Liu Zhongliang and Liu Zhongjiao have received a total of more than 100 million yuan.

(Source: Market Capitalization APP)

As the performance changed, the net profit margin continued to decline, the asset turnover rate decreased, and the company's ROE plummeted from 23.9% in 2019 to 1.4% in 2022, and the ROE was negative in 2023. At the same time, the company's interest-bearing debt ratio increased to 21.3% at the end of this year.

(Source: Market Capitalization APP)

Weican Pharmaceuticals’ background coincides with our stock rating, ranking last in the entire market, which is truly “well-deserved”.

(Source: Market Capitalization APP)

Disclaimer:This report (article) is an independent third-party research based on the public company attributes of listed companies and the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.). Market Capitalization strives to be objective and fair in the content and views contained in the report (article), but does not guarantee its accuracy, completeness, timeliness, etc. The information or opinions expressed in this report (article) do not constitute any investment advice, and Market Capitalization shall not bear any responsibility for any actions taken as a result of using this report.

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