Healthcare buyouts are popular globally. But in China the reasons for buyouts differ. Rather than sector consolidation, Chinese deals hinge on capturing higher valuations in mainland markets. China’s Covid-19 vaccine maker Sinopharm has joined the trend.
The state-owned pharma group reportedly wants to take China Traditional Chinese Medicine private in a consortium. The parent company plans to offer at least HK$5.10 (US$0.66) per share for China TCM. That would value the alternative medicine maker at about $3.3bn, a 28 per cent premium to its previous closing price.
The timing is right. Sinopharm stands to reap a large windfall from sales of its Covid-19 vaccines and is positioned well for dealmaking. The pandemic has attracted high interest in alternative methods to treat and prevent Covid-19 symptoms. Shares of both Sinopharm and China TCM rose on Wednesday, the latter up 7 per cent.
A stronger motivation is the chance to secure a higher valuation by listing China TCM on a mainland Chinese exchange such as Shanghai. Share prices of China’s top traditional medicine companies there have surged in the past year. Shanghai-listed DEEJ, though off its highs, remains up 40 per cent from a March low and trades at 24 times forward earnings.
Yet Hong Kong-listed shares of China TCM trade at just 11 times and significantly trail mainland-listed peers. It does not help that Hong Kong has fallen out of favour due to political uncertainties there. Its benchmark Hang Seng index has bounced 35 per cent from a March low compared with the 57 per cent for China’s CSI 300 index.
Moreover, daily quotas limit mainland retail investor access to trade in Hong Kong-listed stocks. This partly explains why buyouts of Hong Kong-listed companies surged to a record 60 deals last year, according to Refinitiv.
Prospects for China’s traditional medicine sector have improved. Closing out a valuation difference will be a fillip to China TCM shareholders in the near term. More demand should follow from local investors should it return to a mainland exchange.
Our popular newsletter for premium subscribers Best of Lex is published twice weekly. Please sign up here.