The recent development regarding the re-election of the board of directors at Chengda Biological (688739.SH), a leading player in the human rabies vaccine market, suggests the company may soon enter a phase characterized by the absence of a definitive controlling entity. This transition could mark a significant shift in the management and operational dynamics of the firm, as well as its future business strategies.
Chengda Biological announced that its actual controller is expected to change. This decision came after the controlling stakeholder, Liaoning Chengda (600739.SH), voted to approve proposals for a board reshuffle. Subsequently, Shaoguan Gaoteng Enterprise Management Co., Ltd., henceforth referred to as Shaoguan Gaoteng, will wield considerable influence over Liaoning Chengda’s operations through the newly constituted board of directors. This shift will not only alter the controlling shareholder of Liaoning Chengda to Shaoguan Gaoteng but also trigger an offer for acquisition of Chengda Biological by the latter.
Shaoguan Gaoteng is a wholly-owned subsidiary of Guangdong Min Investment Co., Ltd. Upon scrutinizing the shareholding structure, it's evident that Min Investment lacks a definitive actual controlling party. This indicates that following Shaoguan Gaoteng’s involvement, the true controller of both Liaoning Chengda and Chengda Biological could potentially transition to a status of no practical controller, thereby distancing the firms from their previous state where state-owned involvement was prominent.
Sources close to both Liaoning Chengda and Chengda Biological indicated to reporters that once the board elections are finalized, Liaoning Chengda will stand as the sole subject directly controlled by Min Investment in capital markets. This new relationship will allow for synergies across different sectors, including biotechnology and financial investments. The aim of this strategic move appears to be focusing Liaoning Chengda's operations, especially enhancing the core business surrounding biopharmaceuticals represented by Chengda Biological, thereby reinforcing vaccine development and pursuing international markets. However, due to the performance challenges faced by both Liaoning Chengda and Chengda Biological in recent years, there is a palpable urgency to implement market-oriented mechanisms and leverage the industrial resources of Min Investment, which could potentially lead to improved operational efficiencies and optimized business structures for both entities.
The initial announcement about the potential change in control came on the evening of February 10. Chengda Biological was suspended from trading shortly thereafter, having received notification from Liaoning Chengda about its impending board election process. This prospect of significant change understandably led to a drop in share price upon resuming trade, reflecting market trepidation over the unfolding dynamics. By February 13, Chengda Biological's shares opened lower and closed at 27 RMB per share, a decline of 4.53% on the day.
According to Chengda Biological's announcements, the board of Liaoning Chengda will convene on February 12, 2025, to approve board election proposals. Post-restructure, Shaoguan Gaoteng is expected to nominate board members exceeding half of the non-independent director seats on the Liaoning Chengda board, thus exerting substantial control over management decisions. Consequently, the former state-owned asset management authority will cede its position to this new player, Shaoguan Gaoteng, leading to an indirect control over Chengda Biological's 54.67% equity stake.
At the same time, Shaoguan Gaoteng presented an acquisition proposal for Chengda Biological, aimed at acquiring the freely tradable shares held by other shareholders outside of Liaoning Chengda. The offer price stands at 25.51 RMB per share for approximately 184 million shares, accounting for 44.18% of Chengda Biological's total outstanding shares. However, this acquisition is subject to approval from the shareholders' meeting of Liaoning Chengda following the board changes.
This reconfiguration suggests a possible transition from state-owned to private control for Chengda Biological, previously a crucial asset in Liaoning Chengda’s portfolio.
Diving deeper into the history of Chengda Biological reveals that it was established in June 2002, initially with registered capital of 10 million RMB, financed by a consortium of Liaoning Chengda Group, Dalian Chengda Technology Investment Co., and the Liaoning Provincial Medical Devices Research Institute. With Liaoning Chengda acquiring an 80% stake in 2005, it became the firm’s principal shareholder. By 2021, the firm had successfully launched its shares on the Sci-Tech Innovation Board.
The state’s involvement in these enterprises has always been underscored by its recognition of state-owned enterprises as vital backbones of the local economy. The Liaoning Provincial State-owned Assets Supervision and Administration Commission has previously suggested that mixed-ownership reform is crucial for state-owned enterprises to navigate market challenges effectively.
Aiming for continuity despite this transition, Chengda Biological has stated that the control change would not pose any significant disruptions to its day-to-day operations. Management teams are expected to remain intact, and the company intends to uphold its established strategies while enhancing competitive advantages to continue delivering shareholder value.
However, the impending change has prompted speculation about Chengda Biological’s future, particularly given its current financial challenges. As a company primarily engaged in the research and production of human vaccines, its flagship products are the human rabies vaccine and the inactivated Japanese encephalitis vaccine. Notably, since 2008, the human rabies vaccine has consistently captured a leading market share, establishing itself at the forefront of this niche.
In recent submissions, Chengda Biological announced several promising candidates still in development including dual-cell rabies vaccines, quadrivalent/trivalent flu vaccines, and a range of pneumonia vaccines, illustrating its aspirations to diversify its product lineup. Nonetheless, the firm’s revenue heavily relies on its rabies and encephalitis vaccines, leading to concerns over business risk due to a concentrated product structure.
Entering a period marked by intensified competition within the domestic rabies vaccine market, Chengda Biological faces a more challenging landscape than ever before. This has had tangible impacts on its operational performance; after surpassing 2 billion RMB in revenue in 2021, annual revenues dipped consecutively, reflecting a downturn in terms of both sales and profitability. The latest financial reports have indicated that revenues decreased 3.58% in 2023, accompanied by a steep plunge in net profits, exacerbated by rising costs and increasing competition.
As of the first half of 2024, while revenue fell, profitability did not correspondingly improve. Cash flow from operations also took a hit, and an accumulating accounts receivable pool, notably large at 1.19 billion RMB, poses further financial risks. Chengda Biological’s management acknowledges potential issues arising from customer defaults due to various operational difficulties, underlining the complex challenges they navigate.
The forthcoming changes in control, alongside the existing business dynamics signify a pivotal period for Chengda Biological. Stakeholders are keenly watching how these developments might enable or hinder the firm’s recovery and future trajectory in a volatile market.