Tongjitang Chinese Medicines Lowers IPO Pricing to $10

Tongjitang Chinese Medicines (TCM) priced its IPO at $10, down from the original target of $15-$17 and also lower than the reduced range of $12-$14. The IPO shows that the U.S. market still has a desire to own Chinese companies.

However, after the Shanghai surprise of February 27, when the Shanghai stock market lost 9% of its value in one day, U.S. investors may not be willing to pay as high a price for that ownership.

As we reported earlier (see story), Tongitang specializes in pill, tablet, gel or powder formulations of traditional herbal medications that the Chinese have been using for as long as one thousand years. Its lead product is Xianling Gubao, a formulation of barrenwort for osteoporosis, which comprised 77% of Tongjitang’s $62.1 million in revenue for 2006.

At $10 per ADS, Tongjitang has a market capitalization of $334 million (each ADS is equivalent to 4 ordinary shares). The company will receive net proceeds of $77.8 million from the IPO, while selling shareholders reaped $14.1 million. Mr. Xiaochun Wang, CEO and Chairman of the company, owned 56.8% of the total number of the pre-IPO shares.

A price of $10 per ADS gives Tongjitang a valuation of 5.4 times revenues and an EPS multiple of 19.5. For a company that enjoyed a CAGR of 44% in revenue and 243% in profits over the past three years, that is a bargain.

When Tongjitang was expected to net $119 million in the IPO (price=$16), it intended to spend $40 million on marketing, $10 million on research and the rest on general corporate initiatives, including, most likely, acquisitions. The remainder is now probably in the $27 million range (more if the overallotment option is exercised). Even at the lower figure, $27 million is a respectable amount of unallocated funds for a company that came into the IPO with $29 million in cash and does not have a huge budget for research.

In initial open market trading, Tongjitang was slightly lower than its IPO price. It was changing hands at $9.89, a loss of 11 cents.

Disclosure: none.