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Tianjin Pharmaceutical Da Ren Tang Is Shrinking To Succeed In FY2025 · Investor Exchange

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Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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Welcome to a brand new deep dive. Imagine for a second that you're holding stock
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in a massive pharmaceutical giant, right? Okay, I'm with you.
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You wake up, you grab your morning coffee, and you pull up their freshly released
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2025 full year financial announcement.
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And you're probably looking for good news. Exactly.
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But instead, you see this glaring top-line headline, revenue has plummeted by
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33% in a single year. Oh, wow.
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Yeah, that's usually the part where you hit the panic button.
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Right. Your instinct as an investor is to totally freak out. Yeah.
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But what if I told you that by losing a third of their total revenue,
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this exact same company saw its overall gross profit margin
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just absolutely skyrocket. Like from what to what? From 47% to a whopping 72%.
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That is, I mean, that's a massive jump. It really is.
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So today our mission is to step into the shoes of an investor and decode this mystery.
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We are opening the books on a giant in the traditional Chinese medicine space.
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Right, Tianjin Pharmaceutical Da Ren Tang Group. Which, just to keep us from
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stumbling over it every five seconds, we'll just call TJDRT for short. Good call.
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Yeah, TJDRT is much easier. So we're going to strip away all the dense accounting jargon today.
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We're looking at their actual financial health, where their cash is secretly
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flowing, and the risks they're facing in this rapidly modernizing industry.
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Because it's not just about the numbers on the page, it's about the strategy behind them. Exactly.
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So let's jump right into that first segment, this revenue illusion,
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because the numbers are shocking.
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They really are. In 2024, TJDRT reported revenue of 7.31 billion RMB.
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But then in 2025, that drops all the way down to 4.92 billion.
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That is a huge chunk of money just vanishing.
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Right, a 33% drop. I mean, if I'm an analyst, I'm thinking they lost catastrophic market share.
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Yeah, you'd think customers just stopped buying their products entirely.
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But when you actually dig into the filings, this isn't a story of lost sales
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at all. It's actually a story of, like, intentional corporate surgery.
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Corporate surgery. I like that. Break that down for us. So it comes down to
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this accounting mechanism known as a change in consolidation scope.
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Basically, TJDRT had this subsidiary, a company they controlled, called TJZX Medicine.
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And historically, every single RMB that TJZX Medicine made was rolled up into
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the parent company's total revenue.
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Which makes the parent company look huge on paper. Exactly. It pumped up their
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top-line numbers massively.
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But for the 2025 financials, they deliberately excluded that subsidiary's data.
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They deconsolidated it. Ah, okay. So it's kind of like...
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Think of a really high-end Michelin star restaurant, right? Okay.
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But for some weird reason, this restaurant also operates a massive fleet of
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low-budget food trucks on the side.
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Right, right. Now, those trucks are out there doing millions in sales,
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which makes the whole business's total revenue look amazing.
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But when you factor in the gas, the labor, the food spoilage...
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The trucks are barely making pennies in actual profit.
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Exactly. So if the restaurant owners decide to just spin off the food truck
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business, their total revenue drops massively overnight. Because the food truck money is gone. Right.
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But because now they're only selling high margin premium steaks in the restaurant.
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Their overall profit margin shoots through the roof. That is honestly the perfect
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analogy, because that's exactly what TJZX Medicine was doing.
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It was this high revenue, but extremely low margin operation.
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Said weight. Yeah. It was expensive to run, and it dragged down the efficiency of the whole group.
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So by pruning that branch off the tree, the tree looks 33% smaller,
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but the remaining branches are producing way better fruit. Better fruit being
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higher profit. Exactly.
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The math is fascinating here. While the total revenue dropped by a third,
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their actual gross profit increased.
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Wait, it went up even with less revenue.
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Yeah, it went up by 3%, hitting 3.56 billion RMB.
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Wow. And because they shed all that low margin noise, their overall gross profit
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margin leaped to 72%. Plus, the filings show that the core industrial revenue,
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like their actual manufacturing business, went up. So the core engine is actually getting stronger.
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Precisely. And pruning that food truck fleet, to use your analogy,
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also completely slashed their expenses.
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Oh, I bet. What kind of savings are we talking about? Well, their administrative
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expenses dropped by 16%. That alone is a savings of 74.7 million RMB.
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Just in corporate overhead, that's incredible. Yeah. But the craziest part is their finance costs.
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Like the cost of borrowing money. That line item dropped by an unbelievable 97%.
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97%. How do you even do that? Because when they spun off TJZX Medicine,
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they also spun off all the external bank loans that the subsidiary was holding.
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Oh, I see. So they just wiped the debt off their own books. Exactly.
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They cleared their balance sheet. OK, but hang on. I'm looking at the notes here.
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And even with all these amazing cost savings and this 72 percent margin,
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the actual net profit for the year dipped slightly. It did. Yeah.
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Down by 5 percent to 2.11 billion RMB. So as an investor, I'm asking if the
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core business is so healthy and they just saved all this money,
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what's dragging the net profit down?
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And more importantly, when you look at the cash flow, things get kind of weird.
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They do get very weird. Because there's this specific line item under other gains.
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They reported a massive one-off gain of 1.54 billion RMB. Right, which is huge. Yeah.
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So playing the skeptic here, if I see a 1.5 billion RMB windfall in a year where
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net profit still dipped, my first thought is, are they artificially propping up their profit?
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Like, are they selling off the family silver just to make 2025 look OK?
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It's a completely fair question. You know, you don't want to see a company burning
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the furniture to keep the house warm. Exactly.
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But if you look at where that $1.54 billion actually came from,
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it's not a desperate fire sale at all.
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It was generated by the disposal of their remaining 12% equity interest in an associate company. OK.
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Which company? The Sino-American, Tianjin Smith-Kline, and French Lab.
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Oh, OK. So a joint venture with a Western pharma giant. Right.
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And they've been planning this. It's a strategic exit.
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They actually sold off a 13 percent stake back in 2024. And this was just the final 12 percent.
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Ah, so they're just getting out of Western synthetic pharma completely.
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Exactly. They are a traditional Chinese medicine company.
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Holding a minority stake in a Western joint venture just doesn't fit their core mission anymore.
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They're cashing out of non-core investments. You got it. And they're doing this
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house cleaning elsewhere, too.
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Like, they recognize a 17.37 million RMB gained from a bankruptcy liquidation
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of another former subsidiary, Shin Pum.
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Just systematically purging distractions.
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Yeah, purging everything that isn't their core business. OK,
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but this leads me to my next big question.
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They just pocketed over 1.5 billion RMB from the SmithKline sale.
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Right. But when I look at the balance sheet, their cash on hand actually dropped by 65%.
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Did they lose it? Like, if you just sold an asset for over a billion,
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why does your checking account look empty?
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Well, it's not empty. It just moved. This is classic treasury management.
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You have to look at how they reallocated that capital. OK, where did it go?
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They took 2.92 billion RMB and moved it into large denomination certificates of deposit or CDs.
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Oh, wow. So safe interest bearing accounts.
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Exactly. The cash didn't vanish. It was just reclassified on the balance sheet
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from cash to other financial assets. Which is such a telling move for an investor to see.
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They didn't lock it up in real estate, and they didn't blow it on risky acquisitions.
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They kept it highly liquid, earning interest.
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Right. They are building a massive war chest.
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A highly liquid war chest. But they aren't just hoarding all of it, are they?
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Definitely not. If you held TJDRP's stock in 2025, you had a great year.
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They took a ton of that cash and rewarded their investors with phenomenal dividend
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payouts. Yeah, the numbers here are wild.
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They paid an interim dividend of 2.45 RMB per share.
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Which totals nearly 1.89 billion RMB just in that one payout.
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That's insane. And they're proposing a final dividend of 1.28 RMB per share on top of that.
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Yeah, so they're returning massive value to shareholders. But here's the kicker.
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They're also heavily investing in their future. Right, the R&D. Exactly.
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Despite shrinking their top-line revenue, their research and development expenses
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went up by 17%, hitting 189.8 million RMB.
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So let me just connect these dots for the listener here.
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They intentionally shrink their low margin revenue. They sell off non-core assets.
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They build a nearly 3 billion RMB.
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Highly liquid war chest in CDs, and they ramp up R&D by 17%.
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That's the playbook, yeah.
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You don't do all of that simultaneously unless you are bracing for a major shift
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in the industry landscape. No, you definitely don't.
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So what exactly are they preparing for in 2026 and beyond?
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Because traditional medicine right now seems to be at this crazy crossroads
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of ancient history and the digital age. It really is. It's fascinating.
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So on the positive side, they have some massive macro tailwinds.
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The biggest one is just demographics.
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An aging population. Exactly. An aging population creates incredibly resilient demand for health care.
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But it's paired with this cultural shift toward preventive health care.
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Like people not waiting until they're sick to take care of themselves.
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Right. And traditional Chinese medicine is perfectly positioned for that because
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preventive balance is like the entire core philosophy of the practice.
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Okay, so the demand is there. But if I'm an investor, I'm thinking.
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Ancient philosophy doesn't naturally scale into modern corporate profits, right?
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You picture someone measuring out roots and herbs in a dusty apothecary.
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Which is exactly what TJDRT is trying to move away from.
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They are aggressively pushing into intelligent manufacturing.
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Intelligent manufacturing. Yeah. So this is where that 17% boost in R&D is going. Yes, exactly.
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Because the main problem with natural ingredients is consistency.
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A plant's potency changes based on, you know, soil quality or how much it rained that year.
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So you can't build a multi-billion dollar pharma business if your pills have
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different potencies every batch.
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TJDRT is using automated sensor-driven factories to guarantee quality consistency.
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So a bill they make today is chemically identical to one they make a year from now. Exactly.
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But they're also using big data and artificial intelligence for their new drug
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R&D. Wait, AI for traditional herbal medicine? Yeah.
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They're applying modern, evidence-based medicine to these ancient recipes.
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Using algorithms to figure out exactly how these complex compounds work at a
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molecular level. Which they need to do to get regulatory approval, right?
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You absolutely have to have that data now. And they're also shifting their sales
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channels, moving away from just traditional offline pharmacies and leaning hard
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into internet plus pharmaceutical.
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Internet plus pharmaceutical. Basically integrating online and offline sales
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to reach the consumer directly through e-commerce.
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Okay, so they have the aging population tailwind. they have AI,
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they have e-commerce, that all sounds great.
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But we have to talk about the headwinds. The scary stuff. Yeah, the risks.
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Because there's a regulatory storm happening in China right now that explains
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exactly why they are hoarding 3 billion RMB in those safe CDs.
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We have to talk about volume-based procurement.
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Yes, volume-based procurement, or VBP.
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If you invest in this space, you have to understand VBP.
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Let's explain this simply for you listening, because on the surface,
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VBP actually sounds like a good deal.
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It does, yeah. The government basically comes to the pharma companies and says,
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hey, we represent all the public hospitals.
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We will buy your drug in massive bulk, guaranteed massive sales volume.
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Sounds like a dream. Right.
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But the catch is the bidding process. To win that massive government contract,
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the companies have to underbid each other.
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Brutally underbid each other. Yeah. It results in these mandatory price cuts
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of like 50, 60, sometimes 70 percent. It's a massive squeeze on their profit
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margins industry-wide.
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It really is. It forces companies to be hyper-efficient because if you're bloated, VBP will wipe you out.
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And on top of that margin squeeze, the government is demanding incredibly strict
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drug quality and traceability standards.
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Traceability, meaning they need to know exactly where the herbs came from?
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Down to the soil. They want a digital ledger proving where it grew,
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how it was processed, how it was stored.
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Wow. So you can't just cut corners to survive the VBP price cuts.
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You have to be cheap, fully traceable, and perfectly compliant.
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Which makes their entire 2025 strategy make perfect sense.
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If you know a 70% price cut might be coming, you can't be carrying a low-margin
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food truck business like TJZX Medicine. You have to cut it loose.
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And you have to build that huge cash war chest so you don't have to take out
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expensive loans when the bidding war has tightened your cash flow. Exactly.
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So what's their actual operational plan to survive VBP in 2026?
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Well, looking at their documents, they're leaning heavily on a brand-led strategy.
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They are focusing on their exclusive product portfolio. Which is their main
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defense mechanism, right? Yeah.
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Because if you just make a generic chemical pill that 10 other factories can
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make, VBP forces a race to the bottom on price.
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Because it's easily replaceable. Right.
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But TJDRT owns the exclusive rights to several time-honored,
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patented traditional recipes.
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So the government can't just play them off against five other competitors.
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They have the pricing power of exclusivity. Exactly. But they're also doing
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something they call full industry chain capabilities.
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Okay, what does that mean in practice? It's vertical integration.
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They aren't just buying herbs from some third-party broker and hoping it's good.
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They want to control everything, from the dirt the plant grows in,
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to the AI manufacturing, all the way to the retail app that sells it to the consumer.
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Ah, so they capture the profit margin at every single step.
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Yes, and they have complete control over that traceability data the government
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is demanding. That's incredibly smart. And it really brings us back to why they
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deconsolidated their financials at the start of the year.
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They needed to clear out the clutter so they could laser focus all their capital
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into this vertically integrated chain.
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Exactly. So to bring it all together for you listening.
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TJ DRT in 2025 is honestly a masterclass in strategic contraction.
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It really is. At first glance, a 33% revenue drop looks like a disaster. Yeah.
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But they intentionally shrank their top line to drastically improve their profit margins.
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They cashed out of non-core investments, rewarded their shareholders with massive
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dividends, and built a huge safety net.
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And they were heavily funding R&D to survive a highly regulated.
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Tech-driven future. It's a really impressive pivot.
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It is. And it leaves us with this final kind of provocative thought to mull over.
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You know, for the last hundred years, the winners in the pharmaceutical space
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have been companies making brand new synthetic chemicals in modern labs.
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Right. The Western model.
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But as artificial intelligence gets better at validating and mass producing
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natural compounds, will the ultimate winner 10 years from now be the company
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with the newest synthetic chemical?
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Or will it be the company with a thousand-year-old recipe optimized by the world's
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smartest algorithm? Exactly.
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It totally reframes the future of medicine. It does. I mean,
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ancient remedies getting a high-tech upgrade. It's fascinating.
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It really is. Well, thank you for joining us on this deep dive into the numbers
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and the strategies defining the healthcare landscape.
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And as always, before we go, we have to remind you, this content is intended
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to serve strictly and only as an informational, independent,
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objective summary of recent events.
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And should in no way be interpreted, construed, or lied upon by any party as inside information.