At a market cap of HK$9.5 billion and 5% dividend yield, Consun Pharmaceutical Group has gone through a long rally over the last 12 months.
This has raised its shares from less than HK$3 to over HK$11…
Credit: Google Finance
What’s driving this dividend payer share price?
Let’s find out.
Background: What is Consun Pharmaceutical Group?
Consun is a kidney-focused pharmaceutical company. Its crown jewel is a traditional Chinese medicine called Uremic Clearance Granules, or UCG.
Credit: Company’s financial presentation
Now, UCG isn’t a new discovery. It was first developed by China’s military hospitals back in the 1980s.
Later on, when the Chinese government banned the military from running businesses, UCG was handed over to the private sector. This eventually became Consun’s core product.
For patients who have chronic kidney disease, doctors offer dialysis as a solution to slow down the process.
However, when the disease goes to later stages, the more frequently patients need to go to the hospitals. UCG offers an alternative.
By taking pills every day, patients do not need to do dialysis. Their disease can be under control.
Today, UCG treats chronic kidney disease (CKD) in stages 3 to 5.
Credit: Company’s financial presentation
In China, where dialysis is expensive and not easily accessible in smaller cities, UCG offers an affordable alternative.
Patients take the drug daily, slowing the disease – without the need for frequent hospital visits.
Since 2009, UCG has been listed in China’s national drug reimbursement scheme. This means patients can buy the drug with government support. This policy has driven strong demand—and double-digit revenue growth—for over a decade.
Since then, UCG has been achieving double-digit revenue growth every year, becoming the major source of revenue for Consun Pharm.
Consun turned biggest policy hit into an opportunity
China’s central drug procurement policy has hit many domestic drug makers.
In fact, drug makers are required to bid on the tenders at a very low price to get orders from hospitals.
Prices for some drugs have dropped by as much as 90% during the government’s aggressive cost-cutting policies.
This has significantly weakened the profitability of the industry players.
For Consun, it is a different story.
Since UCG is an exclusive drug, Consun needs to negotiate with the authorities, instead of competing with peers. The price of UCG fell only 14% in the first procurement in 2022.
In return, Consun gained access to sell UCG in more hospitals in different provinces. This resulted in long-term financial support.
What’s driving Consun share prices higher?
In addition to UCG that focuses on CKD stage 3 to 5, Consun launched another product called Kidney Repair and Edema Alleviation Granules (KREAG) targeting CKD stage 1 to 3.
Although KREAG is still at its initial stage, Consun has two products that cover all five stages of CKD.
Market data showed over 100 million people in China have CKD. And only one tenth of them are aware of their illness.
As people in China get richer, and regular body checks become more common, I believe more people will find themselves in need to take CKD medicines, and that will benefit Consun’s business.
Besides, new products such as Roxaresta, Lanthanum Carbonate and other innovative drugs or injections are being introduced. These products are also kidney-focused, further enriching Consun’s portfolio in the field.
Impressive financial track record drives dividends
Consun’s financial track record has been impressive over the last five years. Both its revenue and net profits grew at an average 14% and 16%, respectively.
Its net profits grew at a much faster rate because of its tight control on expenses, and tax benefits by the government.
Credit: Company’s financial statements
In fact, its net profit margins averaged 30% in recent years, making it one of the best businesses in the Hong Kong market.
What’s more, Consun has built a cash reserves of ~CNY4 billion, with a borrowing of CNY253 million.
It’s a cash-rich business.
Credit: Company’s financial statements
Put it this way, Consun is in a very strong position to pay generous dividends to its shareholders.
Over the last few years, Consun had been paying a dividend payout ratio of ~30%.
In 2023, it raised its payout ratio to 42%.
Last year, it’s a 51% payout ratio.
This means, for every dollar profits it makes, Consun pays a 51 cents dividend per share. Not too bad.
If you look at the share price chart of Consun, you will find the increase in dividend payout ratio is in line with the increase in share price.
The more generous the dividend payout ratio is, the higher the share price.
Credit: aastocks.com
With such a high cash pile and no pressing need for capital, it’s likely the company will maintain or even increase its dividend payout.
My final thoughts
Consun Pharmaceuticals Group is a simple business – it does boring things well, focusing on one thing like kidney disease. Over the years, it has built a cash rich position and I believe its dividend payout ratio should maintain or even grow over the years.
This is also why shares have hit its all time high.
More crucially, shares of this healthcare giant are trading at a 5% dividend yield.
If it’s able to maintain a net profit growth of 15% and a payout ratio of 50%, the forward-looking yield by end of 2025 and end of 2026 will be 6% and 7% respectively.
