On Friday, Morgan Stanley (NYSE:MS) analyst team downgraded China Traditional Chinese Medicine Holdings Co. Limited (570:HK) stock from Equalweight to Underweight, adjusting the price target to HK$1.70 from the previous HK$2.60. The downgrade followed the company’s profit warning for the year 2024, indicating an expected 90% to 100% decline in net profit and a 50% to 60% fall in core profit. These figures contrast sharply with both the market’s and Morgan Stanley’s earlier projections.
The reasons cited for the profit warning are consistent with those given in the company’s first half of 2024 results. They include price reductions, heightened market competition, and rising costs of raw materials which are impacting the sales and margins of formula granules. Additionally, the company faces credit and goodwill impairments, plant impairments, and back-taxes for subsidiaries.
Morgan Stanley’s revised earnings estimates for China Traditional Chinese Medicine reflect an 80% reduction for the year 2024 and a 22% to 34% decrease for the years 2025 to 2030. Despite these significant cuts, the analysts foresee a possible mild recovery in net profit starting in 2025, contingent upon future management guidance, which may emerge with the official second half of 2024 earnings release.
The report also mentions the change in management that took place in September, noting that since the new leadership assumed their roles, there has been limited communication with the market. This lack of engagement has contributed to the uncertainty surrounding the company’s future performance and its ability to navigate the challenges it faces.
Investors are advised to look out for the official earnings release for the second half of 2024 for further insights into the company’s financial health and potential recovery plans. The updated price target of HK$1.70 reflects the lowered expectations and the challenges that China Traditional Chinese Medicine is currently grappling with.
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