Facing multiple challenges, Shengtong Special Medicine rushes to become the "infant formula and pharmaceutical first stock"

Zebra Consumer Xu Ji

Those who have experienced childbirth may know that if a child has symptoms such as allergies, they cannot consume regular formula milk powder and must opt for relatively expensive special medical food. This unique type of food is also vividly referred to as "milk medicine."

Now, the domestic special medical food leader, Saintong Special Medical, is sprinting toward a Hong Kong IPO, aiming to become the "first domestic special medical food stock."

Compared to infant formula companies, Saintong Special Medical has a higher profit margin and once demonstrated strong growth potential. However, facing pressure from dominant foreign brands and increasingly fierce domestic market competition, whether Saintong Special Medical can maintain its leading edge is the most pressing concern for investors.

Giants Looming

Saintong Special Medical originally operated as a division under the domestic dairy company Synutra. After years of incubation and growth, it gradually expanded and became an independent entity.

According to its prospectus, in 2007, Synutra's special medical food division commercialized preterm and lactose-free milk powder, marking the first commercialized special medical food product by a domestic brand.

Subsequently, Synutra launched partially hydrolyzed milk protein formula products, amino acid formula products, and special medical food products for preterm/low birth weight infants. In 2021, it was officially renamed "Sainte" and "Saintong Special Medical."

Special medical food, as the name suggests, refers to formula food for special medical purposes. For example, infants with allergies, preterm or low birth weight babies, etc., cannot meet their nutritional and health needs with regular infant formula, so they require special medical food.

Not only that, but patients with chronic diseases, those recovering from hospitalization, and inpatients are also potential user groups for special medical food.

Saintong Special Medical's prospectus reveals that, by population, China's special medical food industry's TAM (Total Addressable Market) reached 113 million people in 2024, including over 3 million infants and 110 million non-infants.

Industry data shows that with the standardization of special medical food registration, increased consumer awareness of nutrition, and changing health needs, China's special medical food industry has experienced rapid growth. The market size increased from RMB 7.3 billion in 2019 to RMB 23.2 billion in 2024, with a compound annual growth rate of 26.1%.

Even so, the penetration rate of special medical food in China is only about 3%, far below the 40% penetration rate in the U.S., indicating significant untapped market potential. Institutions predict that by 2029, China's special medical food market will reach RMB 53.1 billion.

The prospectus discloses that, based on 2024 retail sales, Saintong Special Medical is the largest domestic special medical food brand in China, ranking fourth among all brands with a market share of 6.3%. In the infant special medical food sector, it ranks third with a market share of 9.5%.

China's special medical food industry is highly concentrated, with the top three spots all occupied by foreign brands, collectively holding a market share of 68.9%. These foreign giants have become formidable obstacles for Saintong Special Medical to overcome in the market.

Performance Fluctuations

Born out of Synutra, Saintong Special Medical is firmly controlled by the family of Synutra founder Zhang Liang.

Zhang Liang, now 65, graduated from Nanjing University of Foreign Languages with a degree in French. Early in his career, he worked as a university teacher and also gained experience in foreign companies.

In 1992, he founded Beijing Aonaite Dairy Company, primarily engaged in dairy ingredient import trade, earning his first pot of gold.

During this period, he gained a thorough understanding of the dairy industry's upstream and downstream and recognized the potential of the infant formula market. In 1998, he founded Synutra International, betting on the infant formula sector and initiating brand operations.

In 2007, Synutra International's sales reached RMB 2.5 billion. The same year, Zhang Liang took Synutra International public on Nasdaq, making it the first Chinese nutritional products company listed in the U.S.

Later, the domestic infant formula industry suffered heavy blows from a series of incidents, and Synutra International's stock price remained depressed for a long time. Zhang Liang believed the company was severely undervalued. In 2016, Synutra International completed its privatization and delisted from Nasdaq.

Now, Zhang Liang is pushing for Saintong Special Medical's IPO in Hong Kong, another major attempt by the "Synutra Group" in the capital markets.

In the unique special medical food sector, Saintong Special Medical has demonstrated strong growth and exceptionally high profitability.

From 2022 to 2024, the company's operating revenues were RMB 491 million, RMB 654 million, and RMB 834 million, respectively. Adjusted net profits were RMB 121 million, RMB 175 million, and RMB 199 million, respectively. During this period, gross margins remained above 70%.

However, this high growth suddenly halted this year. In the first half, the company's operating revenue was RMB 397 million, down 5.3% from RMB 419 million in the same period last year. The company attributed this to adjusting its sales strategy, shifting more resources online and reducing rebates to distributors.

Saintong Special Medical believes that using rebates as incentives for offline distributors is not conducive to long-term sales performance improvement. The company has decided to no longer provide any rebates to distributors in the future.

Perhaps due to this adjustment, Saintong Special Medical's distributor count has remained at around 300 in recent years, with no significant growth. As of June this year, the number of distributors was 333, five fewer than at the beginning of the year.

Intensifying Competition

For special groups, special medical food can be considered their "lifesaving grain," and for infants with special constitutions, it is even called "milk medicine."

Therefore, unlike regular food or nutritional products, special medical food has a high barrier to entry. The depth of a company's involvement in the industry largely depends on its R&D achievements.

From a financial perspective, Saintong Special Medical, as the domestic leader in special medical food, does not stand out in R&D investment. From 2022 to 2024, its R&D expenses were RMB 6.511 million, RMB 10.812 million, and RMB 13.33 million, respectively, with R&D expense ratios of 1.3%, 1.7%, and 1.6%, far below the nearly 40% sales expense ratio during the same period.

Currently, China's special medical food market is still in its infancy. Saintong Special Medical, by "getting a head start," has temporarily secured a leading position. But where there is a market, competition is inevitable. By the end of 2024, about 60 companies had registered special medical food products in China. Infant formula companies, leveraging their distribution channels and brand advantages, are entering the infant special medical food sector as a natural progression. Some pharmaceutical companies are also joining the fray, bringing their R&D, production, and medical channel advantages.

According to authoritative media reports, as of August 2024, 190 special medical food products had been approved for registration in China. By May this year, the number had increased to 249. This indicates that the registration process for special medical food, as a market entry threshold, has accelerated and become normalized, leading to fiercer competition.

With foreign brands as "roadblocks" ahead and domestic competitors as "chasers" behind, Saintong Special Medical, as the domestic leader in special medical food, may find it challenging to maintain its current leading edge.