The third largest pharmaceutical company lost 150 billion yuan.

For many years, the biopharmaceutical industry has been regarded by the market as a high-quality growth sector capable of weathering economic cycles, giving rise to numerous super-performing stocks. However, after July 2021, this conventional wisdom was shattered as the CSI Healthcare Index plummeted nearly 70%.

Since early February this year, the broader market has staged a strong rebound, but the biopharmaceutical sector has continued to decline against the trend, now approaching its previous lows and nearing levels last seen in early 2019. Amid this broad sell-off, only eight companies in the biopharmaceutical sector maintain market capitalizations exceeding 100 billion yuan, with Pien Tze Huang (PZH) securing the third spot, trailing only Mindray Medical and Hengrui Pharmaceuticals.

As the third-largest pharmaceutical company and the leader in traditional Chinese medicine (TCM), PZH has still retreated more than 50% from its historical peak, shedding over 150 billion yuan in market value. Nevertheless, the market remains generous, assigning PZH a current P/E ratio of 49x—a rarity not only in TCM but across the entire biopharmaceutical sector. Why does PZH command such a premium? How should we view its current valuation?

01

On April 19, PZH released its 2023 annual and Q1 2024 financial results. The report showed annual revenue of 10.058 billion yuan, up 15.69% YoY, with net profit attributable to shareholders reaching 2.797 billion yuan, a 13.15% increase. Q1 revenue grew 20.58% YoY, while net profit rose 26.6%, slightly exceeding earlier guidance.

Breaking it down, Q4 saw double-digit revenue growth but a rare 6.5% decline in net profit—only the third quarterly drop in six years. Two key factors drove this:

First, the pharmaceutical manufacturing segment (including PZH and Angong Niuhuang Wan) saw operating costs surge 43.3% YoY, far outpacing revenue growth of 25.94%. This was primarily due to soaring prices of natural bezoar, which skyrocketed over 140% from 570,000 yuan/kg in early 2023 to 1.4 million yuan/kg by year-end. Second, H2 advertising and promotional expenses jumped 330 million yuan YoY, weighing on profitability.

PZH's core hepatology business maintained stable growth. Its cosmetics division, closely watched by investors, generated 700 million yuan in revenue (+11.5% YoY). While this appears solid, it reflects an easy comparison to 2022's 24.6% plunge. Versus 2021, growth was just 3.2%, lagging both industry averages and peers like Proya.

The underperformance stems largely from strategic missteps—overemphasizing offline channels synergistic with PZH drug sales while neglecting e-commerce. The lack of breakout products or premiumization efforts leaves its marketing and product capabilities far behind cosmetics leaders.

Once a high-potential segment, PZH's cosmetics arm now appears dispensable. Avoiding drags on core growth may be the best-case scenario.

Gross margin edged up 1.12pp to 46.76% in 2023. Hepatology products (mainly PZH) saw margins dip 2.11pp, while Angong Niuhuang Wan fell 8.44pp—both hit by bezoar inflation despite PZH's 28.9% May 2023 price hike.

Net profit margin rebounded to 31.5% in Q1 2024, nearing Q3 2023's record 32.42%. Cost controls improved, with total SG&A ratio down to 10.5% (vs. 20.86% in 2016). Both management and sales expense ratios trend lower, while R&D spending inches up to 2.8%.

PZH raised its dividend payout ratio to 50% for 2023 (from ~30% historically), aligning with policy calls and beating expectations.

In summary, 2023's growth slowdown (excluding anomalous 2022) contributed to valuation compression. But Q1's outperformance and >20% growth may revive optimism.

02

Investor legend Duan Yongping famously said buying stocks means buying businesses—specifically, their discounted future free cash flows. Superior business models ensure sustainable cash generation, while moats protect those flows. This approach may forfeit opportunities but minimizes catastrophic mistakes.

By this framework, PZH's model rivals Moutai's—boasting monopoly-like attributes, premium margins, recurring demand, and scarcity:

Monopoly: PZH's proprietary formula creates unparalleled pricing power versus peers like Ejiao or Angong Niuhuang Wan. Since its 2005 IPO, PZH has raised prices 13 times (325 yuan → 760 yuan, +134%), passing cost inflation to consumers while fueling growth.

Premium Margins: ~80% gross and ~60% net margins enable high ROE without heavy leverage or asset turnover. Limited capex requirements amplify returns, while input cost volatility has muted earnings impact.

Recurring Demand: Dual utility as both medicine (chronic/acute hepatic conditions) and wellness product (alcohol-related liver protection) ensures repeat purchases from a vast user base.

Scarcity: Beyond state-protected formula/process secrets, key ingredients like natural musk (rare medicinal material) constrain supply, creating 茅台-like secondary market speculation. As TCM protections dwindle (2,469 in 2007 → 204 in 2019), PZH's status as one of two Tier-1 protected brands heightens exclusivity.

These attributes underpin PZH's elite business model and historical growth. While surpassing 10 billion yuan revenue may slow future expansion, core drivers remain intact.

One regulatory risk bears monitoring: PZH's Tier-1 protection expires September 15, 2024. Historical precedents (e.g., Liu Shen Wan's downgrade to Tier-2) suggest possible reclassification—a potential black swan that could disrupt PZH's growth narrative by enabling competition.

On the flip side，肝癌 treatment R&D offers upside. Anecdotal accounts of PZH curing 肝癌 lack scientific validation, but formal studies advance: Phase II trials for 肝癌 indications are underway, with results expected July 2024. Phase III (if required) could extend to 2027.

03

The CSI Healthcare Index's 27.5x P/E sits at decade lows, pricing in headwinds like volume-based procurement (VBP) expansion and valuation bubbles.

Sector-wide pessimism weighs on PZH's rerating, but its fundamentals stay robust—a rare quality play in healthcare. While valuations may still bottom, monitoring business risks remains key to assessing future returns. (End)