Crash! Billions in Capital Buried

In a surprising turn of events in the stock market, Shuangcheng Pharmaceutical (002693.SZ) hit the daily trading limit to the downside today, leaving investors and analysts to contemplate the implications of this sudden drop.

This follows a remarkable rise fueled by a much-publicized cross-border acquisition, where the stock soared an astounding 498.47% over a mere 23 trading days, achieving a streak of 21 consecutive upward days, often referred to in the market as a "zombie stock".

Such a meteoric rise effectively catapulted the company from a small-cap entity with a valuation of merely 2.165 billion RMB to a staggering market cap exceeding 100 billion RMB (specifically 116.61 billion RMB). This transition can be likened to moving from being a minor player in the A-share space to becoming a significant market contender.

The severe decline witnessed today has raised eyebrows and fueled speculation among market participants about a potential reversal in momentum. Are we witnessing the beginning of a major breakdown for this heavily speculated stock?

As market sentiments oscillate, a staggering amount of capital—potentially exceeding 10 billion RMB—could be trapped in this stock if the bearish trend continues uninterrupted. Observations suggest that after the initial divergence in investor opinions, trading activity noted an aggressive response from capital that believed in a turnaround for Shuangcheng.

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From October 14 to 22, the stock demonstrated a remarkable "seven consecutive days of trading," raking in a transaction volume amounting to 9.02 billion RMB. This surge reflects a significant appreciation from the preceding “14 consecutive days" that recorded only 2.791 billion RMB in trading volume.

This trend indicates that many speculative traders, buoyed by the alluring prospect of wealth, flocked to the stock, further exacerbating the trading frenzy. What is alarming, however, is that nearly half of the players had managed to exit successfully during the initial volatility framed between October 10 and 11, when the stock faced a similar trading halt.

Critical to note is that before this massive surge of speculation began, Shuangcheng's equity had already been nearing its historical highs with the last record attending an impressive 21.62 RMB per share back in June of 2015 during a booming bull market.

Unexpectedly, the stock continued its spree post divergence, skyrocketing to a remarkable 31.24 RMB per share, ignoring all previous highs and ending with an outsized valuation, much to the disbelief of stakeholders.

The stock market often draws the line between risk and reward in strange ways—as the age-old adage reminds us, the risks often materialize once the heights become unfathomable. Should this speculative bubble burst, funds caught in it could find themselves entrenched indefinitely.

Holding on while in a deadlock

Shuangcheng Pharmaceutical specializes in the production, sale, and research of synthetic peptide drugs, boasting a portfolio that includes multiple drugs from this category as well as 20 others targeting various therapies. Prominent pharmaceuticals include thymosin injection and several other peptide injections.

Despite being positioned in a booming peptide industry in China, Shuangcheng has failed to capitalize on this growth momentum.

In the wake of growing trends towards weight-loss drugs, Shuangcheng has continued to cling to its outdated product lines, lacking the capacity to pivot towards a more dynamic model like some of its competitors whose strategies included branching into peptide Contract Development and Manufacturing Organizations (CDMO).

Evidence has shown that clinging to outdated products tends to yield diminishing returns over time.

Challenges stemming from regulatory shifts and heightened competition in the pharmaceutical space have negatively impacted Shuangcheng's market performance. Revenue and net profits have seen a persistent slide, inhibiting growth prospects severely.

In the first half of 24, the company recorded revenues of 94.89 million RMB, reflecting a staggering 31.74% year-over-year drop, with a net loss attributable to shareholders exceeding 16.94 million RMB and adjusted net loss reaching 17.76 million RMB, escalating by over 1,072.08% year-over-year.

Clear from this is the fact that the adjusted net loss paints a grim picture, having inflated tenfold in excess.

Shuangcheng attributes its struggle largely to regulatory shifts regarding centralized procurement, admitting that the pricing pressures of medicines incorporated into such programs have led to decreased sales for those not included.

The repercussions are glaringly evident.

Income from peptide products, which constituted 43.97% of revenues, saw a stark decline of 37.1%, with profit margins dipping significantly to 60.37% from the previous year, down by roughly 12.98 percentage points.

In the grand perspective, prior to this current slide, Shuangcheng had experienced eight consecutive years of adjusted net losses.

Throughout its listing history, the company has accrued cumulative net losses exceeding 311 million RMB, with adjusted net losses reaching 531 million RMB.

According to the stringent delisting rules introduced in April of this year, companies in the main markets of Shanghai and Shenzhen with negative net profits and revenues below 300 million RMB will face delisting risk warnings.

Analyzing Shuangcheng's revenue and net profit over the past two years, it appears to already fall into this precarious category.

Struggling for survival while seeking new listing pathways

Looking back, this phase represents a battle for survival led by the actual controllers of Shuangcheng, Wang Chengdong and his son Wang Yingpu, aka Wang Yingpu, as they navigate these troubled waters.

In addition to this, they have been attempting to absorb the struggling OLALA shares, which had previously stumbled in their IPO efforts on the Sci-Tech Innovation Board, thereby facilitating a dual advantage.

Do not be surprised by Wang Yingpu's name; he has long since obtained Australian citizenship.

Founded in May 2018, OLALA shares are jointly controlled by the Wang family through OLALA Investment, Ningbo Shuangquan, and Ideal Kingdom, holding a combined 57.52% stake.

According to its website, the Wang family acquired OLALA in January 2018, with the company having been established back in 2010. The acquisition was rapidly followed by a comprehensive integration, marking OLALA's entry into the IPO arena on the Sci-Tech Innovation Board.

OLALA is primarily focused on the research, design, and sales of simulation chips and mixed-signal chips, including products such as clock chips, power management chips, sensor chips, and RF chips.

The proposal highlights OLALA's importance as a key supplier in the jitter-free clock chip sector, distinguished as one of the few domestic firms capable of competing directly with international giants.

Market Data Forecast data reveals that OLALA holds a 23.51% market share in the clock chip segment and an impressive 61.27% in the jitter-free clock chip market, the latter making it the leading domestic player.

On the earnings front, OLALA reported losses of 856 million RMB in 2022 and 962 million RMB in 2023.

However, by January to July 2024, their net profit surged to 307 million RMB (all figures unaudited).

Yes, you read that right; for just the first seven months, the net profit also approached nearly three times the gains from the previous two years combined (specifically 298% increase).

A sudden pivot in performance such as this certainly sparks limitless potential in the market.

However, it is essential to note that OLALA saw their net profits nearly halve in 2023 (down 49.19% year-over-year).

Indeed, the storytelling capability of the Wang father-son duo shines through, positioning them among the finest narrators in the business.

And surprisingly, the capital market dances to the rhythms of such engaging tales.

Ultimately, while tales can captivate, the story's conclusion often leaves a mixed bag of winners and losers.

This is simply a personal perspective, intended for consideration.