Two former chairmen successively under investigation, the established strategy of "Pien Tze Huang" is cast into doubt.

 On July 21, 2021, the stock price of "Pien Tze Huang" reached a historical high of 491.88 yuan, and its market capitalization reached nearly 300 billion yuan.

Reporter: Yao Qian

Engaging in unauthorized business and failing to fulfill responsibilities correctly... More than two years after retiring, the former chairman of "Pien Tze Huang," Liu Jianshun, suddenly faced news of expulsion from the Communist Party. On the afternoon of August 22, the Zhangzhou Discipline Inspection Commission in Fujian Province released this news. During his tenure from 2014 to 2020, the stock price of "Pien Tze Huang" increased by about 10 times, and revenue soared from 1.45 billion yuan in 2014 to 6.5 billion yuan in 2020. It was during this period that Liu Jianshun proposed the development strategy of "One Core, Two Wings" for "Pien Tze Huang," which aimed to strengthen the cosmetic, daily-use, and health product sectors while solidifying the foundation of pharmaceuticals centered around the "Pien Tze Huang" product series. However, it appears that the growth of "Pien Tze Huang" is still being driven by price increases in its core products.

Former Chairman Successively Under Investigation

According to the official website of the Zhangzhou Discipline Inspection Commission in Fujian Province, Liu Jianshun, the former Party Secretary and Chairman of "Pien Tze Huang," was found to have seriously violated his official duties and is suspected of accepting bribes, resulting in his expulsion from the Communist Party and the transfer of his suspected criminal case to the procuratorial organs for review and prosecution.

Investigation revealed that Liu Jianshun, as a party member and leading cadre, lost his ideals and beliefs, abandoned his initial mission, and failed to fulfill his responsibilities as the main party responsible for enforcing strict discipline in an all-around way. This caused severe adverse effects on the party organization. He also concealed evidence, obstructed organizational inspections, and disregarded the spirit of the central "eight-point regulations." He accepted gifts and large sums of money in violation of regulations, and gave valuable gifts to personnel engaged in public affairs. He used his authority to seek benefits for others in cadre selection and appointment. He engaged in business operations in violation of regulations and failed to fulfill his responsibilities correctly, causing adverse effects. He utilized his position to seek benefits for others and accepted large sums of money from others.

Liu Jianshun is not the first chairman of "Pien Tze Huang" to be investigated. In May of this year, the Zhangzhou Discipline Inspection Commission in Fujian Province successively announced the investigation of former Chairman Pan Jie and Party Committee Member and Deputy General Manager Liu Congsheng of "Pien Tze Huang." Due to serious violations of discipline and the law, Pan Jie and Liu Congsheng are currently undergoing disciplinary review and supervision investigation by the Zhangzhou Discipline Inspection Commission.

Pan Jie is an old hand at "Pien Tze Huang," having joined the company in 1999 and serving in various positions such as director, deputy general manager, and general manager. By December 2014, Pan Jie and Liu Jianshun had swapped positions, with Pan Jie transferred to Zhangzhou Jiulong River Group (the controlling shareholder of "Pien Tze Huang") and taking over the positions of Party Secretary and Chairman from Liu Jianshun. From December 2014 onwards, Liu Jianshun served as the Chairman of "Pien Tze Huang," retiring in April 2021 and resigning from his position as Chairman.

Regarding the impact of the successive investigations of high-level executives on the company, the Beijing Business Daily called "Pien Tze Huang's" secretariat and sent an email to the provided address, but as of the time of writing, no response had been received.

Previously Proposed "One Core, Two Wings" Strategy

The recently apprehended Liu Jianshun once led "Pien Tze Huang" to double increases in stock price and performance. During his tenure, the stock price of "Pien Tze Huang" increased by about 10 times, and revenue soared from 1.45 billion yuan in 2014 to 6.5 billion yuan in 2020. In the retirement announcement of "Pien Tze Huang," Liu Jianshun received a relatively high evaluation. "Pien Tze Huang" mentioned that under Liu Jianshun's leadership, the company implemented the "One Core, Two Wings" strategy for the development of the big health industry, which involved comprehensively promoting the company's high-quality development, continuously improving operational efficiency, and enhancing the industrial layout while maintaining a good brand image.

The "One Core, Two Wings" development strategy aimed to strengthen the cosmetic, daily-use, and health product sectors while solidifying the foundation of pharmaceuticals centered around the "Pien Tze Huang" product series. In the cosmetics sector, "Pien Tze Huang" has multiple brands, including "Pien Tze Huang" and "Huanghou."

As early as October 2020, "Pien Tze Huang" expressed its intention to list the company operating the cosmetics business. In its 2023 interim report, "Pien Tze Huang" stated that its subsidiary "Pien Tze Huang Cosmetics" is conducting an IPO due diligence investigation and promoting the process of shareholding system transformation.

Although "Pien Tze Huang" expanded beyond pharmaceuticals, the cosmetics sector remains relatively weak. According to the latest 2023 interim report, "Pien Tze Huang" achieved operating income of 5.045 billion yuan in the first half of the year, a year-on-year increase of 14.08%, and a net profit of 1.541 billion yuan, a year-on-year increase of 17.23%. Among them, the liver disease drug segment, centered around "Pien Tze Huang" products, achieved revenue of 2.251 billion yuan, a year-on-year increase of 14.29%. The cosmetics business only achieved revenue of 634 million yuan, a 24.61% decrease from 2021, and the gross profit margin decreased by 6.41 percentage points year-on-year.

Professor and head of the Beijing Health Law Firm team, Deng Yong, said in an interview with the Beijing Business Daily that, in light of the need for transformation and upgrading, pharmaceutical companies venture into daily-use sectors such as functional toothpaste to increase the added value of products or cultivate new products and brands in the market to enhance economic benefits. However, with the fall of the former chairman, it's hard to say whether there will be adjustments to the strategy. "Generally, it will bring about changes; new leaders have their own governing philosophies and corporate development strategies."

Decline in Core Product Gross Margin

While the decline in the cosmetics business revenue has not yet brought substantial contributions to performance, the gross margin of "Pien Tze Huang's" core products is also declining. Regarding the increase in net profit in the first half of the year, "Pien Tze Huang" mentioned that the growth in operating profit was due to increased sales of the core products, the "Pien Tze Huang" series products, and the "Pien Tze Huang" brand Angong Niuhuang Pills.

This year, in May, the highly regarded "liver-protecting miracle drug" "Pien Tze Huang" experienced its largest price increase in history. The retail price of the core product, "Pien Tze Huang Pills," was raised from 590 yuan per pill to 760 yuan per pill, an increase of nearly 30%, surpassing the total increase of the previous three price hikes by 0.5%.

According to a research report by Everbright Securities, "Pien Tze Huang" has increased prices 11 times since 2007, with a compounded annual growth rate of 5.27% in overall channel prices (excluding taxes) and 18.03% in sales volume.

Relying on price increases of core products, "Pien Tze Huang" has maintained double growth in performance and stock price in recent years. "Pien Tze Huang's" revenue increased from 593 million yuan in 2007 to 8.694 billion yuan in 2022, and net profit increased from 95 million yuan to 2.472 billion yuan. The growth in performance drove a surge in the company's stock price. On July 21, 2021, the stock price of "Pien Tze Huang" reached a historical high of 491.88 yuan, and its market capitalization reached nearly 300 billion yuan.

However, even with the substantial price increase of the core product by nearly 30% this year, the company's overall gross profit margin for the first half of 2023 decreased by 0.6 percentage points compared to the same period last year. Among them, the gross profit margin of the pharmaceutical manufacturing industry decreased by 3.82 percentage points year-on-year. The liver disease drug segment decreased by 2.78 percentage points.

Price increases can be a double-edged sword. Previously, Dong-E-E-Jiao blindly raised prices, leading to high inventory and low turnover, which in turn caused a significant drop in gross profit margin. From 2006 to 2019, Dong-E-E-Jiao increased prices 17 times, raising the price of 250g blocks of ejiao from 25 yuan to 1,499 yuan. In 2019, Dong-E-E-Jiao experienced its first loss in 24 years of being listed. The company's inventory amounted to 2,711 tons that year, more than double the previous year, with a value of 3.522 billion yuan, exceeding the total revenue. After the failure of the price increase strategy, Dong-E-E-Jiao increased its efforts to clear inventory from its distribution channels.

Deng Zhidong, the general manager of Hainan Boao Medical Technology Co., Ltd., once stated that factors such as rising raw material costs can lead to product price increases, and companies need to maintain profitability by raising prices. Raising prices must be done appropriately and properly; inappropriate price increases can have negative effects. "Pien Tze Huang" has a high brand awareness in the market, and price increases may change consumers' evaluation of the product. As for whether it will affect sales and performance, it will also be influenced by market supply and demand, among other factors.