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One Asset Deal Changed Everything For Tianjin Da Ren Tang In Q3 2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Welcome to the Deep Dive. Today, we're digging into the financials of Tianjin
• 0:11
  Pharmaceutical Daren Tang Group, or DRT.
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  We've got their 2025, third quarter, and nine-month results here. That's right.
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  A major player in traditional Chinese medicine, or TCM.
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  And the big headline, the thing that jumps right out, is this strange situation.
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  Revenues are down significantly, like over a third, but profits have just exploded
• 0:32
  upwards by 168%. Yeah, it looks completely contradictory on the surface.
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  So our mission today is to figure that out. What's the real story behind these numbers?
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  We need to understand the strategy, not just the volatility,
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  and see what it suggests for DRT's future.
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  And it's crucial, as you said, to look behind the numbers, because DRT's 2025
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  results, well, they have a lot of, let's call it structural noise.
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  Structural noise. Yeah, significant changes in what's included in their consolidated
• 0:59
  results, plus major asset sales.
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  These things distort the simple year-on-year comparison.
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  So you really have to filter that noise out to see the true health of their
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  core business. It requires a bit of critical thinking. Okay,
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  let's dive into that first confusing number then, the revenue.
• 1:14
  For the nine months ending September 2025, consolidated revenue fell, what, 35%?
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  Down from about 5.6 billion RMB to 3.7 billion.
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  That sounds bad. It would sound bad in most cases, but here it's almost entirely down to one thing.
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  A change in their consolidation scope. Ah, the structural noise you mentioned. Exactly.
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  They excluded the operating revenue from Tianjin Zongson Medicine Co., LTD, or TJZX Medicine.
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  This was largely a distribution business. So they basically spun off or removed
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  a big chunk of lower value business. Precisely.
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  And what's really interesting is if you actually isolate DRT's core industrial
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  revenue, the TCM manufacturing side, that part increased compared to last year.
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  Right, so they intentionally shrank the top line to focus. That's a huge difference in interpretation.
• 2:02
  It really is. It wasn't a market collapse. It was a deliberate strategic move.
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  And that move immediately changes the picture for profitability,
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  right? Because despite revenue falling so much, the gross profit was pretty much flat.
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  Exactly right. Gross profit was about RMB 2.69 billion, almost identical to
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  the 2.68 billion last year.
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  But with a much smaller revenue base. The gross profit margin takes a huge leap.
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  It went from 48% in the first nine months of 2024, all the way up to 73% for the same period in 2025.
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  Wow, 73%. That's a massive jump. 25 percentage points.
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  And that jump is the direct result of taking out that lower margin TJZX distribution business.
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  It tells you their core industrial TCM operation is highly profitable.
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  So the cleanup worked, at least in terms of clarifying the margin profile of
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  the core business. Yeah.
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  If the margin shift was impressive, the bottom line profit figure is, well, staggering.
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  Profit attributable to the owners for the nine months hit roughly RMB 2.15 billion.
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  Yeah. That's up 168% from about 804 million last year. And earnings per share
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  went from RMB 1.04 to RMB 2.80.
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  How does that happen? It can't just be the margin improvement.
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  No, you're absolutely right. That spectacular headline number is overwhelmingly
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  driven by something else entirely.
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  And for you listening, the key thing to grasp is that this is a one-time event. A one-off gain. Yes.
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  Look at the other gains line item in their income statement. It exploded.
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  Went from about 49 million RMB last year to roughly 1.63 billion RMB this year.
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  1.6 billion in other gains. Yeah. So what's in that? The vast majority of it,
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  about 1.54 billion RMB, came from selling off their remaining 12% stake in Sino-American
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  Tianjin-SmithKline and French laboratories.
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  Ah, the GSK joint venture disposal. That was completed then.
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  Fully completed. They also had a much smaller gain, around 17 million RMB,
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  from deconsolidating another former subsidiary that went through bankruptcy
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  liquidation, Tianjin-Shinpun Pharmaceutical.
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  So putting it all together, that 168% profit surge isn't really from selling
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  more medicine. It's almost entirely this massive asset sale.
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  Exactly. It netted them about RMB 1.31 billion after tax.
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  It's cash in the door from a strategic cleanup, not from recurring operations.
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  You absolutely cannot expect that gain to repeat next year.
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  So we need to mentally park that huge gain to see the underlying operational
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  picture. So let's do that. Let's look underneath that one-off gain.
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  How are the actual operational costs looking? What's the health of the core engine?
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  Well, we can actually understand a lot of the cost shifts because of that TJZX
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  deconsolidation we talked about. Right.
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  Taking that distribution business out would affect things like admin costs,
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  finance costs. Precisely.
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  For instance, administrative expenses overall decreased by 13% for the nine
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  months, down to about RMB 311 million. That's largely because TJZX's admin costs are gone.
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  Okay, but what were the core industrial part that's left? That's where it gets interesting.
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  Within that remaining core industrial segment, admin expenses actually rose. Oh, why?
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  They specifically mentioned intensified brand promotion efforts,
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  so they're actively investing more in marketing their core high-margin brands.
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  That sounds positive. What about R&D?
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  Also up. R&D costs increased 6% to about RMB $105 million. So continued investment
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  in innovation, which is crucial in pharma.
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  Makes sense. And finance costs. We saw those mentioned.
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  Clumeted. Down 97% to almost nothing. Just RMB, $0.6 million for the nine months.
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  Again, that's mainly because TJZX had external borrowings and its interest expense is now excluded.
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  So costs are generally down due to the deconsolidation, but with targeted increases
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  in R&D and brand support within the core.
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  What about the impact from associates now that the Sino-American Tianjin stake
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  is gone? Yeah, that shows up clearly, too.
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  The share of profit of Associates line dropped dramatically,
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  down 88 percent to only RMB 20 million.
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  Because the profit contribution from Sino-American teenage is gone.
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  Completely gone. Last year, it contributed about RMB 136 million in that period. This year, zero.
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  So that divestment strategy is fully reflected now. OK, this leads us to another
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  slightly confusing part.
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  Cash flow. They just received this huge windfall, right?
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  Over 1.6 billion RMB from the asset sale.
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  That's right. The inflow from the Sino-American disposal was RMB 1.623 billion.
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  But their cash and cash equivalents balance actually decreased significantly
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  since the end of last year, down 64 percent, but RMB 1.9 billion,
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  leaving them with just over 1 billion RMB in cash.
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  Yeah, it seems counterintuitive, doesn't it? You sell a huge asset,
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  you expect cash to pile up.
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  So where did all the cash go? Okay, this needs connecting a few dots on the cash flow statement.
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  While that $1.6 billion came in from the disposal, there were some absolutely massive cash outflows.
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  Bigger than the inflow. Oh, much bigger in total. First, dividend payments.
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  They paid out a staggering RMB $9.8 billion in dividends during the period.
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  Whoa, $9.8 billion. Okay, that explains a lot of the cash reduction right there.
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  That's the primary driver, yes.
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  But second, they took a large chunk of the money they generated,
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  about RMB $2.56 billion, and used it to buy large-denomination deposit products.
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  So they didn't just keep the cash.
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  They moved it into a different kind of asset, like short-term investments. Exactly.
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  Think of it as turning pure cash into very safe, interest-bearing financial
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  assets. You actually see this on the balance sheet.
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  The line item other financial assets increased by 146%. That's where that $2.5
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  billion went. They opted for security. Got it.
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  Cash didn't vanish. It was paid out or parked safely.
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  What about cash from actual operations? That also took a hit,
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  but for a related reason.
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  Net operating cash inflow decreased by 89%. The main reason?
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  Taxes. Taxes on the asset sale. You got it.
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  They had to pay the income tax related to that big Sino-American Tianjin disposal
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  gain about RMB 491 million.
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  And that payment flows through the operating cash flow section.
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  So it dragged down the operating cash figure significantly, even though it's
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  linked to the investing activity.
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  Right. So it's an immediate consequence of the sale, not a sign that day-to-day
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  operations are suddenly burning cash.
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  Yeah. Okay, so they've done this
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  major restructuring, cleaned up the financials, got a chunk of capital.
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  What does the future look like? What's the outlook for DRT in the broader TCM industry?
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  Well, they didn't give a formal forecast, but they talked quite a bit about
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  the industry landscape.
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  The TCM sector itself is kind of reshaping. Reshaping how?
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  There's short-term pressure, mainly from things like health insurance cost controls,
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  but the underlying demand seems resilient.
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  The big shift, though, is this move away from just getting bigger towards focusing
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  on quality and value first. Quality and value.
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  Makes sense in health care. And importantly, there's strong policy support for
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  this. The government is pushing TCM innovation, trying to speed up R&D,
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  get classic formulas approved faster as modern drugs.
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  There's even this whole pharma industry digital intelligence transformation plan.
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  Digital transformation in TCM. Yeah, aiming to digitize the whole supply chain
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  R&D manufacturing by 2030.
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  So a lot of supportive policy tailwinds for companies focusing on quality in tech.
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  OK, that sounds promising. But what are the main headwinds or challenges they
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  face? The big one remains the cost of raw materials.
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  Prices for many Chinese medicinal herbs have surged, while maybe easing slightly, they're still high.
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  Right, that could really squeeze those nice high margins if they can't manage it. Exactly.
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  So managing the supply chain, controlling costs, ensuring efficiency that's
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  critical for someone like DRT to maintain that 73% gross margin.
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  So how is DRT positioning itself strategically?
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  Given this landscape. Their strategy seems pretty aligned with that quality and value trend.
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  They're talking about deepening their brand-led strategy, leveraging their well-known
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  brands, focusing R&D on things with clear clinical value, and making management
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  upgrades to boost operating efficiency.
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  So using the focus gained from the divestments to really double down on the
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  core industrial business. That seems to be the plan.
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  Become, as they put it, a market-driven, tech-enabled leader,
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  the cleanup gives them the platform. Now it's about execution.
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  Okay, so let's try and wrap this up. Our deep dive into DRT's 2025 results shows,
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  well, it shows a company in deliberate transition.
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  Definitely. Not instability, but transformation.
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  Right. That huge revenue drop and the massive profit surge aren't contradictory
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  if you understand the context.
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  They purposefully cut out a lower-margin distribution arm and sold off a major non-core investment.
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  Which cleaned up the balance sheet, boosted their capital, and dramatically
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  improved the reported margin of the remaining core business.
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  And that soaring profit, primarily that big one-time gain from the asset sale.
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  A successful strategic move, but not repeatable income.
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  Exactly. So the picture now is of a more streamlined company,
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  focused on its high-margin core TCM business, and sitting on a significant pile
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  of capital from that sale. Which brings us to the final thought.
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  You mentioned they immediately parked over 2.5 billion RMB of that cash in safe deposit products.
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  Right. A very conservative move initially.
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  So the big question for you, the listener, to consider going forward is,
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  what's the long-term plan for that capital?
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  Will they keep playing it safe, maybe use it for future dividends?
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  Or they actually deploy it strategically, use that financial firepower to really
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  accelerate their stated vision. Will we see major investments in cutting-edge
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  R&D, maybe strategic acquisitions to bolster that tech-enabled leader goal?
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  Watching how they deploy or don't deploy that capital, that's going to be the
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  key story for DRT in the coming year.