Fosun's plan to increase its stake in US-listed Tongjitang may signal the investment conglomerate's intention to eventually purchase the undervalued traditional Chinese medicine (TCM) maker as part of its efforts to diversify its pharmaceutical business, said analysts.

Shanghai-listed Fosun Pharmaceutical Group, owned by one of Shanghai's richest tycoons Guo Guangchang, said yesterday that it had purchased 1.51 million American Depository Shares (ADS) of US-listed Tongjitang in the secondary market.

The move makes Fosun the second largest shareholder of the Shenzhen-based Tongjitang, with a 24.48-percent stake. Fosun classified the purchase as a purely investing activity and said the probability to increase the stake further still exists.

Fosun shares closed at 6.69 yuan yesterday, up 0.96 percent.

The $6.16-million share purchase plan, the 13th of its kind carried out by Fosun, was completed through Fosun Industrial Corp by using cash and bank loans.

Fosun was earlier well known for its leadership in modern biomedicine and healthcare products. However, the company did not take a strong position in TCM development.

"Tongjitang is a good investment target for Fosun because of its abundant experience in the TCM market. Fosun could further expand its product range instead of simply focusing on Western medical products," said Jiao Haomang, analyst, Central China Securities.

However, Fosun's move to diversify its pharmaceutical business might still have a long way to go, as Chinese laws do not allow overseas-registered firms to float shares on the mainland, said Song Han, analyst, Northeast Securities.

Tongjitang, registered in the Cayman Islands, was the first Chinese TCM manufacturer to be listed in the US stock market in 2007. The core business of the company is modernized Chinese traditional medicine development and its Xianlin Gubao tablets are used for treatment of osteoporosis in the US.

"Due to insufficient knowledge about China's TCM sector and unfamiliarity with Tongjitang's business model, its shares were undervalued significantly in the US market. The average price/earning ratio of listed TCM makers on the A-share market in Shanghai is 30, while it's only 10 for US-listed Tongjitang," said Song.

The initial listing price for Tongjitang was $10 back then but it has dropped to $3.1095 as of yesterday.

Previous media reports said the share depreciation had prompted Tongjitang to consider retreating from the US stock markets last year through a share repurchase plan and instead seek listing opportunities in China's stock market. The plan was abandoned due to the global financial crisis.

(China Daily August 14, 2009)