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Author | Wen Shijun

Editor | Wang Weikai

Produced by | Prism·Tencent Xiaoman Studio

China ResourcesTasly, the integration of the two pharmaceutical giants is underway.

On August 4, China Resources Pharmaceutical Group (3320.HK) and Tasly Group signed a technology and industry strategic cooperation agreement.China Resources PharmaceuticalUnderChina Resources Sanjiu(000999.SZ) signed a share transfer agreement with Tasly Group and six parties acting in concert to acquire 28% of the shares of listed company Tasly (600535.SH) at a price of RMB 14.85 per share, for a total of RMB 6.212 billion.

The “Management Measures for Acquisition of Listed Companies” stipulates that if a company acquires more than 30% of a listed company’s shares, it must make an offer to all shareholders and conduct an open “tender offer”. The current transaction arrangement for China Resources’ acquisition of 28% of the shares has a relatively simplified process and cycle.

After the transaction is completed, China Resources Sanjiu will become the largest shareholder of Tasly. The actual controller of the latter will also change from the Yan family, the founder of Tasly, to the central enterprise China Resources Group (China Resources).

Calculated based on the price in the share transfer agreement, the overall valuation of Tasly in this transaction is 22.186 billion yuan. On July 31, Tasly announced a suspension of trading due to equity and control transfer. On the day of the suspension, Tasly closed at 14.08 yuan, with a total market value of 21.035 billion yuan.

Before the suspension, Tasly's stock price had risen for five consecutive trading days, with a cumulative increase of 11.13%. After the news of China Resources' acquisition was made public, Tasly's stock price continued to open high on August 5, the day of resumption of trading, with a single-day increase of 5.68%. This is the stock market's response to this record-breaking acquisition by China Resources Sanjiu.

Of course, while further stirring up the competitive landscape of the pharmaceutical industry, especially the traditional Chinese medicine industry, this merger and acquisition also allowed China Resources Group, with an asset size of over 2.6 trillion yuan, to gain another foothold in its "big health" industry layout.

The snake is one of the typical images representing medicine and pharmacy. This tradition originated from ancient Greek mythology, in which Asclepius (Ασκληπιός), the son of Apollo, the god of medicine, held a staff wrapped with a snake. Today, the snake staff pattern can be seen in the logos of many medical-related departments, organizations, hospitals, and colleges at home and abroad.

If we use a snake as an analogy, today's China Resources has become a giant python in the pharmaceutical industry.

In addition to Tasly, which is about to "join", the pharmaceutical A-share and H-share listed companies that will be incorporated into the China Resources system through different shareholding relationships include:Dong'e Ejiao（000423.SZ）、China Resources Double Crane(600062.SH), China Resources Sanjiu (000999.SZ),China Resources Medical(1515.HK), China Resources Pharmaceutical (3320.HK),Jiangzhong Pharmaceutical（600750.SH）、Kunming Pharmaceutical Group(600422.SH), Boya Bio (300294.SZ) and many other companies.

It is easy to forget that this 86-year-old company is actually a "latecomer". China Resources officially entered the pharmaceutical industry in 2004.

Shareholdings of the largest shareholders of A-share pharmaceutical companies of China Resources. Among them, the largest shareholder of China Resources Double Crane is Beijing Pharmaceutical Group, whose largest shareholder is China Resources Pharmaceutical Investment Co., Ltd. Image source: drawn by the author, data as of the latest reporting period (MRQ), extracted from Wind.

The start of entering the pharmaceutical industry was not smooth

How big is China Resources? Official data shows that it has 3,077 physical enterprises and about 390,000 employees. At the end of 2023, the total asset size will exceed 2.6 trillion yuan, which is at the same level as Hong Kong's GDP in the same year.

How much money does China Resources make? In 2023, its operating income will be 893.2 billion yuan, and its total profit will be 88.1 billion yuan, which means it can earn 2.4 "small goals" every day on average. If listed companies are used as a reference, China Resources' total profit in 2023 will rank 14th among more than 5,300 A-share listed companies, higher than energy giants such as Sinopec and China Shenhua.

And the growth is still going on. The China Resources Group's 2024 first half work conference held on July 29 showed that in the first half of 2024, operating income was 405.5 billion yuan, a year-on-year increase of 2.2%, and total profit was 46.9 billion yuan, a year-on-year increase of 3.3%.

On the latest Fortune Global 500 list released on August 5, China Resources ranked 72nd in the world and 23rd in China. Among the Chinese companies ranked ahead of China Resources, none of them has taken medicine as one of its core business sectors and has controlling or participating shares in a series of listed pharmaceutical companies.

China Resources' large-scale mergers and acquisitions in the pharmaceutical industry began at the beginning of this century.

Not long ago, Ning Gaoning, one of the key figures leading China Resources' transformation and former general manager of China Resources, talked about the core logic of China Resources' mergers and acquisitions in an open dialogue with Wang Boming, the former editor-in-chief of Caijing Magazine:

"China Resources' so-called mergers and acquisitions may seem dazzling, but in fact, they are quite industrial in nature - it should be said that there is a thought process of integrating industries. If I were in this industry, I would definitely integrate this industry."

What is China Resources' "integration"? In Ning Gaoning's view, integration means quickly becoming a leading player in the industry through mergers and acquisitions: "There are too many participants in the industry, and the competition is chaotic. There is no leader, and no one has a large market share, and the competitiveness is not strong. Once I come in, I must occupy a certain market share and must be ranked first in the industry."

In fact, China Resources’ core industries, including beer, retail, medicine, beverages, real estate, and building materials, all took the shortcut of capital integration in their inception and growth: backed by the credit advantage of state-owned assets and relying on the Hong Kong capital market, targeting key industries in the Mainland, and once they are optimistic about a particular track, they will engage in large-scale mergers and acquisitions to quickly occupy the top market position in the industry, consolidate and increase profits, and thus influence or even control the direction of industry development.

However, when China Resources was "integrating" the pharmaceutical industry, things were not so smooth at the beginning.

China Resources’ earliest target was located in Shenyang.Northeast PharmaceuticalNortheast China is a traditional pharmaceutical industry concentration area, and China Resources has already landed projects such as Snow Beer and Sanyo Compressor in Shenyang, and the local government has a positive attitude.

In March 2001, China Resources and Northeast Pharmaceutical signed a letter of intent to establish a joint venture, with China Resources investing RMB 1.5 billion to hold a 51% stake. However, the two parties subsequently had major financial disagreements, and the management of Northeast Pharmaceutical at the time also had different opinions, so the cooperation ultimately failed to materialize.

China Resources started to move south to Yunnan again. In early 2002,Yunnan BaiyaoYunnan Pharmaceutical Group, the parent company of China Resources Pharmaceutical Group, began to promote property rights reform and introduce strategic investment. Yunnan has a unique climate and rich animal and plant medicinal resources. China Resources was determined to win Yunnan from the beginning and hoped to build it into a base for the pharmaceutical industry.

But China Resources is not the only one that has set its sights on Yunnan Baiyao. While China Resources is pushing for a reverse takeover of Yunnan Pharmaceutical Group through financing in the Hong Kong capital market, Huayuan Group and Sinopharm Group, also central enterprises, have also begun to compete.

During this period, China Resources also approached Shandong Lukang, North China Pharmaceutical and more than a dozen other companies for investment, mergers and acquisitions, but nothing came of it. On September 5, 2004, China Pharmaceutical Industry Co., Ltd. (a joint venture between Sinopharm Group and Xi'an Dongsheng Group) signed a "marriage" with Yunnan Pharmaceutical Group, and China Resources had to withdraw by agreement.

In a later official description, China Resources admitted that "the implementation of the big pharmaceutical strategy encountered difficulties" at that time.

At the critical moment, Dong'e Ejiao helped China Resources save its "face". In the same month, on September 28, 2004, China Resources reached an agreement with the then Shandong Liaocheng State-owned Assets Administration Bureau to jointly invest in the establishment of China Resources Dong'e Ejiao Co., Ltd. The new company inherited Liaocheng State-owned Assets' position as the largest shareholder of the listed company Dong'e Ejiao. China Resources invested 230 million yuan and held 51% of the shares of the new company, thereby indirectly controlling Dong'e Ejiao.

The negotiation on China Resources' acquisition of Dong'e Ejiao had already begun a year before the agreement was reached. In 2000, China Resources successfully acquired Liaocheng Cotton Textile Factory and had cooperated with Liaocheng. Perhaps because of the experience accumulated from previous setbacks, China Resources "bypassed" Dong'e Ejiao in this acquisition and reached a merger agreement directly with the controlling shareholder Liaocheng State-owned Assets.

This is the real strategic starting point of China Resources Pharmaceutical’s current business landscape.

Reorganized two central enterprises and continued to buy in recent years

A more important integration followed, with China Resources' pharmaceutical sector taking over two central pharmaceutical enterprises through restructuring, which became the basis for China Resources to make pharmaceutical business one of its main businesses.

In 2005, Huayuan Group, a central enterprise that once competed for the control of Yunnan Baiyao, began to fall into a liquidity crisis, with a debt ratio of more than 80%. Huayuan's crisis was directly related to its radical expansion strategy.

Before the crisis broke out, Huayuan Group, founded in Pudong New Area in 1992, had relied on the triple backgrounds of the former Ministry of Textiles, the former Ministry of Foreign Trade and the Bank of Communications, and through capital expansion, had become one of China's largest textile and pharmaceutical enterprise groups. It holds 40% of the shares of Shanghai Pharmaceutical Group and 50% of the shares of Beijing Pharmaceutical Group, and has seven listed entities including Huayuan Pharmaceutical and Kaima B.

This was the first case of a central enterprise directly under the State-owned Assets Supervision and Administration Commission of the State Council to undergo a "hotline restructuring" when a debt crisis broke out. In December 2005, during a central enterprise work conference held by the State-owned Assets Supervision and Administration Commission of the State Council, the then president of Huayuan Group and the then general manager of China Resources came into contact, and Huayuan hoped that China Resources would participate in the restructuring.

After China Chengtong, which had intervened in the restructuring earlier, withdrew due to funding and other issues, China Resources, together with Dinghui, which originated from the direct investment department of CICC, began to intervene in the restructuring of Huayuan in 2006. Huayuan's core assets, pharmaceuticals and textiles, were both strategic priorities of China Resources at the time.

In 2007, the State-owned Assets Supervision and Administration Commission of the State Council once again designated China Resources to restructure the troubled Sanjiu Group. Sanjiu Group is also a central enterprise for which the State-owned Assets Supervision and Administration Commission of the State Council performs the duties of an investor. It is well-known throughout the country for its "999" brand of traditional Chinese medicine. After the restructuring, at the end of that year, Sanjiu Group was merged into China Resources and became a wholly-owned subsidiary, China Resources Sanjiu, and the list of central enterprises was reduced by one more.

Of course, if you want to take over these distressed assets, you need not only funds, but also to maneuver between numerous debtors and central and local shareholders. However, with the "legacy" of Sanjiu and Huayuan, two central enterprises, China Resources was able to set up China Resources Pharmaceutical Group (China Resources Pharmaceutical Group Co., Ltd.) in Hong Kong in 2007. These assets being disposed of are enough to form the framework for China Resources to build a large central enterprise pharmaceutical platform.

If China Resources wanted to acquire the 50% stake in Beijing Pharmaceutical Group, which originally belonged to Huayuan Group, it had to reach an agreement with another major shareholder, Beijing State-owned Assets. The matter was delayed until around 2011, when the plan was finally implemented: China Resources Pharmaceutical Group actually controlled 100% of Beijing Pharmaceutical Group, and Beijing State-owned Assets became the second largest shareholder of China Resources Pharmaceutical Group with a 28% stake. At the same time, Beijing also became the headquarters of China Resources Pharmaceutical's mainland business outside of Hong Kong.

After this, Shuanghe (formerly Beijing Pharmaceutical Factory, later renamed China Resources Shuanghe), Zizhu (formerly Beijing Pharmaceutical Factory No. 3, later renamed China Resources Zizhu), Wandong (formerly Beijing Medical Instrument Factory, later renamed China Resources Wandong) and other companies were completely incorporated into the China Resources system. However, in 2015, China Resources withdrew from China Resources Wandong (600055.SH, now known as Wandong Medical), and sold all 51.51% of the shares of this medical device listed company to Yuyue Technology controlled by the Wu family.

In 2016, China Resources Pharmaceutical Group (3320.HK), the core entity of China Resources Pharmaceutical Industry, went public on the Hong Kong Stock Exchange. According to the prospectus, China Resources Pharmaceutical Group is the second largest pharmaceutical manufacturer, the largest over-the-counter drug manufacturer, and the second largest pharmaceutical distributor in China in terms of revenue in 2015.

After entering the capital market, the pace of "buying, buying, buying" in the China Resources Pharmaceutical sector seems to have accelerated.

Based on different entities, the track has a certain emphasis. For example, the acquisitions made through the subsidiary China Resources Double Crane focus on the chemical drug industry chain and the track of special diseases. Including the acquisition of Hainan Sinochem Pharmaceutical (2017), Xiangzhong Pharmaceutical (2018), Dongying Tiandong (2020), Zhejiang Paipeptide (2021), Shenzhou Biological (2022), Tianan Pharmaceutical (2023), etc.

When necessary, China Resources Pharmaceutical Group will also "personally" take action. In 2018, China Resources Pharmaceutical Group signed a strategic cooperation agreement with the Jiangxi Provincial Government to reorganize Jiangzhong Group. In 2019, Jiangzhong Group "transformed" into China Resources Jiangzhong, and the national brand Jiangzhong was incorporated into the China Resources system. In 2021, China Resources Jiangzhong also started its own acquisition, buying a 51% stake in Hayes Pharmaceuticals, which also focuses on gastrointestinal drugs. In 2023, China Resources again increased its stake in China Resources Jiangzhong by approximately 9.21% to 60.55% at a price of 517 million yuan.

The mergers and acquisitions carried out by China Resources Sanjiu are more focused on traditional Chinese medicine and nutritional supplements: such as the traditional Chinese medicine company Jilin Jinfukang (2017), the dietary health supplement company Shandong Shenghai (2017), the children's zinc and calcium supplement company Auno Pharmaceutical (2019), and the traditional Chinese medicine preparation company Anhui Runfurong Pharmaceutical (2020).

In 2022, China Resources Sanjiu acquired 28% of Kunming Pharmaceutical Group for more than 2.9 billion yuan in cash. After nearly 20 years, it "returned" to Yunnan and acquired this listed company that manufactures botanical medicines. In 2023, it concentrated on restructuring Kunming Pharmaceutical Group. After a period of "quiet" in mergers and acquisitions, in August 2024, China Resources Sanjiu took out more than two years' profits - 6.212 billion yuan, and took over Tianjin's largest private pharmaceutical company Tasly.

As of June 30, 2024, China Resources Sanjiu's equity structure. Image source: company announcement.

The "Red Chip Morgan" forced out

China Resources is one of the oldest central enterprises. It was established in Hong Kong in 1938 and was formerly known as "Lianhe Hang" and "Lianhe Import and Export Company". In 1948, Lianhe Import and Export Company was reorganized into "China Resources Company".

Since its inception, one of China Resources' core missions has been to utilize Hong Kong's unique location and environment to conduct international trade.

Since the early 1950s, China Resources has become the general agent for domestic import and export companies in Hong Kong, Macao and other countries around the world, and is one of the earliest and most important windows for New China to conduct foreign trade. At its peak, China Resources alone accounted for 30% of the country's total foreign trade.

In 1983, China Resources held its 35th anniversary and the completion ceremony of China Resources Building. At that time, the newly completed China Resources Building was the tallest building in Hong Kong. Image source: China Resources Magazine

Starting in 1979, the state approved Guangdong, Fujian, Beijing, Tianjin, and Shanghai to conduct import and export trade without going through the Ministry of Foreign Trade. By the 1980s, special economic zones, coastal open cities, and economic and technological development zones were gradually established. At the same time, with the increase in the number of countries that have established diplomatic relations with China, many commodities no longer need to be re-exported in Hong Kong through China Resources.

China Resources has traditionally relied on policy-based agents and even a business model based on franchised foreign trade rights. However, as reform and opening up continued to deepen, its foundation began to shake.

In particular, in the 1990s, the country entered a period of market economic development. In 1994, the foreign trade operation right was officially changed from an approval system to a registration and approval system. In that year, 52 provincial economic development zones were approved for establishment. By 1996, "every county had foreign trade."

At the same time, the wave of globalization was rising, and China's negotiations for joining the General Agreement on Tariffs and Trade and the World Trade Organization (WTO) were also ongoing. By this time, China Resources' traditional trade model was naturally unsustainable. In fact, many traditional foreign trade companies "collapsed" at this stage.

Under the pressure of the situation, China Resources completely transformed. In 1998, China Resources terminated all import and export businesses in Hong Kong and overseas within three years, retaining only a part of the production and terminal consumption businesses.

Of course, China Resources' transformation has some characteristics that others do not have: it understands the national conditions, has the status of a state-owned enterprise and a central enterprise, and because it is located in Hong Kong, the financial center of Asia, it has earlier exposure to financial tools such as mergers and acquisitions, financing, and investment.

The book "Red China Resources" written by China Resources officially summarized a series of large-scale mergers and acquisitions promoted by China Resources after ending its main foreign trade business:

"In 1998, China Resources' investment in the mainland shifted from equity participation and new construction to mergers and acquisitions and integration. The first mergers and acquisitions were in the supermarket, beer, textile and other fields. Since 2000, China Resources has organized a series of mergers and acquisitions and restructurings around supermarkets, beer, textiles, electricity, microelectronics, cement, gas, chemicals, pharmaceuticals, purified water and other fields."

"This move was called 'Red Chip Morgan' by the industry at the time," the book said.