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The launch ceremony of China’s first online liability insurer, Zhong An Insurance, on Wednesday was attended by three of China’s most prominent personalities, namely Jack Ma of Alibaba, Pony Ma (Ma Huateng) of Tencent, and Ma Mingzhe, president of Ping An Insurance. Although the only one of the three operative in a traditional industry, Ma Mingzhe was the one who predicted an Internet revolution at the ceremony when he expressesd his vision of the future of the banking industry:

Bank branches will grow smaller and closer to neighborhoods, and become more intelligent and diversified. In ten years, 50% to 60% of credit cards and cash will disappear. In twenty years, the counters in banks will disappear.

Refraining from explicitly suggesting who exactly will take the place of the disappearing banks, Ma and his company was noted for making strides in the online financing industry with the launch of Lufax, a modified version of a P2P lending website that links small businesses with funders and investors. Interestingly, Ping An also acquired a more traditional bank, called Ping An Bank, which gave Ping An an advantage that few in the insurance industry enjoy.

Designed to cater to the increasing needs of online businesses for protection from liabilities, Zhong An carries with it the Internet pedigree inherited from its two major shareholders, Tencent and Alibaba. Yet these companies’ collaboration with Ping An may be a marriage of convenience, because a large insurer like Ping An was required to participate in order for the venture to obtain a business license. Nevertheless, for Ping An, Zhong An is perhaps the last step to complete an online financing edifice as envisioned by the company’s president.

Companies and brands affected
Tencent (HKG:00700)
Ping An Insurance (SHA:601318; HKG:2318)

Links and sources
Beijing Times: 三马同台首秀众安保险开业

Two A-share market-listed pharma companies, Xiangxue Pharma and Kangmei Pharma, announced this week that they had obtained licenses to conduct direct sales.

Such licenses are under tight regulation for fear that they would be used to start pyramid schemes.

So far there are forty direct sales companies operating in China, most being cosmetics brands such as Avon or specialized health supplement brands such as Amway. Chinese media commentary on the two companies’ direct sales licenses has speculated that the companies are eying the dietary supplement market.

Xiangxue Pharma already owns a subsidiary that produces a variety of traditional Chinese medicine- based oral supplements that claim cosmetic benefits. According to the company’s own data, such products achieved sales of 193 million yuan by mid-2012, a figure that may be impressive given the size of the company, but meager compared to direct sales market leaders. Amway, for example, has annual sales of 27.1 billion yuan, and Perfect and Infinitus both have 12 billion each. The other company Kangmei Pharma is also reported to have launched a joint venture company last year with insurance giant PICC in the business of “health management”.

So far, the few other pharma companies that already have direct sales licenses are not doing very well with them. Harbin Pharma, for example, discontinued its direct sales department in 2010, two years after obtaining the license, when it was accused of operating a pyramid scheme. However, the market responded positively to the news and the stocks of both Xiangxue and Kangmei were boosted by the announcements.

The rationale might be that the health supplement and “cosmeceutical” (cosmetic-pharmaceutical) sectors are increasingly seen as an alternative source of growth, especially in the wake of recent government pressure to lower drug prices. This was corroborated by the recently released Q3 results of some companies. Yunnan Baiyao, a traditional Chinese medicine (TCM) company that originally produced anti-inflammatory drugs, was a pioneer in the cosmeceutical area. The company reported strong results in the first nine months of the year. Its net profit reached 1.9 billion yuan, 54.1% higher year-on-year. Strong growth in the company’s general health department, responsible for several TCM- based toothpastes, was cited as a factor.

In related news:
• A news article reports that the price of Dong-E E-Jiao – a donkey skin-based health supplement, has grown sharply in recent years
• Jiangzhong Pharma announced a hericium erinaceus-based biscuit that claims to soothe stomach discomfort

Companies and brands affected
Xiangxue Pharma (SHE:300147)
Kangmei Pharma (SHA:600518)
Harbin Pharma (SHA:600664
Yunnan Baiyao Group (SHE:000538)
Shan Dong Dong-E E-Jiao (SHE:000423)
Jiangzhong Pharma (SHA:600750)

If you’d like to hire Danwei to track your company, investment or other topic of interest in China, please write to danwei@danwei.com and tell us what you want to follow.

Yili, a leading Chinese diary brand, posted record quarterly revenues of 12.55 billion yuan for the third quarter of 2013. To put it in perspective, the number is more than the total revenues of Guangming, one of Yili’s domestic competitors, in the first three quarters of the year. Mengniu, another competitor has not yet released its results.

One factor frequently cited by Chinese market observers is Yili’s ability to secure its supply of raw milk. The company owns more diary farms than either of its competitors. Mengniu, for example, relies more on individual farmers, which makes it more vulnerable to quality problems that have sunk domestic brands such as Sanlu.

Yili’s advantage appears particularly pronounced in a time when China is experiencing a sort of “milk crunch”. According to a report that appeared on today’s China Business News, the number of milk cows nationwide has dropped to somewhere between eight and nine million, a low point in recent years. The article attributes the change to a variety of factors including rising beef prices, outbreak of foot-and-mouth disease and farmers’ lack of confidence in the future of the dairy industry in the aftermath of several serious food safety scandals.

Despite strong growth, the company’s results still fell short of investors’ expectations – Yili’s stock price dropped slightly after the release of the results.

Companies and brands affected
Yili (SHA:600887)

If you’d like to hire Danwei to track your company, investment or other topic of interest in China, please write to danwei@danwei.com and tell us what you want to follow.

Following Guangzhou Bayunshan Pharma’s announcement that it plans to invest five billion yuan in high-end hospitals and a strong rally in the health care sector in China’s A-share market last week, several newspaper articles have appeared beating the drum for investing in so-called “private hospital concept stocks”.

One such article appeared on China Business Times 中华工商时报, a national business newspaper. The article attributes the strong stock market performance of several A-share listed pharma companies that have holdings of hospital-related assets to the government’s favorable policies and apparent hostility to foreign pharma companies. The author quotes a source estimating that a turning point has been reached for the private hospital industry. The source also listed a number of listed companies that he believed are poised to gain from the forthcoming private hospital boom – companies that are either already active in the private hospital industry or who plan to do so.

Equally bullish, Metropolis Express 都市快报, a Hangzhou newspaper, quotes an industry insider who says that many big investment institutions see private hospitals as the next big thing. The article compares private sector hospitals to private sector banks, reasoning that hospitals are better investments given government incentive policies and relative lower entry barriers for newcomers.

The positive outlook is not shared by everyone. Today, another newspaper, Private Economy News 私营经济报 took a skeptical view on the trend of pharma companies buying into the hospital industry. The article quotes Ge Jianqiu (葛剑秋), former vice president of Shanghai Pharma, who says that many pharma companies only do it to burnish their annual reports and many of these investors have no experience of running hospitals. Another source, Li Su (李肃), president of a corporate consultancy, expresses doubt as to whether such a trend will last. Li believes that over the long term, hospitals’ margins will be squeezed as medical reform deepens.

None of the articles mention Chindex International, a Nasdaq-listed company that began selling medical equipment from the US to China in the 1980s. Chindex now operates a chain of high-end private hospitals in Beijing, Shanghai, Tianjin and Guangzhou. While the clinics initially cater to expatriates living in China, the growing number of wealthy Chinese patients promise a rosy future for the hospital chain. The image above shows a gold-plated Ferrari (from Shanghai-based writer Abe Sauer), a typical sight outside Beijing Family United clinics.

Companies and brands affected
Shanghai Forsun Pharmaceutical (HKG:02196 SH:600196)
Guangzhou Baiyunshan Pharmaceutical (HKG:00874 SH:600332)
Chindex International, Inc. (NASDAQ:CHDX)
Aier Eye Hospital Group Co Ltd. (SZ:300015)
Topchoice Medical Corporation (SH:600763)
Shanghai Fosun Pharmaceutical (Group) (SH:600196)
Gansu Duyiwei Biological Phrmctcl Co Ltd. (SZ:002219)
Xian Kaiyuan Holding Group Co., Ltd. (SZ:000516)
Zhejiang DA Diagnostics Co Ltd (SZ:300244)
Da An Gene Co., Ltd. of Sun Yat-Sen Uni. (SZ:002030)
Shanghai Kehua Bio-Engineering Co., Ltd. (SZ:002022)
Beijing Leadman Biochemistry Co Ltd. (SZ:300289)
Jiangsu Yuyue Mdcl Eqpmnt & Sply Co Ltd. (SZ:002223)
Beijing Tongrentang Co., Ltd. (SH: 601607, Hong Kong related companies not mentioned in text HKG:8138 and 1666)
Yunnan Baiyao Group Co., Ltd. (SZ:000538)
Zhangzhou Pientzehuang Pharmaceutical Co. 片仔癀 (SH: 601607)

Links and sources 
Abe Sauer on Twitter; image source
Private Economy News: 药企成资本掘金民营医院主力军 短炒业绩或难成长久战略
China Business Times: 民营医疗概念上市公司值得期待
Metropolis Express: 民营医院概念股大涨后续仍有机会

If you’d like to hire Danwei to track your company, investment or other topic of interest in China, please write to danwei@danwei.com and tell us what you want to follow.

On October 8, China Business News, a publication owned by SMG, a media conglomerate controlled by the Shanghai city government, published a report attacking Starbucks’ high prices in China. On October 20, China Central Television (CCTV) broadcast a story targeting the high prices of Starbucks coffee and mugs. The stories have been repeated in different versions in various media outlets.

The CCTV story uses man on the street interviews in Beijing, Chicago and Mumbai to emphasize the high prices of Starbucks China compared to other countries. The CCTV report says a cup of 354 milliliters of latte coffee costs 27 yuan (USD4.4) in China as compared to only 19.98 yuan in Chicago, 14.6 yuan in Mumbai and 24.25 yuan in London. Starbucks stainless steel cups, which are made in China, are sold at about 97 yuan to 122 yuan (USD 16-20) in the US, while in China they cost between 220 to 350 yuan (USD 36 to 58). Netizens, however, are laughing at CCTV’s report for its injustice and suggested CCTV to go after the de facto monopolies, as reported by other media outlets such as Tea Leaf Nation and South China Morning Post.

Danwei contacted branches in Chaoyang District, Chaoyang Park/Sanlitun area, one of the most popular destinations for shopping and relaxation in Beijing, of the chains Starbucks, Costa Coffee, Up Bridge Coffee (上岛咖啡) and Pacific Coffee Company to compare coffee prices. Starbucks prices actually compare favorably with other similar chain stores.

• In each cell, the listed prices are in the order from the smallest size to the largest size offered.
• While the sizes offered in Starbucks and Pacific Coffee Company are 12oz, 16oz and 20oz, Costa Coffee offers 12oz, 14oz and 16oz; the only size offered at the Up Bridge Coffee is about 12oz.
• The cheapest coffee at Starbucks is the weekly special filter coffee; at Costa is an espresso. At Up Bridge and Pacific Coffee, the cheapest offering is an Americano.
• Up Bridge Coffee offers various flavored latte coffees, and the one listed above is their cheapest one.

Companies and brands affected
Starbucks Corporation (NASDAQ:SBUX)

Links and sources
China Business News: 星巴克中国“暴利”：亚太区利润率为欧洲16倍
CCTV: 星巴克咖啡中国市场高价
china.org.cn: CCTV: Chinese pay higher price for Starbucks coffee
Tea Leaf Nation: China’s Silly War on Starbucks Lattes
South China Morning Post: CCTV’s criticism of Starbucks ‘pricey coffee’ prompts online backlash