Donkey skin just the tonic for China’s urbanites

Dong-E E-Jiao, a Shenzhen-listed company that produces the traditional Chinese medicine e-jiao, has seen its shares jump 14 per cent so far this month, with analysts saying the industry leader will maintain its attractiveness due to pricing power and the upcoming Shenzhen Hong Kong Stock Connect.

E-jiao, with a 3,000 year of history, is a traditional Chinese health care product in the form of gelatin and made of donkey skin. It is used as a blood tonic, especially for females.

The Shandong-based company saw its shares rally to 52.9 yuan after its biggest shareholder and senior management increased their holdings this month. On June 7, six Dong-E E-Jiao executives, including its president, spent over 120 million yuan (HK$141.4 million) buying 0.4 per cent of the company’s shares at 46.31 yuan apiece. It was the management’s largest ever shareholding increase in terms of value, according to UBS Securities.

Then on Wednesday, China Resources Pharmaceutical Group increased its shareholding in the firm from 23.14 per cent to 27.8 per cent.

“These moves reflect their confidence in the company’s financial results in the second half,” said David Li, Bocom International’s health care analyst. Li expects the company’s share price to reach 60.31 yuan.

Dong-E E-Jiao’s revenue for 2015 jumped 35.94 per cent year on year to 5.45 billion yuan, with net profit rising 19 per cent to 1.37 billion yuan.

Bocom International forecasts the firm’s net profit in 2016 to climb 19.8 per cent year on year to 1.95 billion yuan, while Guotai Junan said net profits would reach 1.89 billion yuan this year, with a target share price of 70.0 yuan.

“The momentum for its revenue growth is price. Price hikes in past years have weeded out consumers who are sensitive to price and now the customer base is very stable,” Li said, who expects the company to raise prices again in the second half with growth in customer numbers rising at single digit rates.

E-jiao has been increasingly popular among high-net-worth Chinese because its claims to cure dizziness, insomnia, and anaemia satisfies the demand of urbanites, according to a report by Huatai Securities.

Dong-E E-Jiao holds a 70.7 per cent market share in donkey hide, according to a research report by Bocom International.

From 2010 to 2015 the firm raised the ex-factory price of e-jiao products by 600 per cent in, and the product is now selling for 2,365 yuan per 500g, according to its official website. A daily intake of 4-5g is required for nourishment, the company said.

Meanwhile, the industry leader has been increasing what it pays to donkey hide providers to encourage donkey farming, and passing the cost on to buyers to maintain its gross profit margin at around 70 per cent.

The biggest challenge for the e-jiao industry is the shrinking size of donkey farming, Li said.

“Farmers were unwilling to raise donkeys. They have little commercial value except for the hide. And donkeys are quite hard to raise as they are not a social animal,” Li said, adding that local governments provide few subsidies for donkey farming.

The price increases implemented by Dong-E E-Jiao also eliminated smaller brands in the market as they were unable to transfer higher costs to customers, Li said.

The planned Shenzhen Hong Kong Stock Connect is likely to bring more capital inflow to unique stocks like Dong-E E-jiao, SWS Research said in a report.

Hong Kong Exchanges and Clearing said on Wednesday it would launch a system test run for the trading link starting from Monday, triggering market expectation that the launch of the stock link is around the corner.

Companies with unique businesses that cannot be found listed in Hong Kong would be the most popular investor targets after the link-up, the SWS report said.

Traditional Chinese medicine brand such as Dong-E E-Jiao and Yunnan Baiyao Group, and white liquor makers such as Wuliangye Yibin and Luzhou Laojiao, are likely to emulate the rally of Shanghai-listed Kwichow Moutai, which has seen its share price surge 98 per cent since the Shanghai Hong Kong Stock Connect launched in November 2014. Moutai is also one of the most popular stocks among the southbound trading stocks in terms of monthly turnover.

Mainland A shares with low valuation and growth potential may also attract Hong Kong investors, such as home appliance maker Media Group and Zhuhai-based Gree Electric Appliance, SWS said.