Modern Chinese Medicine Group Co., Ltd. to raise a maximum of approximately HK$221 million by way of Public Offer and Placing

Highlights

The Group principally engages in the production of proprietary Chinese medicine (the "PCM") in particular,and the Group offers both OTC and prescribed medicines intended for use by the Middle-aged and the Elderly in the PRC.

During the Track Record Period and up to 21 December 2020,the Group had 59 types of PCM products.

The intended therapeutic effects of the major products include treatment and/or alleviation of (i) Qi-deficiency and blood-stasis condition; (ii) cardio-cerebrovascular condition; (iii) digestive and gastrointestinal condition; and (iv) gynecological condition.

According to the Euromonitor Report,based on the unlisted Qi-deficiency and blood-stasisPCM pills manufacturers market size in Northeast,the Group ranked second with a market share of approximately 1.96% in 2019 and became one of the leading non-listed companies engaged in the production of PCM.

The Group considers the COVID-19 had brought new business opportunities to the Group. For 9 months ended 30 September 2020,Additional Ingredient Huoxiang ZhengQi Pill and Fever-removing and Detoxification Pill were two of the Group's top selling products. Both products were believed to be having the intended therapeutic effect for the treatment of the symptoms of COVID-19 and/or similar illness[1].

As at 21 December 2020,the Group had established a distribution network of 77 distributors that covers 39 cities in the PRC. In particular,the distribution network allowed the Group to penetrate in reasonably extensive width and breadth in Northeast. During the Track Record Period,the revenue contribution from Northeast was approximately 50.3%,51.0%,55.0% and 53.9%,respectively.

Financial Highlights

For the year

ended 31 December

For 9 months

ended 30 Sep

RMB'000

2017

2018

2019

9M2020

Revenue

106,466

173,512

218,767

218,838

Gross profit

44,427

73,657

99,069

98,234

Profit before tax

34,770

64,507

65,256

72,874

Profit for the year / period

25,881

48,237

46,237

52,771

HONG KONG,Dec. 30,2020 --Modern Chinese Medicine Group Co.,Ltd. ("Modern Chinese Medicine",together with its subsidiaries,the "Group"; stock code: 1643),which principally engages in the production of proprietary Chinese medicine and offer both OTC and prescribed medicines intended for use by the Middle-aged and the Elderly in the PRC,announces the details of its plan to list on the Main Board of The Stock Exchange of Hong Kong Limited ("SEHK") today.

A total of 150,000,000shares (subject to the Over-allotment Option) will be offered under the Share Offer,of which 90%,or 135,000shares (subject to reallocation and the Over-allotment Option),will be offered by way of International Placing; while the remaining 10%,or 15,000Shares (subject to reallocation) will be offered under the Hong Kong Public Offering. The Offer Price per Offer Share is expected to be not less than HK$0.92and not more than HK$1.47. The Hong Kong Public Offering will commence at 9:00 a.m. on 31 December 2020 (Thursday) and close at 12:00 noon on 7 January 2021 (Thursday). The final offer price and allotment results are expected to be announced on 14 January 2021 (Thursday). Dealings in shares of Modern Chinese Medicine on the Main Board of the SEHK are expected to commence on 15 January 2021 (Friday).

Assuming an Offer Price of HK$1.20 per Offer Share (being the mid-point of the Offer Price range),the aggregate net proceeds from the Share Offer,after deducting related expenses and assuming the Over-allotment Option is not exercised,will be approximately HK$120.0 million. Modern Chinese Medicine intends to use these net proceeds for the following purposes: 1) approximately 43.1% will be used for enhancing and expanding the production capacity to further produce the major prescribed medicine,in particular the major capsule products with the intended effect of treating/alleviating cardio-cerebrovascular condition; 2) approximately 16.4% will be used for broadening the distribution network in Huanan and Huadong; 3) approximately 10.0% will be used for raising the brand awareness through media marketing and promotion efforts; 4) approximately 19.5% will be used for further raising the R&D efforts,procuring quality management equipment and broadening the product portfolio; and 5) approximately 3.3% will be used for upgrading the IT system; and 6) approximately 7.7% will be used for working capital and other general corporate purposes.

Soochow Securities International Capital Limited is the Sole Sponsor. Soochow Securities International Brokerage Limited and Wealth Link Securities Limited are the Joint Global Coordinators,the Joint Bookrunners and the Joint Lead Managers.

Industry Overview

The proprietary Chinese medicine market in the PRC has experienced rapid growth from 2015 to 2019. According to the Euromonitor Report,it is estimated that the total market size of PCM in the PRC has increased from approximately RMB625.2 billion in 2015 to approximately RMB814.9 billion in 2019,representing a CAGR of approximately 6.8%. With further market expansion,the total market size of PCM is expected to increase at a CAGR of approximately 6.7% from 2020 to 2024.

There are a large number of PCM manufacturers producing various types of PCM in Northeast PRC. The manufacturers' sales value of PCM in Northeast increased from approximately RMB50.8 billion in 2015 to approximately RMB65.0 billion in 2019,witnessing a CAGR of 6.4%. In particular,the market size of Qi-deficiency and blood-stasis PCM increased at a CAGR of 11.0%,while that of cardio-cerebrovascular PCM in Northeast increased at a CAGR of 7.9% from 2015 to 2019. Based on the unlisted Qi-deficiency and blood-stasis PCM pills manufacturers market size in Northeast,the Group was ranked second and became one of the leading non-listed companies engaged in the production of PCM in 2019.

Looking forward,Chinese medicine industry in the PRC has a broad prospect. Major growth drivers include growing economy in the PRC and rising purchasing power of PRC citizens,growing awareness of personal health,growing proportion of Middle-aged and Elderly population in the PRC and increasing Government support and favourable national policies and healthcare reform plans.

Business Overview

The Group is principally engaged in the production of PCM and offer both OTC and prescribed medicines intended for use by the Middle-aged and the Elderly in the PRC. During the Track Record Period and up to 21December 2020,the Group had 59 types of PCM products. The major products (in terms of revenue) are Vigour and Vitality Supplement Pill,Circulation Enhancement Pill,Cardiotonic Enhancement Capsule,Kidney Invigoration Pill,Heart Wellness Capsule,Menstrual Discomfort Relief Pill,Liver Detox Tablet,Additional Ingredient Huoxiang ZhengQi Pill and Fever-removing and Detoxification Pill.

According to the Euromonitor Report,the Group is in a fragmented market and yet the Group was one of the leading non-listed companies engaged in the production of PCM in 2019 in terms of the sales of Qi-deficiency and blood-stasis PCM pillsand cardio-cerebrovascularPCM capsulesin Northeast,the PRC.

The Group's headquarters and production facilities are strategically located at Chengde City,Hebei Province,the PRC. Currently,the Group has three GMP-certified production lines and one extraction line that are capable of producing all our PCM in tablet,pill and capsule forms as stipulated by the GMP requirement. As at 21 December 2020,the Group had established a distribution network of 77 distributors that covers 39 cities in the PRC. The broad distribution network not only helped the Group to penetrate in reasonably extensive width and breadth in Northeast,but also allowed it to develop geographically from Northeast to other areas in the PRC.

Measures On the COVID-19 Outbreak

The Group considers the COVID-19 pandemic since the beginning of 2020 had brought new business opportunities to it,raised public health awareness in the PRC and increased the customers' awareness of its diversified product portfolio,such as Additional Ingredient Huoxiang ZhengQi Pill,which was believed to be having the intended therapeutic effect for the treatment of the symptoms of COVID-19 and/or similar illness[1].

For 9 months ended 30 September 2020,Additional Ingredient Huoxiang ZhengQi Pill and Fever-removing and Detoxification Pill were two of the top selling products,which contributed approximately RMB31.8 million and RMB21.0 million of revenue,respectively. The demand for these two products were surging,in particular,Additional Ingredient Huoxiang ZhengQi Pill has a similar major active pharmaceutical ingredient with the state recommended PCM for COVID-19 as announced by the PRC Government.

Competitive Strengths

1. The Group's product position is competitive with a diversified portfolio,strategically-located production facilities and favourable national policies

The Group had 59 types of PCM products during the Track Record Period and up to 21 December 2020 in the PRC. According to the Euromonitor Report,three of the Group's major products were having around or over 10% of the overall market share in FY2019. Its headquarters and production facilities are strategically located at Chengde City,the PRC. According to the Euromonitor Report,Chengde City is one of the well-known breeding places of Hawthorn Leaves and sourcing places of Ginseng and Mongolian Milkvetch Root in the PRC,which enables the Group to procure quality raw materials. In addition,the Group's sales are also expected to benefit from a number of new regulations and government policies concerning the traditional Chinese medicine (the "TCM") industry in recent years. Therefore,the Group believes that their diversified product portfolio,strategically-located production facilities and favourable national policies has strengthened its brand recognition in the PRC TCM industry,which also helped to further increase its sales.

2. The Group is one of the leading Chinese medicine brands in Northeast,the PRC,and has an established distribution network across the PRC especially in Northeast

According to the Euromonitor Report,the Group was one of the leading non-listed companies engaged in the production of PCM in 2019 in terms of the sales of Qi-deficiency and blood-stasis PCM pillsand cardio-cerebrovascular PCM capsules in Northeast,the PRC. The Group has stringent selection criteria for engaging distributors. Currently,the Group had established a distribution network of 77 distributors that covers 39 cities in the PRC. The established distribution network helps the Group to stabilise its market position and brand recognition and to capitalise on the strong potential growth in the TCM industry in the PRC.

3. The Group implements a stringent quality management system to ensure product safety and quality

The Group complies with the GMP standards in the production process of its products,and have devised and implemented a comprehensive quality management system that covers every aspects of its production activities. The Group believes that its comprehensive quality management system enables it to establish an end-to-end quality management to ensure strict adherence to the highest safety and quality standards,which will further strengthen its competitive position.

4. The Group possesses an experienced,dedicated,capable and stable management team

The Group possesses an experienced,capable and stable management team,which consists of members with on average,over ten years of relevant experience and background in the TCM industry or as a role of sales or management. The Group believes such experienced management team allows it to stay attuned to the competitive environment and effectively manage variability and challenges in the future.

BUSINESS STRATEGIES

1. Improve and enhance production capacity

The TCM industry in the PRC has experienced a significant growth in recent years. Particularly with the growing demand of the products intended to treat/alleviate cardio-cerebrovascular condition,which have higher gross profit margins,the Group plans to enhance and expand its production capacity by building a new workshop,establishing a new extraction line and a new production line for its capsule products and also to allocate considerable resources to promote the sales of the products intended to treat/alleviate cardio-cerebrovascular condition,namely,Cardiotonic Enhancement Capsule and Heart Wellness Capsule.

2. Broaden the distribution network and raise brand awareness

The Group believes that its distribution network is essential to its success. It is expected to develop and broaden its existing distribution network by exploring additional new distributors,expanding its distribution efforts to cover more cities in the PRC and establishing cooperation with strategic partners. Furthermore,the Group intends to raise its brand awareness through media marketing and promotion efforts,and thus boost its sales in the end.

3. Further strengthen its R&D efforts,procure quality management equipment and broaden its product portfolio

In order to encourage sustainable growth and development,the Group intends to strengthen its R&D efforts and market share through collaborating with external research institutes and developing its internal R&D team by recruiting staff members who have at least five years of experience in R&D in the TCM industry.

4. Strengthen the IT system and further expand the capabilities for the provision of its products

The Group considers possession of up-to-date IT system important for improving overall efficiency in its management and day-to-day operations. Therefore,the Group is determined to upgrading the IT system by upgrading,developing and integrating the internal financial reporting system,the enterprise resource planning system and by purchasing and upgrading the relevant IT related equipment.

About the Group

Modern Chinese Medicineprincipally engages in the production of PCM and offer both OTC and prescribed medicines intended for use by the Middle-aged and the Elderly in the PRC. According to the Euromonitor Report,the PRC.

As at 21 December2020,the Group had 59 types of PCM products and had established a distribution network of 77 distributors that covers 39 cities in the PRC. For FY2017,FY2018,FY2019 ended 31 December and 9 months ended 30 September 2020,the Group's revenue was approximately RMB106.5 million,RMB173.5 million,RMB218.8 million and RMB218.8 million,respectively.

[1]P. 182,https://www1.hkexnews.hk/app/sehk/2020/102501/documents/sehk20122401177_c.pdf