Chipped off?

Liu: he gave the tiger its wings

When it went public in Hong Kong in 1994, CSPC Pharmaceutical Group was known as China Pharmaceutical Group. At that time whenever a firm had ‘China’ at the front of its name, that ‘national’ trademark usually suggested it was the dominant state-firm in its field (think China Mobile or China Life).

However, CSPC was relatively speaking a minnow in the highly fragmented pharma industry. Nor was it controlled by the central government (via Sasac) but by Shijiazhuang Pharmaceutical (SJZP), a state-owned enterprise under Hebei’s Shijiazhuang local government.

Even after 13 years as a listed company, CSPC carried a modest market value of just $1.2 billion (as of June 2007). That was when things began to change, as Legend Holdings, a private sector investment conglomerate, took over SJZP.

“What I am doing is to set the tiger free from the cage, and give it a pair of wings,” explained Legend’s chairman Liu Chuanzhi at the time, describing SJZP as a beast in captivity, and proclaiming a privatisation would release its true potential.

Indeed, SJZP’s fortunes roared and the value of CSPC has since soared more than 14 times. But in a bizarre twist of fate Liu’s flying tiger has just come back to bite him. That’s because last week, CSPC was selected as the newest member of Hong Kong’s blue chip Hang Seng Index (HSI). And the company that was dumped to make way for it was Lenovo, China’s most iconic computer brand – founded by Liu and controlled by Legend.

In the last HSI reshuffle – which occurred last November – Hong Kong’s flagship carrier Cathay Pacific was removed to make way for Guangdong-based property giant Country Garden (see WiC388).

CSPC is the first pharmaceutical firm to be added to the 50-member HSI. Its inclusion, Hong Kong Economic Times suggested, underscores investors’ growing confidence in China’s healthcare industry (see WiC397 on China’s ‘Big Health’ concept). In a move to attract more promising start-ups from the sector, the Hong Kong bourse has also amended its listing rules to allow biotech firms to go public even before they generate any revenue (see WiC406).

SJZP is in no shape or form a start-up: it started as a fairly basic factory founded by the Red Army in 1938 in Hebei province. And like many older state-owned enterprises, it suffered decades of inefficient management. The lossmaking firm was finally turned around in the reform era and grew into an important production base for penicillin and vitamin C.

CSPC’s current management, including chairman Cai Dongchen, was given most of the credit for the transformation. According to China Economic Weekly he joined the group in 1975 as a technician and led efforts to develop a number of innovative and popular pharmaceutical products including the NBP series (or butylphthalide products, mainly for treating acute ischemic strokes).

Following the Legend-funded privatisation, the group’s Hong Kong-listed unit changed its name from “China Pharmaceutical” to CSPC in 2013 after acquiring various profitable sister firms. At the same time Legend began to exit. By mid-2015, it had sold its entire stake in CSPC to Cai and other executives.

Yet still, the share price of CSPC has continued to take flight – it traded at below HK$3 in June 2007, climbing to over HK$6.2 when Legend exited, and as of this week it is worth more than HK$23 per share, equating to a HK$145 billion ($18.6 billion) valuation.

Forbes estimates Cai is worth $4 billion.

For some critics, SJZP’s privatisation and the subsequent management buyout of CSPC may appear a standard case of “siphoning state-owned assets” on the cheap.

But in this case, Cai seems to have won the approval of state media. China News Weekly, for instance, says it has been a “win-win-win” situation for Legend, CSPC and the Shijiazhuang government, which continues to reap hefty tax revenues and other economic benefits from hosting one of the nation’s leading pharmaceutical firms.

As for Lenovo, it marks the second time that the PC-to-smartphone firm has lost its blue-chip status. It was dropped from the HSI in 2006 only to return in 2013.

Its value has slumped 56% since then (to HK$46 billion) and last month Bloomberg bestowed on it the unwelcome moniker of being “the world’s worst tech stock”.

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