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On July 24, Pianzihuang [600436.SH] released its 2024 semi-annual performance report: in the first half of this year, the company's revenue reached 5.65 billion yuan, a year-on-year increase of 11.99%; the net profit attributable to shareholders of listed companies reached 1.72 billion yuan, a year-on-year increase of 11.61%.

On the surface, the performance growth momentum seems good, but investors are not buying it. On July 25, the share price of Pien Tze Huang fluctuated greatly, falling by more than 8% at one point, and finally closed down 7.59%, with the market value evaporating by more than 10 billion yuan in a single day.

The stock price plunge is mainly due to investors' concerns about its profitability and growth capabilities. Although the semi-annual report showed a double increase in revenue and net profit, the growth rate of revenue and net profit was the lowest in the past decade. In particular, the growth rate of net profit has declined most significantly, from the highest point of 44.29% in 2012 to 11.61% in 2024.

In terms of single-quarter performance, Pien Tze Huang achieved the worst second-quarter revenue growth in the past five years. The company achieved revenue of 2.48 billion yuan in the second quarter, with the growth rate falling to single digits for the first time, at 2.58%; it achieved a net profit attributable to the parent of 745 million yuan, with a growth rate of -3.48%, the first negative growth in the past seven years.

Pien Tze Huang was once known as the "Chinese herbal medicine giant", and Pien Tze Huang tablets are its classic products. Due to shortages, purchase restrictions, and difficulty in obtaining a single tablet, the price of a tablet has risen from a few yuan to the current 760 yuan, and the stock price has soared accordingly, from a folk panacea to a hot bull stock.

However, this year's semi-annual report performance forecast has brought this "Chinese medicine giant" stock down from the altar. Is it the high price that scares off some consumers, or is it that the company is overly dependent on large single products and lacks a second growth curve?

1. Why is Pian Zai Huang so expensive?

According to research, in the late Ming Dynasty, an imperial physician came to Zhangzhou with the secret recipe of Pian Zai Huang. He used high-quality musk, bezoar, Panax notoginseng, snake gall and other precious Chinese medicinal materials to refine it into tablets, which were specially used to treat heat toxins, swelling and pain. It was commonly known as "Pian Zai Huang" among the people ("zai" is a modal particle in the Minnan dialect, and "huang" means heat toxins, swelling and pain).

In 1972, when China and Japan established diplomatic relations, Pien Tze Huang was presented as a "state gift" to Prime Minister Tanaka. It is known as one of the "Three Treasures of Fujian" along with "Oolong Tea and Shoushan Stone". There is also a saying that "there is Tong Ren Tang in the north and Pien Tze Huang in the south".

In December 1999, the company was restructured from the original Zhangzhou Pharmaceutical Factory established in 1956. In June 2003,

The company is listed on the Shanghai Stock Exchange.

In 2006, the company became one of the first batch of "Chinese time-honored brands" recognized by the Ministry of Commerce. Its core product, Pien Tze Huang, is a national first-class protected Chinese medicine variety. Its traditional production techniques have been included in the national intangible cultural heritage list. It has been at the forefront of Chinese patent medicine exports for many years and is known as the "Chinese symbol" on the "Maritime Silk Road".

The efficacy of Pien Tze Huang includes clearing away heat and detoxifying, reducing swelling and relieving pain, etc. The most eye-catching is its liver protection effect, such as being used for acute and chronic viral hepatitis caused by heat toxicity and blood stasis. In recent years, the company has focused on tumors, digestive system diseases and other diseases with clinical advantages in traditional Chinese medicine, and has continuously explored the clinical advantages of Pien Tze Huang, Angong Niuhuang Pills and other products, gradually opening the door to the tumor drug market.

In addition to the price being pushed up by its gradually "deified" efficacy, the price of raw materials involved in the product is also rising. The raw materials mainly include musk, bezoar, snake gallbladder, and Panax notoginseng. Although musk and bezoar only account for 3% and 5% of the total weight, the sum of the two costs accounts for more than 90% of the total cost.

Bezoar is an extremely scarce medicinal material. It is also used in products such as Angong Niuhuang Pills and Niuhuang Qingxin Pills. Natural bezoar comes from cow gallstones. The quantity is extremely small and the price is almost twice that of gold.

At the beginning of this year, the price of natural bezoar was once 1.8 million yuan per kilogram due to its extreme shortage. Recently, it has dropped slightly to about 1.65 million yuan per kilogram. Ten years ago, the price of natural bezoar was only 200,000 yuan per kilogram.

In order to ease the pressure brought by the rising prices of raw materials, Pien Tze Huang repeatedly raised its selling prices, which once brought about performance growth. However, this year, price increases suddenly became unfeasible.

2. Raising prices doesn’t work?

In May 2023, Pianzihuang announced that the domestic market retail price of its leading product, Pianzihuang tablets, will be increased from 590 yuan/tablet to 760 yuan/tablet, an increase of nearly 30%.

In the past 20 years, Pianzihuang has continuously adjusted its product prices due to fluctuations in raw material prices. This tactic is still quite effective when consumption upgrades.

According to Pianzihuang's reply letter to the Shanghai Stock Exchange, from 2010 to 2013, after the price increase, the sales revenue of Pianzihuang product series increased by 31.56%, 30.48%, 26.16% and 23.84% respectively.

However, after the price adjustment in 2023, the company achieved revenue of 10.059 billion yuan, a year-on-year increase of 15.69%; net profit attributable to shareholders was 2.797 billion yuan, a year-on-year increase of 13.15%.

In the current environment of weakening consumer spending power, it is difficult for price increase strategies to significantly increase revenue. While demand is sluggish, the rising cost of key raw materials has also squeezed profit margins.

Although performance seemed to have grown in 2023 and the growth momentum continued in the first quarter of 2024, the second quarter performance immediately highlighted the double blow of product price increases and raw material price increases.

3. Behind the slowdown in performance growth

(1) Growth in accounts receivable

The product price adjustment in 2023 brought a slight increase in the performance of the year, but by comparing the net cash flow from operating activities with the net profit, it can be found that the quality of the net profit is not high. Why do we say that? We need to look at it together with the growth of accounts receivable.

Net cash flow from operating activities is the difference between cash inflows and cash outflows from daily operating activities. In the past five years, most companies have had net profits higher than net cash flow from operating activities, probably because a large amount of recognized revenue was held in the form of accounts receivable, and no cash equivalent to the revenue was received.

At the end of 2023, accounts receivable were close to 912 million yuan, up 22% year-on-year; the turnover days were 29.64 days, up 1.55 days year-on-year. The increase in balance and turnover days will increase the risk of bad debt losses, and also indicate that the company may have the risk of inflating revenue and accounts receivable, so the quality of net profit is low.

(2) What else can you rely on besides core products?

In the first quarter of this year, liver disease medication products achieved revenue of approximately 1.5 billion yuan, nearly half of the total revenue, and Pian Zaihuang tablets are the core product of liver disease medications.

The company started to develop cosmetics business in 2011 and owns several brands including "Pian Zai Huang" and "Queen", which mainly focus on whitening effects. However, it has been tepid, accounting for 6% to 14% of revenue.

In 2020, Pien Tze Huang launched the Angong Niuhuang Pills product to increase its presence in the cardiovascular sector. However, in the first quarter of this year, the revenue from cardiovascular drugs business was approximately 265 million yuan, accounting for only 3% of the total revenue.

In addition, the sales gross profit margin of cardiovascular drug products is about 16%, which is extremely low compared to the 75% gross profit margin of liver disease drug products. It still has a long way to go before becoming the second core product.

4. Summary

After looking around, it is hard to find a good competitor except Pian Zai Huang Tablets, so all hopes are placed on this core product.

The increase in raw material prices has led to a squeeze on profit margins, and the company can still achieve a short-term increase in performance through a simple and crude price increase. However, the lack of a second growth curve and the increasing difficulty in making profits are the problems that need to be solved in the future.