news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

China Resources Group strikes again.

Author | Wooden Box

Editor | Xiaobai

Kunming Pharmaceutical (600422.SH), formerly known as Kunming Pharmaceutical Factory established in 1951, has been a traditional Chinese medicine company for more than 70 years.

At the same time, Kunming Traditional Chinese Medicine, a high-quality Chinese medicine platform under its umbrella, was founded in the 14th year of the Hongwu reign of Emperor Taizu of the Ming Dynasty, breaking the Guinness World Record for the world's oldest pharmaceutical company. It is a Chinese medicine brand with a history of more than 600 years, one of the five major Chinese medicine time-honored brands, and also a Chinese intangible cultural heritage protection unit.

Therefore, as a traditional Chinese medicine company, Kunming Pharmaceutical already has the most important thing - the time-honored brand "Kun Chinese Medicine 1381".

However, Fengyunjun found that Kunming Pharmaceutical's innovative research and development is actually very good, and there are many innovative drugs:

(1) In 2003, the company developed the innovative Class 1 chemical drug Panaxatriol 3,6-disuccinate sodium for injection, which is also a national engineering project; (2) Currently, a Class 1 drug for ischemic stroke is in Phase II clinical trials, which is also independently developed by the company; (3) A Class 1 innovative drug for isocitrate dehydrogenase-1 (IDH1) gene mutation is in Phase I clinical trials. …

As a time-honored brand of traditional Chinese medicine, it challenges itself to develop Class 1 innovative drugs and at the same time internationalizes its artemisinin products and sells them abroad. This really refreshed Fengyunjun's three views!

Rich product matrix: herbal medicine + traditional Chinese medicine + chemical medicine

The business of Kunming Pharmaceutical Group can be generally divided into two parts: pharmaceutical distribution and pharmaceutical manufacturing, with operating income of 7.54 billion in 2023:

(1) The revenue from pharmaceutical distribution was RMB 3.321 billion, accounting for 44% of the total. The gross profit margin of this segment was relatively low, at only 14.49%; (2) The revenue from pharmaceutical manufacturing was RMB 4.22 billion, accounting for 56% of the total. According to the types, it was divided into oral preparations of RMB 3.054 billion and injections of RMB 1.058 billion. The gross profit margins of these two segments were relatively high, at 68.09% and 83.39% respectively.

(Operating income composition, 2023)

Fengyunjun believes that Kunming Pharmaceutical Group’s pharmaceutical manufacturing business can be divided into three categories: “herbal medicine, traditional Chinese medicine, and chemical medicine”, which will make it easier to understand its business.

01Herbal medicine

Relying on Yunnan's herbal plant resources, Kunming Pharmaceutical Group actually has more than 40 new natural herbal medicine products that are advanced at home and abroad, but the most influential ones are Sankecao's "Panasonic notoginseng, Gastrodia elata, and Artemisia annua".

Kunming Pharmaceutical Group has done a lot of drug development around these three herbs. For example, the Panax notoginseng product is "Xuesetong" for treating cardiovascular and cerebrovascular diseases, the artemisinin product is "artemether" for treating malaria, and the Gastrodia elata product is "Gastrodin" for treating neurological diseases.

Kunming Pharmaceutical pays special attention to the "Xuesetong" of Panax notoginseng, which is also the product with the highest revenue. The product types also cover oral and injection:

(1) Oral preparations include Xuesetong soft capsules, Xuesetong tablets, Xuesetong granules and Xuesetong pills; (2) Injectable preparations include Xuesetong injection (lyophilized powder) and Xuesetong injection.

(Xuesetong series products, Minsheng Securities)

As for artemisinin products, it has become one of the well-known Chinese antimalarial drug brands in Africa and the most exported product. In 2023, Cotai tablets passed the pre-certification of the World Health Organization and were included in the procurement scope of international organizations and public hospitals.

(Data source: Market Capitalization)

In addition to artemisinin products, Panax notoginseng-related products have also begun to be sold abroad.

(Internationalization in 2023)

02Traditional Chinese Medicine

Traditional Chinese medicine includes:

(1) Kunming Traditional Chinese Medicine's fine Chinese medicine category covers multiple clinical treatment areas. It has core products such as Shenling Jianpiwei Granules, Shugan Granules, and Xiangsha Pingwei Granules, and is also cultivating potential and specialty products such as Qingfei Huatan Pills, Jinhua Xiaozao Pills, and Kouyan Qing Pills;

(Kunming Chinese Medicine 1381 Fine Chinese Medicine Series, Minsheng Securities)

(2) Specialty botanical medicines from Kunming Pharmaceutical, such as colchicine tablets, aconitine soft capsules, and denguenaotong capsules;

(3) Banner Pharmaceuticals’ Zhuzigantai Capsules, Kidney Tea Bags, Shuangjiang Stomachache Pills and other ethnic medicines.

03Chemicals

Chemical drugs include cephalosporins, penicillins, etc., which will generate revenue of approximately 600 million yuan in 2023, accounting for about 13% of pharmaceutical manufacturing.

(2023 operating income composition)

Although traditional Chinese medicine is Kunming Pharmaceutical Group's advantage, the company also attaches great importance to chemical drugs, with indications covering solid tumors, immunity, fatty liver, etc., including two Class 1 innovative drugs.

(Some major R&D projects, 2023 annual report)

In 2023, Kunming Pharmaceutical Group's products can be divided into the following categories based on downstream therapeutic areas:

(1) The revenue of cardiovascular products was the highest, RMB 2.078 billion, mainly including the Sanqi (Xuesetong) series and the Gastrodia elata system, and the gross profit margin was also the highest, at 78.08%; (2) The revenue of orthopedics products was RMB 218 million, including sodium hyaluronate injection, alfacalcidol soft capsules, etc.; (3) The revenue of antimalarial products was RMB 0.91 billion, mainly artemether; (4) The revenue of gynecology products was RMB 332 million, including Shugan granules; (5) The revenue of digestive products was RMB 535 million, including Shenling Jianpiwei granules, Xiangsha Pingwei granules, etc.; ...

(Operating income composition, 2023)

(Product composition, Minsheng Securities research report in March 2024)

Reinvention of China Resources Sanjiu01China Resources’ entry

In December 2022, China Resources Sanjiu (000999.SZ) acquired a 28% controlling stake in Kunming Pharmaceutical Group by acquiring 3.3355 million shares of Kunming Pharmaceutical Group held by Huali Group Co., Ltd. and 209 million shares of Kunming Pharmaceutical Group held by Huali Pharmaceutical Group Co., Ltd.

(2023 Annual Report)

China Resources Sanjiu, formerly known as Sanjiu Pharmaceutical, became one of China Resources Pharmaceutical's important capital operation platforms after being acquired by China Resources in 2008. It has been making continuous acquisitions since then. For specific information, you can search for research reports on "China Resources Sanjiu" on the Market Capitalization Storm App.

(Market Value App)

In the A-share market, China Resources has also been frequently involved in mergers and acquisitions, not only acquiring Boya Bio and Dong-E E-Jiao, but also Kunming Pharmaceutical Group.

(Listed companies controlled by China Resources at the end of 2023)

After the controlling shareholder changed from Huali Pharmaceutical to China Resources Sanjiu in 2023, China Resources Sanjiu began to fully intervene in management:

(1) In December 2022, Wang Siyang, former chairman of Kunming Pharmaceutical Group, three directors and the chief financial officer resigned; (2) In January 2023, Qiu Huawei, Yan Wei, Guo Ting and Liang Zheng, who were recommended by China Resources Sanjiu, were appointed as members of the company's tenth board of directors. Qiu Huawei is also the chairman of China Resources Sanjiu and is currently the chairman of Kunming Pharmaceutical Group. Yan Wei was previously the general manager of the OTC business unit and the general manager of the rehabilitation and chronic disease business unit of the Pharmaceutical Co., Ltd. and is now the vice chairman and president; (3) Mr. Zhong Jiang and Mr. Shao Jinfeng, who were recommended by China Resources Sanjiu, were added as members of the company's tenth board of supervisors; (4) In June 2023, Sun Zhen, a former senior executive of China Resources Sanjiu, was appointed as the company's vice president and Sun Zhiqiang as the company's chief financial officer.

02Reshaping values, business, and organization

After China Resources Sanjiu officially entered Kunming Pharmaceutical Group in 2023, it changed and reshaped the company's values, business, organization, and spirit.

The biggest change is the positioning of Kunming Pharmaceutical Group.

In the past, Kunming Pharmaceutical Group had no vision. Its strategic positioning was to become an international pharmaceutical provider focusing on cardiovascular and chronic diseases, and to prepare to enter the precision medical service ecosystem.

(2017 Annual Report)

The current vision is to be “the leader in the silver health industry”, and the strategy is to “inherit fine Chinese medicine, focus on the Panax notoginseng industry chain, focus on elderly health, expand the field of chronic disease management, and become the first silver health stock”!

(2023 Annual Report)

Instead, China Resources has a clear understanding of the essence of its business. The core of traditional Chinese medicine is its brand, while the core of Western medicine is academic promotion.

Regarding the pharmaceutical distribution (pharmaceutical commerce) business, Kunming Pharmaceutical Group was previously positioned as the leader in the Yunnan region.

(2017 Annual Report)

The current goal is to build a specialty pharmaceutical commercial company with front-end service capabilities in the elderly health and traditional Chinese medicine industry chain.

(2023 Annual Report)

In other words, the emphasis used to be on the coverage of the pharmaceutical business network, but now the focus is on differentiated businesses (elderly health and traditional Chinese medicine) to serve the overall company strategy.

Since China Resources Sanjiu has strong commercial channels, it integrated and optimized the sales channels of Kunming Pharmaceutical. Previously, there were 7 business units.

(2017)

Now there are three major divisions:

(1) “Kunming Chinese Medicine 1381” Division: Focusing on the field of high-quality Chinese medicine, promoting the rapid development of the company’s high-quality Chinese medicine business. Specific products include Shenling Jianpiwei Granules, Shugan Granules, Xiangsha Pingwei Granules, Qingfei Huatan Pills and other high-quality Chinese medicines. (2) “KPC·1951” Division: Inheriting the deep cultivation of Kunming Pharmaceutical in the field of core botanical medicine for more than 70 years, it will focus on serious medical products in the hospital, laying the foundation for the company to continue to consolidate its advantages in the treatment fields of cardiovascular and cerebrovascular diseases, bone rheumatism, kidney diseases, CNS, etc., and expand the field of elderly health industry. Specific products include Xuesetong for injection (lyophilized), Gastrodia elata injection, sodium hyaluronate injection, aconitine A soft capsules and other serious medical products. (3) Panax notoginseng oral preparations "777" Division: The Division focuses on Panax notoginseng oral preparations with the core goal of building a benchmark enterprise for the entire Panax notoginseng industry chain, driving Yunnan's authentic medicinal material Panax notoginseng to go abroad and promoting the international dissemination of Chinese medicine culture. Specific products include Xuesetong soft capsules and other Xuesetong series oral products and other specialty Panax notoginseng oral preparations.

China Resources Sanjiu is aware of the general background of centralized procurement of traditional Chinese medicines. In terms of specific products, it also encourages the company to actively participate in centralized procurement to seize market share by increasing "quantity".

(Kunming Pharmaceutical Group's winning bid for centralized procurement in 2023)

Reshaping: reducing costs and increasing efficiency

The core manifestation of China Resources Sanjiu's management is still financial performance. In addition to actively participating in centralized procurement, it not only needs to reduce costs and increase efficiency to enhance cost advantages, but also innovate in research and development and expand the out-of-hospital market to gain market share.

Judging from the costs and expenses of Kunming Pharmaceutical Group in 2023, the most intuitive thing is that operating costs have decreased more than operating income, while administrative expenses have dropped significantly by 17.29%.

(Financial data for 2023)

Therefore, the revenue in 2023 and Q1 2024 will decrease by 7% and 3% year-on-year respectively.

(Market Value APP-My Stock Big Data)

However, the non-GAAP net profits in 2023 and Q1 2024 were 335 million and 110 million, respectively, up 33.45% and 9.11% year-on-year.

(Market Value APP-My Stock Big Data)

The net profit margins in 2023 and Q1 2024 were 5.8% and 6.4% respectively, a significant increase from 4.6% in 2022.

(Market Value APP-My Stock Big Data)

The return on shareholders has also increased significantly, with ROE reaching 6.5% in 2023 and 5.1% in 2022.

(Market Value APP-My Stock Big Data)

In fact, Kunming Pharmaceutical Group’s shareholder returns were also good in the past. Since its listing, it has distributed dividends totaling 1.7 billion yuan, exceeding the total fundraising of 1.66 billion yuan (409 million yuan in IPO in 2000 + 1.25 billion yuan in private placement in 2015).

In 2023, Kunming Pharmaceutical Group's R&D expenditure was 125 million yuan (accounting for 3% of pharmaceutical manufacturing revenue), slightly more than 124 million yuan in 2022, with increased research and development of innovative drugs.

(2023 capitalized development expenditure)

Competition after acquisition

After China Resources Sanjiu took control of Kunming Pharmaceutical Group, it faced the problem of competition from the same industry. The solution was to let Kunming Pharmaceutical Group acquire China Resources Shenghuo, a subsidiary of China Resources Sanjiu, but only acquire 51% of the shares.

(China Resources Shenghuo's equity structure)

China Resources Shenghuo’s main product is “Lixuwang” Xuesaitong soft capsules, while Kunming Pharmaceutical also has Xuesaitong capsules, named “Luotai”.

This acquisition requires 1.791 billion in cash for 51% of China Resources Holy Fire's equity, with a corresponding valuation of 3.51 billion. In 2023, China Resources Holy Fire's operating income will be 751 million and its net profit will be 200 million, with an acquisition PE of 17.6 times.

(Financial situation of China Resources Shenghuo, in ten thousand yuan)

The core assets of Kunming Pharmaceutical Group are its time-honored brands of traditional Chinese medicine, characteristic herbal medicines and Chinese medicine varieties. This is also the reason why China Resources Sanjiu chose Kunming Pharmaceutical Group. China Resources Sanjiu itself has strong brand operation capabilities.

As a traditional Chinese medicine company, Kunming Pharmaceutical has also made a lot of achievements in internationalization and innovative drug research and development, but the proportion of chemical drug revenue is still small, and traditional Chinese medicine is still the basic plate, especially Xuesetong, a Panax notoginseng-type drug.

After China Resources Sanjiu took over the management, it reshaped all aspects of the company. After 2023, the company's profitability improved. It also added high-quality assets, further enhancing Kunming Pharmaceutical Group's market share and profitability, a win-win situation!

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.

The above content is original from Market Capitalization App

Unauthorized reproduction will be prosecuted