With a history of more than 300 years, the medical facility unit of one of China’s oldest and most well-known pharmacy operators has applied for listing in Hong Kong
The central theses:
- Tong Ren Tang Healthcare has applied for listing in Hong Kong and reported that its revenue has nearly doubled from 470 million yuan in 2021 to 890 million yuan last year.
- The company, one of the oldest providers of traditional Chinese medicine, said goodwill accounted for 27.2% of its net assets last year.
By Lee Shih Ta
Another positive for the modern Chinese healthcare sector is that it offers healthy medicine to a much older group of reputable institutions – some with centuries of history – that are engaged in the sale of traditional Chinese medicine (TCM).
Tong Ren Tang, arguably China’s most prestigious TCM company, has led a merger and acquisition wave that has swept the Chinese medicine industry with a wave of acquisitions to build a modern healthcare kingdom based on ancient Chinese medicine. Now the company is extending its reach further into the global capital market by recently filing for an IPO of its Hong Kong subsidiary. Beijing Tong Ren Tang Healthcare Investment Co. Ltd.which operates a chain of hospitals, clinics and other medical facilities.
The history of Tong Ren Tang dates back over 300 years to 1665, the eighth year of the reign of the Kangxi Emperor of the Qing Dynasty, when imperial physician Yue Xianyang left his post to open the first Tong Ren Tang Pharmacy in Beijing. The outlet was known for its uncompromising dedication to quality, regardless of time and cost, in the labor-intensive and complex process of producing traditional medicines. Later, the Qing Emperor Yongzheng appointed Tong Ren Tang as the Imperial Pharmacy, with medicines certified by and supplied exclusively to the Qing royal families.
Many of the most famous self-developed drugs are now household names among ordinary Chinese for treating certain diseases. The current Tong Ren Tang is owned by the Beijing branch of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the head office of major state-owned enterprises. The name Tong Ren Tang is also on a list of time-honored trademarks maintained by the Ministry of Commerce and has been designated a national intangible cultural heritage.
With its rich history and government support, the company has recently built a modern business empire. The brand currently has three listed companies, the Shanghai-listed Beijing Tong Ren Tang Co. Ltd. (600085.SH) and listed in Hong Kong Peking Tong Ren Tang Chinese Medicine (3613.HK) and Tong Ren Tang Technologies (1666.HK). Tong Ren Tang Healthcare would become the newest member of the family tree of listed companies.
The predecessor of Tong Ren Tang Healthcare is Tong Ren Tang Investment Development Co. Ltd., founded in 2015 and renamed Tong Ren Tang Healthcare following a capital increase in 2019. Tong Ren Tang continues to hold 83.9% of the company.
Tong Ren Tang Healthcare provides TCM medical services through 11 offline healthcare institutions, including seven hospitals and four clinics. Listing document Filed late last month. It also operates an Internet hospital and nine offline medical management facilities. The total number of visits to the company’s various healthcare facilities has increased from 1.4 million in 2021 to 1.9 million in 2023.
Growth through M&A
According to the listing filing, Tong Ren Tang’s healthcare revenue rose from 470 million yuan ($64.5 million) in 2021 to 890 million yuan in 2023, an average annual growth of 38%. The company swung from a loss of 18.97 million yuan in 2022 to a profit of 27.13 million yuan in 2023, while gross margin improved from 16.9% to 21.6% during that period.
Much of the company’s growth has come from a steady series of acquisitions. In 2022, it acquired hospitals and pharmacies under the name San Xi Tang, another time-honored Chinese brand. That same year, it launched its internet hospital Tong Ren Tang TCM. Its buying spree continued this year with the acquisition of Anshan Tong Ren Tang Chinese Medicine Hospital, Shijiazhuang Tong Ren Tang Chinese Medicine Hospital, as well as 70% of a unit of Shanghai Chengzhitang and 60% of Shanghai Zhonghetang.
In 2023, San Xi Tang’s pharmacy unit generated revenue of 170 million yuan, while the brand’s hospital unit generated another 190 million yuan, accounting for about 40% of the company’s total revenue.
It is worth noting that as part of the financing of the San Xi Tang acquisition, Tong Ren Tang Healthcare has pledged more than 40% stake in San Xi Tang’s hospital and pharmacy units to banks as collateral. Tong Ren Tang Healthcare currently has about 130 million yuan in outstanding bank loans and has announced that it will use the proceeds from the IPO to partially repay these debts.
Great value on goodwill
The series of acquisitions has also brought a flood of goodwill to Tong Ren Tang Healthcare. The value of goodwill on the balance sheet rose from 26.1 million yuan at the end of 2021 to 190 million yuan a year later. Goodwill accounted for 27.2% of the company’s net assets at the end of last year, increasing the risk of future goodwill impairment.
The company plans to continue growing through mergers and acquisitions and has set itself the goal of acquiring five Chinese hospitals by the end of 2028, according to its stock exchange prospectuses.
In TCM circles, it is often said: “Tong Ren Tang is the best in northern China, while Pien Tze Huang is at the top in the south.” But the two big names have been drifting further and further apart recently, which is also reflected in their market values. Zhangzhou Pien Tze Huang Pharmaceuticals(600643.SH), the market capitalization has risen to the current level of around 124 billion yuan, more than double Tong Ren Tang’s 53.8 billion yuan. In addition to its original TCM business, Tong Ren Tang has also tried to leverage its core competencies by entering the healthy coffee and milk tea field, and has even made its first steps into less significant areas such as cosmetics, mother and baby products, and liquor. Nevertheless, growth remains mediocre.
TCM Healthcare offers a unique niche for Hong Kong equity investors due to its strong growth potential and a fragmented market that is ripe for consolidators such as Tong Ren Tang Healthcare.
rival Gushengtang (2273.HK), owner of 56 Chinese medical institutions, is a good gauge of how Tong Ren Tang Healthcare might be valued, with a price-to-earnings (P/E) ratio of 34. Guangsheng has added about two healthcare institutions to its portfolio in recent years, which might be hard for Tong Ren Tang Healthcare to match. But by leveraging its time-honored brand and its parent company’s strong presence across the TCM food chain, Tong Ren Tang Healthcare could still find a warm welcome from investors if it can continue to grow through shrewd mergers and acquisitions.
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