Sound Bites_ China Healthcare_ Chart of the Week – Hong Kong Retail and TCM Sales

Summary of Key Points from the Conference Call Industry Overview - Industry: China Healthcare - Market Performance: In August, Hong Kong retailers reported overall sales of HK$29.2 billion, with traditional Chinese medicine (TCM) sales at HK$386 million, reflecting a year-over-year decline of 10% and 12% respectively, which impacts the performance of the Tongrentang group of companies [1][3] Company Analysis: Tongrentang Technologies (1666.HK) - Valuation Methodology: Utilizes a discounted cash flow (DCF) approach with a WACC of 11.1%, a cost of equity (COE) of 8.5%, a steady growth rate of 2%, and a leverage rate of 20% [4] - Upside Risks: - Potential price hikes on core product series - Launch of new products from a vast pipeline - SOE reform rollout improving management incentives - Entry into HK-China Stock Connect [5] - Downside Risks: - Increased competition from regional brands - Slower-than-expected recovery in China's consumption - Rising costs of TCM raw materials [6] Company Analysis: Beijing Tongrentang Chinese Medicine (3613.HK) - Valuation Methodology: DCF approach with a COE of 8.5%, perpetual growth of 3%, and 10 years to reach steady-state growth [7] - Upside Risks: - Earlier-than-expected launch of premium products - Significant cross-border shopping - Management incentive scheme rollout - Relaxation of bezoar imports easing cost pressures [8] - Downside Risks: - Competition from brands like Ma Pak Leung and Wai Yuen Tong - Volatility in local retail markets, particularly in Hong Kong and Macau - Shortages of key raw materials like bezoar and musk [9] Company Analysis: Beijing Tongrentang (600085.SS) - Valuation Methodology: DCF with a COE of 8.9%, a perpetual growth rate of 5%, and a longer time frame of 20 years to reach steady-state growth [10] - Upside Risks: - Return to high growth with new product launches - Margin expansion through better cost controls and price increases - Faster-than-expected growth in core product series [11][12] - Downside Risks: - Slower growth in core product series - Potential pricing cuts - Slow growth in retail business [13] Stock Ratings and Industry View - Stock Ratings: - Tongrentang Technologies (1666.HK): Overweight - Beijing Tongrentang Chinese Medicine (3613.HK): Overweight - Beijing Tongrentang (600085.SS): Overweight - Industry View: Attractive [3][19] Additional Insights - Market Context: The decline in TCM sales in Hong Kong may indicate broader challenges in the healthcare sector, particularly for companies reliant on retail sales [1][3] - Investment Considerations: Investors should weigh the potential for growth against the backdrop of competitive pressures and market volatility [5][6][9] This summary encapsulates the critical insights from the conference call, focusing on the performance and outlook of the China healthcare sector, particularly the Tongrentang group of companies.