Tongjitang Chinese Medicines: CEO Buyout Offer Blunts Effect of Disappointing Report

| About: Tongjitang Chinese (TCM)

[Update below] Tongjitang Chinese Medicines Company (NYSE:TCM) received a buyout offer from its Chairman and CEO, Mr. Xiaochun Wang, for $10.20 per ADS, a 55% premium to its closing price on Friday of $6.60 per ADS. Tongjitang makes modernized forms of traditional Chinese medicines.

Tongjitang made its IPO in March of 2007 at $10 per ADS. It has traded as high as $12.88, but the recent downtrend in stock markets took the stock price to new lows.

Tongjitang, which is scheduled to release its 2007 financial report after the closing bell Monday, is a solidly profitable company. In the most recently announced 12 months (ending September 2007), it earned $26 million on revenues of $80 million. While profitable and well-stocked with cash, Tongjitang reported in Q3 that its main source of revenue, the osteoporosis drug Xianling Gubao, increased its sales just 2% over the year-earlier quarter.

The company floated 9.9 million ADSs in the IPO, so its cash reserves of $108 million will just about pay for the entire go-private move. Nevertheless, the offer is contingent upon obtaining financing.

Of the 33.4 million ADSs outstanding, Mr. Wang holds about one-third. One of the directors is participating with him on the buy-out, which is being considered by the remainder of the board.

One of the upshots of the buy-out would be that the company would no longer have a publicly traded stock to use as currency to make acquisitions. However, that could be seen as a bonus, because the stock had fallen to a point where it was trading at just 7.3 times trailing 12 month earnings. At that point, a privately held stock may be more valuable. For a profitable company like Tongjitang, an IPO is often a means to make acquisitions, but Tongjitang has not announced any during the past 12 months.

Tongjitang Chinese Medicine’s ADSs responded to the announcement, rising $2.23 to $8.83, a 34% jump. The fact that the ADS price remains a long way from the $10.25 buy-out offer indicates investors have considerable doubt the deal will go through.


Tongjitang Chinese Medicines Company said that share-based compensation costs took its net operating income down to almost zero in the fourth quarter. Without special charges, which include share-based compensation and other public company-related charges, Tongjitang would have reported net operating income of 55.2 million RMB ($7.6 million), a 55% improvement over the 35.5 million RMB ($4.9 million) the company earned in Q4 of 2006.

The decline is net operating income occurred despite an 18% increase in revenues, which were 180 million RMB ($24.6 million). Sales of the company’s main revenue driver, the osteoporosis treatment Xianling Gubao, were up 14% to 135 million RMB ($18.5 million) while other products increased their sales by 67%.

Following its IPO last March, Tongjitang has had a large cash position of $110 million. The cash earned interest, which took its null income from operations to a profit of $2.5 million.

Earlier Monday, Tongjitang CEO and Chairman, Mr. Xiaochun Wang, made a cash buyout offer of $10.20 per ADS for each publicly traded ADS. The offer pushed Tongjitang $2.07 higher to $8.67, a 31% jump. Without that offer, Tongjitang shares would be under considerable pricing pressure. The timing of the buyout offer – just before an earnings announcement – seemed unusual, but the announcement will now serve to blunt the effects of a disappointing year-end report.

For the 2007 full-year, Tongjitang recorded a 23% increase in revenues, which came in at 596 million RMB ($81.7 million). Profits from operations were down 19% at 121 million RMB ($16.6 million), largely because of the Q4 disappointment. Nevertheless, net income, with the interest income added in, moved up 27% to 171 million RMB ($23.5 million). 2007 net income was 76 cents per ADS.

The company had cash reserves of 798 million RMB ($109.4 million), up sharply from the 231 million RMB it had on hand at the end of 2006, largely because of the IPO.

Although Tongjitang is a profitable, well-funded company, it is not growing as fast as its peers. It also has the problem of being heavily dependent upon its main product, Xianling Gubao. The company is developing new products, and it spends money on marketing, but its efforts have not provided big revenue and profit increases so far.

Disclosure: none.