Tong Ren Tang Healthcare IPO banks on famous name, growth through M&A

With a history of more than 300 years, the medical facility unit of one of China’s oldest and best-known pharmacy operators has applied to list in Hong Kong 

Key Takeaways:

• Tong Ren Tang Healthcare has applied to list in Hong Kong, reporting its revenue nearly doubled from 470 million yuan in 2021 to 890 million yuan last year
• The company, one of the oldest sellers of traditional Chinese medicines, said that goodwill accounted for 27.2% of its net assets last year

By Lee Shih Ta

What’s good for China’s modern healthcare sector is also proving healthy medicine for a much older group of revered institutions – some with hundreds of years of history – engaged in the sale of traditional Chinese medicine (TCM).

Tong Ren Tang, arguably China’s most storied TCM company, has been leading an M&A charge sweeping China’s medical industry with a wave of acquisitions in its quest to build a modern healthcare kingdom based on ancient Chinese medicines. Now, it’s further extending its tendrils in the global capital market with the recent Hong Kong IPO application by subsidiary Beijing Tong Ren Tang Healthcare Investment Co. Ltd., which operates its chain of hospitals, clinics and other medical institutions.

Tong Ren Tang’s story traces back more than 300 years ago to 1665, the eighth year of Qing Dynasty Emperor Kangxi, when imperial physician Yue Xianyang left his post to establish the first Tong Ren Tang Pharmacy in Beijing. The outlet was renowned for its uncompromising devotion to quality, regardless of time and costs, in the labor-intensive and complex process of preparing traditional medicines. Later, Qing Emperor Yongzheng would designate Tong Ren Tang as the Imperial Pharmacy, with its medicines exclusively certified by and supplied to the Qing royal families. 

Its most famous self-developed drugs include many names that are now household words among average Chinese for treatment of specific conditions. 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 main administrator of major national state-owned entities. The Tong Ren Tang name is also on a list of time-honored brands maintained by the Ministry of Commerce, and has been given National Intangible Cultural Heritage status.

Armed with its storied past and state backing, the company has been building up a modern business empire lately. The brand currently has three publicly traded companies, Shanghai-listed Beijing Tong Ren Tang Co. Ltd. (600085.SH), and Hong Kong-listed Beijing Tong Ren Tang Chinese Medicine (3613.HK), and Tong Ren Tang Technologies (1666.HK). Tong Ren Tang Healthcare would become the newest member on the family’s tree of listed companies.

Tong Ren Tang Healthcare’s predecessor is Tong Ren Tang Investment Development Co. Ltd., which was established in 2015. It was renamed Tong Ren Tang Healthcare after a capital increase in 2019, with Tong Ren Tang still holding 83.9% of the company.

Tong Ren Tang Healthcare provides TCM medical services through 11 offline medical institutions, including seven hospitals and four clinics, according to its listing document filed late last month. It also operates an internet hospital and nine offline medical management institutions. Total visits to the company’s various healthcare institutions have grown from 1.4 million in 2021 to 1.9 million in 2023.

Growth through M&A 

According to the listing document, Tong Ren Tang’s healthcare revenue grew from 470 million yuan ($64.5 million) in 2021 to 890 million yuan in 2023, representing 38% average annual growth. It swung from a loss of 18.97 million yuan in 2022 to a profit of 27.13 million yuan in 2023, while its gross margin improved from 16.9% to 21.6% over that time.

Much of the company’s growth has come through a steady stream of acquisitions. In 2022, it acquired hospitals and pharmacies under the San Xi Tang name, another time-honored Chinese brand. That same year, it launched its Tong Ren Tang TCM internet hospital. Its buying spree resumed this year with its 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, the San Xi Tang pharmacy unit generated 170 million yuan in revenue, while the brand’s hospital unit logged another 190 million yuan, which combined to account for about 40% of the company’s overall revenue.

It’s worth mentioning that as part of the financing for the San Xi Tang acquisition, Tong Ren Tang Healthcare pledged more than 40% of the shares 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 said it plans to use proceeds from the IPO partly to repay the some of that debt.

Heavy on goodwill

The string of acquisitions has also brought a flood of goodwill to Tong Ren Tang Healthcare. The value of goodwill on its balance sheet jumped 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 by the end of last year, raising the risk of charges from future goodwill impairment.

The company plans to keep growing through M&A, with a goal of acquiring five Chinese hospitals by the end of 2028, it said in its listing document.

In TCM circles, it’s often said that “Tong Ren Tang is the best in North China, while Pien Tze Huang is tops in the South.” But these two big names are increasingly diverging lately, as reflected by their market values. Zhangzhou Pien Tze Huang Pharmaceutical’s(600643.SH) market cap has grown to its current level of about 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 expertise by moving into products like healthy coffees and milk teas, and it has even dipped its toes into more distant fields like cosmetics, maternal and infant products and liquor. Still its growth remains mediocre.

TCM healthcare offers a unique niche for Hong Kong stock investors due to its strong growth potential and fragmented market that’s ripe for consolidators like Tong Ren Tang Healthcare. 

Rival Gushengtang (2273.HK), owner of 56 Chinese medical institutions, is a good reference for how Tong Ren Tang Healthcare might be valued, with a price-to-earnings (P/E) ratio of 34 times. Guangsheng has been adding around two healthcare institutions to its portfolio in recent years, which could be hard for Tong Ren Tang Healthcare to match. But by leveraging its time-honored brand and strong presence of its parent company throughout the TCM food chain, Tong Ren Tang Healthcare may still get a warm reception from investors if it can continue to grow through savvy M&A. 

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