Summary of Key Points
After withdrawing its A-share IPO application 21 months ago, Jiangsu Zhiyuan Pharmaceutical has turned to the Hong Kong Stock Exchange (HKEX) in search of listing, focusing on a dual-track development strategy that combines "over-the-counter (OTC) dermatological medications with efficacy-based skincare products." However, the reality is as follows: The company relies on 90% of its revenue from homogeneous generic drugs, its R&D investment is significantly lower than its marketing expenses, it faces cash flow challenges (with insufficient cash to cover short-term debts), and the compliance issues stemming from its A-share application (such as illegal loan transfers, fraudulent invoicing, and related-party transactions) have not been fundamentally resolved. Although the HKEX market is somewhat accommodating of the "medication + skincare" model, the company's strong focus on generic drugs may make it difficult to achieve the desired valuation. The success of its listing will ultimately depend on whether its skincare business can become a significant source of profit growth.
Detailed Analysis
1. A Dual-Track Strategy That's More Theory Than Practice
Zhiyuan Pharmaceutical claims to pursue a balanced approach with both medication and skincare products, but the financial data in its prospectus contradicts this claim. As of the end of 2025, the medication business accounted for over 90% of total revenue, while the skincare segment contributed less than 8%. The core products driving revenue are metronidazole gel and bifonazole cream—both of which are manufactured by more than 20 companies in China, including Yunnan Baiyao and Huarun Sanjiu. Online retailers frequently compete by cutting prices, leading to intense homogeneous competition. Moreover, the gross profit margin on generic drugs has been declining: it dropped from 71.8% in 2023 to 68.8% in 2025. In other words, the so-called "dual-track" strategy is currently just a concept, and the company's profits still come mainly from its traditional generic drug business, which is becoming increasingly competitive.
2. Marketing Expenses Outpace R&D Investment
Zhiyuan Pharmaceutical's profit model resembles that of consumer goods companies rather than pharmaceutical firms. Over the past three years, annual marketing expenses have exceeded 400 million yuan, with a marketing expense ratio consistently above 35% (for example, 35% of sales revenue is spent on marketing). Most of this money is invested in online platforms to acquire customer traffic. In contrast, R&D investment totaled only 180 million yuan over the same period, resulting in a R&D expense ratio of just 4.7% to 5.4%, which is less than even a fraction of marketing expenses. Additionally, among the company's more than thirty research projects, only three are innovative drugs and are still in the early stages of clinical development, meaning they won't generate profits anytime soon. Analyst reports highlight a common issue with such companies: they rely on advertising to drive sales, and any reduction in marketing funding leads to a immediate decline in sales. Moreover, the cost of acquiring customer traffic is rising, further squeezing their profit margins.
3. Cash Flow Challenges and Short-Term Debt
The company's financial situation is concerning. As of the end of 2025, its current ratio (current assets / current liabilities) fell below 1, indicating that it does not have enough cash and quickly liquidatable assets to cover its debts within one year. This is largely due to high marketing expenditures and low R&D output—money is being invested in acquiring customer traffic rather than building a cash reserve to manage debt.
4. Unresolved Compliance Issues from the A-share Application
When applying for an A-share listing, the Shenzhen Stock Exchange raised questions about several significant issues: whether the high promotional expenses were compliant, whether related-party transactions were fair, and whether there were any financial irregularities. These problems have not been resolved despite the company's transition to the HKEX market:
- Illegal Loan Transfers: During the reporting period, the company made illegal loan transfers totaling 130 million yuan.
- Fraudulent Invoicing: Its promotional subsidiary was identified by tax authorities for fraudulent invoicing.
- Related-Party Transactions: Alibaba Health is both a shareholder and the company's largest customer, engaging in frequent financial transactions with the company. Similarly, Baiyunshan is both a customer and a supplier, which raises concerns about potential manipulation of revenue and transfer of fees.
Although the HKEX places more emphasis on information disclosure, these historical issues may cause investors to doubt the company's governance and profitability, affecting its valuation.
5. HKEX Valuation Hopes to Leverage the "Consumer Trend," but Generic Drug Focus Remains a Barrier
The HKEX has different valuation standards for companies in the skincare sector. Companies with exclusive patented ingredients and efficacy-based skincare products (such as Juzi Biology) can achieve valuations of 15 to 30 times their earnings per share (PE). In contrast, those that focus solely on generic drugs are valued at 6 to 10 times PE. Zhiyuan Pharmaceutical hopes to attract a middle-range valuation based on its "medication + skincare" strategy, but since 90% of its revenue comes from generic drugs, the market is likely to value it according to the standards for generic drug companies. Only if the skincare business experiences rapid growth and becomes a major source of profit could its valuation increase to 10 to 12 times PE. However, the current proportion of skincare revenue is too low, and whether this segment can thrive in the competitive skincare market remains uncertain.
Conclusion
Zhiyuan Pharmaceutical's decision to list on the HKEX is aimed at taking advantage of the market's tolerance for consumer-related businesses while avoiding the strict requirements of the A-share market regarding innovation and compliance. However, the company's core issues (reliance on generic drugs, weak R&D, and compliance risks) have not been addressed, making it challenging to achieve a higher valuation. The success of its listing and the potential for a good valuation depend on two factors: whether the skincare business can truly take off and whether the previous compliance issues can be resolved to reassure investors. Otherwise, the company may continue to be labeled as a generic drug company with a lower valuation.