► The COVID-19 pandemic has laid a relatively negative impact on Tong Ren Tang, who owns over 800 offline Chinese medicine pharmacies.
► Tong Ren Tang's high-tech subsidiary is faced with fierce competition in the biotechnology area.

The COVID-19 outbreak has been significantly impacting the Chinese healthcare industry. From a general outlook, many healthcare companies pivoting to research and development are actively taking advantage of this trend. However, with national social distancing and a wide-scale suspension of manufacturing, production and business operations are suffering. The disruptive forces have tortured healthcare retailers in almost every segment.

Tong Ren Tang (600085:SH), a Chinese pharmaceutical company founded in 1669, has not benefited a lot from rising healthcare trends. On the contrary, this time-honored brand did not perform well in the first half of 2020. The company jumped to a record low of CNY 24.13 within one recent year.

Quite apart from the recent negative impact brought by COVID-19 pandemic, Tong Ren Tang itself has not been a very outstanding performer among traditional Chinese medicine (TCM) industry players. Over the last twenty years, Tong Ren Tang showed a relatively poor performance in weighted ROE compared to other peers, Yunnan Baiyao (000538:SZ), Pientzehuang (600436:SH) and Dong-E-E-Jiao (000423:SZ).

Tong Ren Tang primarily engages in manufacturing Chinese medicines and retail sales at operating drug stores across China. It has established a national network of 852 drug stores, with more strategic weight in tier-one cities and a dynamic of outwards expansion. Through these retail shops, the company directly serves offline customers with Chinese and western OTC  drugs, dietary supplements and medical devices.

The product structure in the offline shop did not change a lot in the last two years. But these two years indeed saw an increasing trend in dietary supplements and home-use medical devices. Among the over 852 drug stores, 627 shops are qualified as a healthcare insurance providers. The pharmaceutical business recorded a gross margin of 31.5% in 2019, an increase of 1.24% compared to the previous year.

These shops have been working as the company’s major selling channels and have become a more efficient revenue generator. However, on the other side, they are also the most negatively impacted by the lockdown.

A zigzag high-tech path

As it comes to tech-driven modern times, most old companies are faced with the need for digitalization or internationalization. So are these centuries-old Chinese medicine makers. They will not survive by merely sticking to old medical recipes – and probably may fail to pass down their time-honored brand to a new generation.

For Tong Ren Tang, it is undoubtedly an urgent and significant issue. It tried to solve it by establishing a high-tech subsidiary, Tong Ren Tang Technologies (1666:HKEX). To expand the business into a more high-value medical industry, this company primarily engages in Chinese patent medicines, biological preparations, antibiotics and biochemical medicines.

In 2019, Tong Ren Tang Technologies recorded revenue of CNY 4.47 billion and net profits of CNY 741 million,  which are 11.53% and 26.29% fall from 2018. Since the newly-built construction base has not fully worked and the product portfolio transfer is still in process, the revenue during 2019 was negatively influenced.

In a positive outlook, the high-tech subsidiary's performance may do better after the production capabilities are fully loaded; many market watchers are counting on a recovery in the retail business.

However, there are still many uncertainties in front of the 350-year old pharmaceutical. The most short-term issue is whether the retail business can go back to normal. During the lockdown period, the online healthcare business captured the right timing to realize a soaring boom. Many e-healthcare platforms, such as Ping An Good Doctor, WeDoctor and Ali Health, have achieved growth in terms of new users.

It is undeniable that many consumers have started to use online healthcare platforms to buy medicine and consult doctors. As the advantage of the Internet impresses consumers amid the pandemic, how much will they stick to the traditional retail drug stores later?

Indeed, offline drug stores need to adopt user perspectives and develop more functions than merely selling drugs.

Another issue for Tong Ren Tang to consider is that of the high-tech subsidiary. Faced with fierce competition in the biotechnology and healthcare tech-game with its Internet giants, Tong Ren Tang will not stand out if it cannot develop a competitive advantage in a niche segment or keep a low ratio of R&D investment.

All things considered, the global public issue has awoken a wide-scale awareness of healthcare and human life concerns.