China Traditional Chinese Medicine_ Deal Breaks; Our Rationale for the Bear Case

Summary of Conference Call Notes Company and Industry Overview - Company: China Traditional Chinese Medicine (CTCM) (Ticker: 0570.HK) - Industry: China Healthcare Key Takeaways - Privatization Proposal Termination: CTCM announced the termination of the privatization proposal by CNPGC and the investment consortium on October 18, 2024. This marks the second failed attempt at privatization within 12 months [1][1] - Bear Case Price Target: The bear case price target is set at HK$2.7/share, which corresponds to a 2025 estimated P/E of 6x. The current price target is HK$4.60, indicating a potential upside of 20% from the current price of HK$3.82 [1][1] - Reasons for Withdrawal: The filing cites two main reasons for the withdrawal: 1. Inability to satisfy outbound direct investment pre-conditions 2. Inability to extend the "long stop" date [1][1] - Impact on Shareholder Perception: The failure of the privatization attempt is likely to negatively affect the perception of the stock among both event-driven and fundamental investors [1][1] Financial Metrics - Earnings Projections: - FY 2023 EPS: Rmb 0.26 - FY 2024 EPS: Rmb 0.27 - FY 2025 EPS: Rmb 0.41 - FY 2026 EPS: Rmb 0.48 [1][1] - Revenue Projections: - FY 2023 Revenue: Rmb 18,122 million - FY 2024 Revenue: Rmb 17,452 million - FY 2025 Revenue: Rmb 21,051 million - FY 2026 Revenue: Rmb 24,072 million [1][1] - EBITDA Projections: - FY 2023 EBITDA: Rmb 2,445 million - FY 2024 EBITDA: Rmb 2,802 million - FY 2025 EBITDA: Rmb 3,411 million - FY 2026 EBITDA: Rmb 3,696 million [1][1] Market and Valuation Insights - Market Capitalization: Approximately Rmb 17,637 million [1][1] - Valuation Methodology: The base case uses a discounted cash flow methodology with a WACC of 8.8% and a steady-state growth rate of 2% [3][3] - Risks to Upside: More favorable government policies on the TCM industry and potential M&A deals [4][4] - Risks to Downside: - Break of the privatization deal - Policies leading to a dimmer outlook for formula granules or TCM, such as reimbursement control and centralized procurement price cuts [5][5] Additional Considerations - Reputation Impact: The latest development surprised many stakeholders, given the seemingly positive progress in the previous months [1][1] - Investor Focus: The investment community is now focused on determining the appropriate "break price" following the failed privatization attempt [1][1] - Stock Price History: Prior to the deal announcement on February 21, the stock traded around HK$3.0/share, indicating a significant drop in value following the news [1][1] This summary encapsulates the critical points from the conference call regarding CTCM and the broader implications for the China healthcare industry.