The Sinopharm giant is leading a consortium to acquire China Traditional Chinese Medicine (China TCM), which is listed in Hong Kong, in a 2.7 billion euro operation. It already owns 32%, and along with the other two major shareholders, which add up to another 18%, will offer at least $ 5.10 Hong Kong per share, a 27% cousin. The operation values the company at more than 7 times the ebitda forecast for 2021.
The purchase of the rest could give a boost to the state-owned company, of 5.8 billion euros. Changes in drug procurement and pricing policies have reduced the margins of wholesalers and retailers such as Sinopharm. New players, such as online JD Health, have intensified competition. In January-June, China TCM achieved a net profit margin of 17%, compared to 2.4% for Sinopharm.
In addition, the traditional Chinese medicine market looks attractive. It is controversial: many products have not undergone rigorous testing and have an unscientific passion for endangered animals. But sales in the country are expected to reach 26 billion euros in 2024, compared to 13 billion in 2017, according to Daxue Consulting.
Xi Jinping once referred to traditional medicine as a treasure of Chinese civilization, but the government has gone beyond rhetoric: it is included alongside Western medicines in the national insurance plan. They were also promoted for Covid, and a bill has proposed criminalizing criticism.
For Sinopharm, putting it back on the stock market can produce long-term benefits. Valuations on the mainland can be much richer than in Hong Kong. For example, Zhangzhou Pientzehuang Pharmaceutical, which is listed in Shanghai, has a value of 24 billion. It is known for a treatment that, according to the company, was formulated 500 years ago, made from secretions of deer navel and snake gall. The stock is trading at more than 60 times the expected EBITDA for this year. This would be even better for the health of the buyer.
The authors are columnists of Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gómez Baix, Is the responsibility of Five Days