Family-controlled characteristics are prominent. Related-party transactions and huge dividends attract attention as Hanfang Pharmaceutical's affiliated transactions and billion-yuan promotion fees come to light.

This article is reprinted from: Economic Information Daily

□ Reporter Zhang Wen

As a traditional Chinese medicine company listed in Hong Kong, Shandong Hanfang Pharmaceutical Co., Ltd. (referred to as “Hanfang Pharmaceutical”) exhibits clear family business characteristics in its prospectus. The prospectus shows that Hanfang Pharmaceutical is currently 100% controlled by brothers Qin Wengui and Qin Yinji. The management team includes several family members. An enterprise controlled by the chairman’s nephew has long received large amounts of promotional fees as a related party, and before going public, the company distributed substantial cash dividends. These details outline the company’s governance structure, raising market concerns about decision-making independence, fairness of related-party transactions, and long-term sustainability.

Brother-controlled Core Rights

Family Involvement in Management

Hanfang Pharmaceutical’s family control is evident in its equity structure and management team. The prospectus clearly states that as of the last practical date, Chairman Qin Wengui directly holds 90% of the company’s shares, while his younger brother and General Manager Qin Yinji hold the remaining 10%. The two brothers, through a joint action agreement, jointly control the company’s voting rights, decision-making, operational policies, and major investments, exerting absolute control. Even after the IPO, considering the dilution from new share issuance, the Qin brothers will still hold the majority of voting rights, ensuring the family’s core control over the enterprise.

The reporter notes that family members play important roles in Hanfang Pharmaceutical’s operations. Besides the Qin brothers serving as chairman and general manager, Qin Wengui’s daughter Qin Chengxue and son-in-law Ye Weibin also hold key positions. The prospectus discloses that Qin Chengxue is an executive director overseeing R&D. In addition to her role at the company, she has been a professor and doctoral supervisor at Shandong University School of Pharmacy since May 2025. Ye Weibin joined Hanfang Pharmaceutical in November 2025, responsible for corporate governance and company secretary affairs. Before joining, he worked as a senior consultant at KPMG Australia from August 2015 to May 2025, providing tax and business consulting services to various clients.

The highly concentrated family control also carries risks. The prospectus warns that “such shareholding concentration may hinder, delay, or prevent changes in control, which could deprive other shareholders of the opportunity to receive premiums when selling H-shares and may reduce the market price of the company’s H-shares. Even if opposed by other shareholders, such events may still occur. Furthermore, the interests of controlling shareholders may differ from those of other shareholders. We cannot guarantee that controlling shareholders will not exercise their significant influence over us or induce us to enter into transactions or make decisions that conflict with the best interests of other shareholders.”

Notably, Hanfang Pharmaceutical has not imposed non-compete agreements on core employees, relying only on confidentiality agreements. The prospectus admits that if key employees join competitors or establish competing businesses, the company could lose valuable technology, trade secrets related to proprietary formulas, and key professional relationships. Under the family management structure, this has raised additional concerns about the protection of the company’s core assets.

Related-Party Companies as Promotional Partners

Receiving Billions in Promotion Fees During the Reporting Period

In its business operations, transactions with related parties controlled by the family have attracted market attention. The prospectus discloses that Shandong Jiyuan Information Technology Co., Ltd. (“Shandong Jiyuan”) is a related party during the reporting period (2023, 2024, and January-September 2025). The company is controlled by the family’s nephew and has long served as a third-party promoter for Hanfang Pharmaceutical, responsible for market analysis, sales guidance, and other promotional services, earning substantial promotional fees.

As a company heavily reliant on distribution channels, Hanfang Pharmaceutical’s sales performance is closely linked to its network of distributors. The prospectus shows that during the reporting period, the company had 1,078, 992, and 930 distributors, mainly supplying compound Huangbai liquid ointment to medical institutions and retail pharmacies nationwide. During this period, sales through distributors accounted for 95.3%, 92.3%, and 93.2% of total revenue, respectively. Meanwhile, the top five customers during the period were all distributors, accounting for 56.1%, 55.9%, and 55.0% of total revenue, respectively.

Shandong Jiyuan, as one of the core promotional service providers, has service quality and fee standards that directly impact the company’s operating costs and market expansion efficiency. Founded on November 20, 2018, Shandong Jiyuan became a promotional service provider for Hanfang Pharmaceutical in 2019, mainly responsible for marketing strategy development, market research, academic conference promotion, pharmacy and clinic visits, and customer relationship maintenance. Since it is ultimately controlled by Wang Meng, the nephew of controlling shareholders Qin Wengui and Qin Yinji, it is regarded as a related party under listing rules. The prospectus discloses that during the reporting period, Shandong Jiyuan received a total of 179 million yuan in promotional service fees from Hanfang Pharmaceutical.

Transactions with related parties lacking sufficient market comparison data pose potential risks of benefit transfer. Although the prospectus states that “the promotional service fees paid to Shandong Jiyuan are determined based on expected costs, service complexity, quantity, duration, and current market conditions, and are negotiated fairly under normal commercial terms, and are not less favorable than those from independent third-party promoters,” it does not detail the specific basis for pricing or compare fees with other independent third-party providers. This has raised questions about the fairness of this related-party transaction.

Interestingly, Hanfang Pharmaceutical both affirms the promotional services provided by Shandong Jiyuan, which support the sustainable growth of the compound Huangbai liquid ointment, and, after Wang Meng’s exit from Shandong Jiyuan’s shareholder list, immediately terminates all transactions with Shandong Jiyuan. The prospectus discloses that in 2025, Wang Meng sold all his interests in Shandong Jiyuan. Since then, Hanfang Pharmaceutical has ceased all dealings with Shandong Jiyuan and does not plan any further transactions.

Consistent Dividend Payments During the Reporting Period

Large Dividends Entirely Benefiting Controlling Shareholders

Before listing in Hong Kong, Hanfang Pharmaceutical distributed significant cash dividends during the reporting period. The prospectus shows that in 2024 and from January to September 2025, the company declared dividends of 50 million yuan and 150 million yuan, respectively. The 50 million yuan dividend in 2024 was fully paid, and of the 150 million yuan declared for January-September 2025, 133 million yuan has been paid. Over the two years, total dividends paid amounted to 183 million yuan. Given that the company is 100% controlled by the Qin brothers, these dividends before listing effectively benefited family members, highlighting typical family enterprise profit distribution.

From a financial perspective, this dividend scale aligns with Hanfang Pharmaceutical’s profitability during the same period. In 2024 and the first nine months of 2025, the company achieved net profits of 199 million yuan and 145 million yuan, respectively, totaling 344 million yuan. The cumulative dividends paid (183 million yuan) account for 53.20% of cumulative net profit. However, from a cash flow standpoint, such frequent dividend payments exert pressure on liquidity. As of September 30, 2025, the company’s net current assets were 7.019 billion yuan, a sharp decline from 301 million yuan at the end of 2023.

Market analysts note that for pre-IPO companies, dividend payments should balance shareholder returns with the company’s long-term development needs. Shandong Hanfang’s core product, the compound Huangbai liquid ointment, contributed 99.7% of total revenue as of September 30, 2025. The company is in a critical stage of product diversification and R&D investment. The prospectus states that during the reporting period, R&D expenses were 56.945 million yuan, 59.615 million yuan, and 41.553 million yuan, respectively, and future plans include using part of the IPO proceeds for R&D and commercialization of candidate products. At this stage of development, large cash dividends may impact the sufficiency of R&D investment and new product development, attracting market attention.