Recently, the pharmaceutical sector has experienced significant benefits. Earlier, on March 13, a draft solicitation of comments on the “Full Chain Support for Innovative Drugs Plan” came out, bringing catalytic effects to the pharmaceutical sector, which had been sluggish for a long time. Hong Kong stocks surged, and market sentiment showed increased excitement that had been lost for a long time.

With the introduction of a series of substantial benefits, the opportunities for Hong Kong pharmaceutical stocks are becoming more and more bright. By focusing on the traditional Chinese medicine sector, it will benefit from the enthusiasm of the entire pharmaceutical sector, and it will also have the potential to be repaired.

As we all know, in the Hong Kong stock market, Chinese medicine stocks have been undervalued for a long time. Judging from the net market ratio, the net market ratio of the entire traditional Chinese medicine concept is less than 1 times. A large part of the reason behind this is that investors in the Hong Kong stock market, especially foreign investors, have long had distrust and prejudice against traditional Chinese medicine and traditional Chinese medicine.

(Source: Futu Market)

The recent privatization and delisting of Chinese traditional Chinese medicine shows that Hong Kong stocks have been struggling with “traditional Chinese medicine” stocks for a long time.

China Traditional Chinese Medicine surged 25% on the same day after announcing the resumption of trading at a premium of 34%. The transaction amount exceeded HK$2.8 billion, accounting for 2.3% of the total Hong Kong stock turnover on the same day. At the same time, it also recorded its largest trading volume since Hong Kong stocks.

(Source: Futu Market)

It is easy to see from the “jump” in the valuation of Chinese traditional Chinese medicine that once the time comes, the market's correction of the Chinese medicine stock valuation bias is effective and very explosive. Meanwhile, the market impact brought about by the privatization of Chinese medicine may also give Hong Kong stock investors a new opportunity to re-examine the real value of other relevant Chinese medicine stocks.

Recently, I noticed that Tong Ren Tang Technology (01666.HK) released its financial report for the past year. The data showed that in 2023, Tong Ren Tang Technology achieved revenue of 6.773 billion yuan, an increase of 13.04% over the previous year; achieved net profit of 590 million yuan, an increase of 1.25% over the previous year.

It is easy to see from the financial report that the overall performance of Tong Ren Tang Technology is steady and steady. On the one hand, the continued increase in revenue shows good results in market expansion, and also reflects the wide recognition of the company's products and the stability of demand.

At the product level, in 2023, the company will have 62 products with sales exceeding 5 million yuan, of which 9 products have sales of over 100 million yuan. Among the leading products, sales of the Shengmai Drink Oral Liquid series increased by 70.63%, and the cold cleansing granule series increased by 27.42%. The growth rate was strong.

On the other hand, although net profit growth was slightly conservative, it still maintained a steady profit level, indicating the company's core control in controlling costs and improving operational efficiency.

Judging from the capital market performance, Tongrentang Technology's current dynamic price-earnings ratio is only 8 times and the net price-earnings ratio is 0.9 times. Although the valuation is comparable to the overall sector, judging from this financial report and a series of new changes in the market, Tongrentang Technology still has double expectations due to favorable sector and performance catalyst.

First, the first major difference in expectations comes from the company's steady performance growth under sector valuation restoration, strengthening market confidence. Continued fulfillment of growth expectations will stimulate valuation performance.

From the perspective of the Chinese medicine sector, pharmaceutical stocks have been at the bottom for a long time. Although the traditional Chinese medicine sector bucked the trend in the first half of last year, it continued to decline since the May high until February of this year, showing a rebound trend. The medium- to long-term valuation repair path is already clearly visible.

(Source: Futu Market)

The logic behind the strengthening of the traditional Chinese medicine sector in the first half of last year lies in price increases expected and performance bursts due to rising raw materials and production costs, and this continues to be interpreted this year. However, the rise in raw material prices was transmitted downstream, and the rise in costs also suppressed the performance expectations of pharmaceutical companies to a certain extent.

(Source: Kangmei Traditional Chinese Medicine Network)

Judging from Tongrentang Technology's performance, the company still has good control on the cost side. On the one hand, it has strong bargaining power under the company's scale and Tongrentang brand advantage, which enables the company to maintain relatively stable costs when raw material prices fluctuate greatly, thereby improving the competitiveness and profitability of products.

On the other hand, Tongrentang Technology has actively adopted various cost management measures, further reducing the company's production and operating costs.

The company continues to promote fine management, using technological empowerment to promote financial informatization construction, optimize production processes, improve production efficiency, and reduce labor costs. It is worth mentioning that in 2023, Tongrentang Technology's technical control project “Data Analysis Job Statistics Multi-dimensional Data Time Reduced from 80 Hours/Time to 20 Hours/Time” won the Gold Award in the 6th National Enterprise Technology Control Competition. This is also the highest honor it has received in national competitions. This award highlights the company's positive attitude and fruitful results in improving operational quality and efficiency.

Under good cost control capabilities, the company's gross margin and net margin remained stable. In 2023, Tongrentang Technology's gross margin was 42.04%, and the net profit margin was 14.65%.

It can be said that this annual report card shows the company's highlights in terms of revenue, profit, and cost control, providing strong confidence and direction for the market. As the performance level continues to achieve steady growth, while benefiting from the beta brought about by sector valuation repairs, it will support the company's subsequent capital market performance.

Second, the second biggest difference in expectations in the market is that under a series of favorable policies, Tongrentang Technology, as a highly recognizable and even scarce enterprise in the Hong Kong stock market, will benefit.

On the one hand, with the introduction of the central government enterprise market value management policy, it is expected that the valuation of central enterprise targets may usher in a turning point. As an enterprise with a state-owned background, Tongrentang Technology will also have the potential to repair its valuation.

On the other hand, in the context of the withdrawal of international capital, Beishui's “expansion” is driving the traditional Chinese medicine sector to reevaluate expectations.

It is undeniable that in the past year, the decline in international capital has ushered in a new turning point for the Hong Kong stock market's pricing system. Traditional Chinese medicine stocks, which have been suppressed for a long time in the past, have an opportunity to be revalued as domestic capital continues to increase.

It is worth mentioning that during the previous two meetings, Chairman Lei Tianliang of the Hong Kong Securities Regulatory Commission proposed lowering the asset threshold for Hong Kong Stock Connect individual investor accounts from 500,000 yuan to 100,000 yuan to reduce the dividend tax level of Hong Kong Stock Connect individual investors, so that it is on par with the A-share market.

Once the policy is implemented in the future, it will also be a major benefit to the Hong Kong stock market. The traditional Chinese medicine sector, which has been undervalued in the past, will also usher in new opportunities under the influx of more “North Water.”

Earlier reports indicated that the expected incremental capital would reach 700 billion yuan, and the liquidity and market pricing mechanism of Hong Kong stocks are undoubtedly expected to improve.

It can be said that in the future, with the reversal of the valuation system for traditional Chinese medicine in the Hong Kong stock market, Tongrentang Technology, as a long-term stable player in the industry, will also receive the attention and favor of more investors, ushering in new opportunities.