M&A

Taking their medicine

Baoneng versus China Resources again, this time in donkey tonic?

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Baoneng’s boss Yao Zhenhua

China Resources has a reputation for being one of China’s most illustrious state-owned firms. It was founded in 1938 as Liow & Co in Hong Kong, with a mission to procure military supplies for the Communist Party. It took over a number of Hong Kong companies run by underground Party members and its patriotism was never in question – in 1948 it was renamed with two Chinese characters: the first denoting China and the second inspired by a scholarly name adopted by Mao Zedong.

Despite its glorious past, the company’s influence seems to have been on the wane since its Party boss Song Lin was arrested in 2014 by anti-graft investigators. And in Shenzhen, where China Resources has built a strong presence, the state giant has looked vulnerable enough that a young, privately-held firm is trying to prey on some of its prized assets. Regular WiC readers will be familiar with the M&A saga involving China Vanke, a property giant originally aligned with China Resources (its biggest shareholder), but now a potential takeover target of Baoneng, a property-to-insurance conglomerate controlled by Shantou native Yao Zhenhua.

Vanke isn’t the only China Resources-related company that Baoneng has been going after. According to Beijing Business Today, Foresea Insurance (Baoneng’s Qianhai-based insurance unit) has also accumulated a 4.17% stake in Dongeejiao Pharmaceutical, a tradi tional Chinese medicine (TCM) producer, which counts China Resources as its biggest shareholder.

Dongeejiao is China’s leading producer of e’jiao, a tonic made from donkey skin. Before March this year, China Resources held a 23% stake but the firm’s latest interim report revealed that CR Pharma, the pharmaceutical unit of China Resources, had acquired an additional 4.66% stake during the second quarter.

“The intention of Baoneng [on Dongeejiao] remains uncertain but obviously China Resources has felt the pressure. It is reinforcing its control of Dongeejiao to prevent Baoneng from stoking the same M&A drama as it has done over Vanke,” Beijing Business Today has suggested.

Dongeejiao’s market value stands at Rmb38 billion ($5.7 billion) as of this week. That is only a fraction of Vanke’s Rmb266 billion capitalisation but the shares have experienced a steady rise, climbing more than 800% over the past 10 years.

That is in line with demand for e’jiao, commonly used by Chinese as a ‘blood enricher’ to treat anaemia and prevent miscarriages. Faced with a shortage of donkeys, Dongeejiao has raised the price of its product 16 times in the past decade (see WiC313).

Dongeejiao accounted for about 10% of CR Pharma’s net profit last year. CR Pharma is one of the drug and healthcare firms lining up to go public this year (see WiC335) and it warned in its listing prospectus that it may lose control of Dongeejiao.

“If Dongeejiao’s other shareholders collectively misalign their votes with ours in shareholder meetings, especially under the circumstance that a hostile bidder acquires sufficient equity interests from the open market, we may lose our control in Dongeejiao,” it reported. “Our financial condition and business prospects could be materially and adversely affected.”

As one of the ‘reddest’ state enterprises, China Resources is unlikely to roll over so easily. Song Lin’s successor, Fu Yuning, is no pushover either. Prior to joining China Resources, he spent 15 years with China Merchants, one of the most powerful firms in Shenzhen.

Baoneng may be targeting a lucrative return on the shares that it has already acquired in the medicine maker, as China Resources moves to shore up its position. But the relationship between the two rivals is far from clear cut.

In July, a director at Vanke even accused Baoneng and China Resources of acting in concert to block a share sale to the Shenzhen Metro Group, which is favoured by Vanke’s management.


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