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Jun 20, 2023

Sinopharm's second Chinese herb shot is potent

Employees of a pharmaceutical company prepare traditional Chinese medicine (TCM) decoctions for patients of the coronavirus disease (COVID-19), in Shanghai, China April 18, 2022. Picture taken April

Employees of a pharmaceutical company prepare traditional Chinese medicine (TCM) decoctions for patients of the coronavirus disease (COVID-19), in Shanghai, China April 18, 2022. Picture taken April 18, 2022. China Daily via REUTERS Acquire Licensing Rights

HONG KONG, Dec 8 (Reuters Breakingviews) - Herbal remedies usually take a while to work. In Sinopharm's (1099.HK) case, two years may be enough. The Chinese pharmaceutical giant may revive a buyout of its 32%-owned traditional medicine arm listed in Hong Kong. A growing disconnect between the Asian hub’s markets and those on the mainland allows for the buyer to pay a bigger premium and still hope for lucrative relisting closer to home.

The state-backed group's latest bid for China Traditional Chinese Medicine (0570.HK) looks generous. Sinopharm is considering making a HK$6 per share bid, according to Bloomberg. It values the target's equity at around HK$30 billion ($3.9 billion), a 55% premium to the stock's one-month average. That's two-thirds more than the premium Reuters said it was mulling in January 2021.

Since then, the target's shares have fallen 12%. Hong Kong's dismal markets are one factor, with the benchmark Hang Seng Composite Index (.HSCI) down by even more. Another drag is China TCM's own deteriorating health. Despite Beijing's strong support for the sector, new rules aimed at standardising herbal granules – a big part of the company’s business - combined with intense competition and price-cuts have taken a toll: the company's first-half earnings slumped 58% from a year earlier, to 422 million yuan ($60.4 million).

China TCM's woes are a stark contrast to mainland-listed rivals, including some with heavy exposure to drugs presented as fixes to Covid-19. With Beijing’s endorsement, central health authorities have enthusiastically promoted traditional Chinese medicine like popular flu remedy Lianhua Qingwen as effective against the virus - despite a lack of publicly-available and reliable medical data. Shijiazhuang Yiling Pharmaceutical (002603.SZ), the maker of that treatment, for example, has seen its shares in Shenzhen more than double since 2021; its enterprise now trades at over 30 times forecast 2023 EBITDA, per Refinitiv.

Assuming some of that enthusiasm can rub off on China TCM, that makes Sinopharm's latest offer look like a steal. The deal pegs the former’s enterprise at an undemanding 8.5 times expected 2023 EBITDA. Over the longer term, its business is also expected to recover, with 2024 earnings forecast to rise 15%, based on the average analyst forecast on Refinitiv. A relisting in Shanghai or Shenzhen could reinvigorate both the company and Sinopharm.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Sinopharm is considering reviving a bid for China Traditional Chinese Medicine Holdings, Bloomberg reported on Dec. 7, citing people familiar with the matter.

Sinopharm, which owns 32% of China TCM, may offer HK$6 a share to buy the rest of the company it does not already own, a 59% premium to the stock's closing price on Dec. 7. That would value the China TCM's equity at HK$30.2 billion ($3.9 billion).

In January 2021, Reuters reported that a consortium led by Sinopharm planned to take China TCM private. In August the same year, China TCM announced Sinopharm had decided not to proceed with a deal.

China TCM's stock rose 20% to HK$4.52 on Dec. 8, and Sinopharm's rose 1.5% to HK$20.30.

Editing by Una Galani and Thomas Shum

Our Standards: The Thomson Reuters Trust Principles.

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.