The aggressive expansion strategy of the established pharmaceutical firm Shaanxi Kanghui Pharmaceutical Co.,Ltd. (ASX: 603139) following its A-share listing is now resulting in significant fallout, with risks materializing all at once. Recent company announcements reveal that its subsidiary, Sichuan Chunsheng Pharmaceutical Group Co., Ltd., has defaulted on a loan and completely failed to meet its performance guarantee commitments. Looking back at previous acquisition targets, the core operating entity of an earlier acquisition, Shaanxi Youbang Biopharmaceutical Technology Co., Ltd., has ceased all production and is undergoing bankruptcy restructuring, while over 100 million yuan in massive performance compensation remains mired in a protracted arbitration process.
It has been noted that influenced by the shutdown and restructuring of Shaanxi Youbang alongside its own operational challenges, Kanghui's losses deepened in 2025, extending a streak of annual losses that had already lasted three years. Following a change in the company's actual controller, Kanghui reported a brief return to positive net profit attributable to shareholders in Q1 2026. However, this paper profit was primarily achieved through a one-time gain from the sale of idle equipment, with net profit after deducting non-recurring items remaining in the red.
From rampant expansion to successive failures of performance guarantees, and now subsidiary shutdowns and loan defaults, Kanghui's "post-expansion syndrome" is laid bare. Finding a genuine path out of this predicament presents a major test for the new controlling shareholders and management team.
Subsidiary Chunsheng Pharmaceutical Faces Dual Crises
On June 23, Kanghui received a "Loan Overdue Collection Notice" via mail from Dujiangyan Property Rights Transfer Financing Guarantee Co., Ltd., urging the company to press its subsidiary Chunsheng Pharmaceutical to arrange funds for repayment, failing which Kanghui would bear corresponding counter-guarantee liabilities.
Established in 2009, Chunsheng Pharmaceutical is primarily engaged in the planting and sales of Chinese medicinal herbs and the production and sales of prepared herbal slices. In June 2025, Chunsheng secured a 4 million yuan loan from Dujiangyan Jindu Village Bank Co., Ltd., with the guarantee company providing a guarantee for the loan and Kanghui providing a counter-guarantee to the guarantee company. Shareholders Luo Chunming and Yin Nianjuan of Chunsheng signed counter-guarantee contracts with Kanghui, undertaking counter-guarantee liability to the company for up to 49% of the guaranteed principal debt.
Due to changes in the overall industry environment and temporary market pressures, Chunsheng's operating cash flow came under strain, collection of accounts receivable from downstream customers fell behind schedule, and fund-raising and allocation faced temporary tightness. This led to a failure to pay the loan principal and interest in full and on time, resulting in the loan delinquency.
It has been observed that Chunsheng Pharmaceutical not only defaulted on its loan but also failed its performance guarantee. In March 2023, Kanghui spent approximately 56.7953 million yuan to subscribe to 15.820408 million new shares in Chunsheng, acquiring a 51% stake. At the time of the transaction, the original shareholders made a three-year performance promise: Chunsheng's net profit (based on the lower of the figures before and after deducting non-recurring gains and losses) for 2023, 2024, and 2025 would be no less than 3 million yuan, 5.5 million yuan, and 8.5 million yuan respectively, with a cumulative total of no less than 17 million yuan over the three years.
Audit data shows that Chunsheng's net profits for April-December 2023, 2024, and 2025 were 452,400 yuan, 5.2673 million yuan, and -36.7035 million yuan respectively, failing to meet the promised targets for three consecutive years, with its operational fundamentals deteriorating sharply into significant loss in 2025.
Kanghui stated that both the company and Chunsheng are actively communicating with the bank and the guarantee company, negotiating disposal plans such as loan extensions, renewals, installment repayments, and debt restructuring, striving to smoothly resolve the overdue debt risk and mitigate the adverse impact of this incident. If Chunsheng fails to fulfill its repayment obligations, Kanghui will pursue recourse measures against Luo Chunming and Yin Nianjuan after fulfilling its guarantee repayment responsibility.
M&A Aftermath Erupts with Multiple Problematic Subsidiaries
After listing on the Shanghai Stock Exchange's main board in April 2017, Kanghui embarked on a path of rapid expansion. Between September 2017 and 2021, it successively brought multiple pharmaceutical enterprises into its fold through acquisitions or capital increases, including Shaanxi Fangyuan Pharmaceutical Biotechnology Co., Ltd., Shaanxi Xingaoxin Pharmaceutical Co., Ltd., Shandong Youbang, Hubei Kelaivei Biological Pharmaceutical Co., Ltd., and Sichuan Pufengtang Pharmaceutical Co., Ltd., gaining controlling stakes in most targets. However, in this series of acquisitions, many targets not only failed to bolster performance but instead turned into burdens one after another.
The acquisition of Shandong Youbang serves as a typical example. In September 2020, Kanghui acquired a 51% stake in Shandong Youbang from Lai Xinsheng for 32.64 million yuan. The company primarily engages in the technology development, production, sales, technology transfer, and outsourcing services of high-purity active pharmaceutical ingredients and high-end pharmaceutical intermediates. At the time of the premium-priced acquisition, Shandong Youbang had already ceased production in 2018 and was operating at a loss due to the need for relocation prompted by government high-speed rail project planning. Subsequently, Shandong Youbang established a wholly-owned subsidiary, Shaanxi Youbang, transferring all core product technology, personnel, and operations to the latter, with the former becoming a holding platform.
Kanghui had hoped that the completion and operation of Shaanxi Youbang's production facility would improve performance, but the opposite occurred. Shandong Youbang failed to achieve its promised performance for three consecutive years from 2021 to 2023, with original shareholder Lai Xinsheng owing the company approximately 269 million yuan in compensation.
In June 2024, Lai Xinsheng transferred his 49% equity stake in Shandong Youbang to Hongfu Pharmaceutical Co., Ltd., stipulating that 8.3 million yuan be paid directly by Hongfu Pharmaceutical to Kanghui to settle part of Lai Xinsheng's performance compensation. Hongfu Pharmaceutical concurrently committed that Shaanxi Youbang would achieve profits of no less than 30 million yuan, 40 million yuan, and 50 million yuan for 2025, 2026, and 2027 respectively. One month later, in July 2024, Shandong Youbang transferred its 51% stake in Shaanxi Youbang to Kanghui for 0 yuan and its 49% stake to Hongfu Pharmaceutical for 0 yuan, making Shaanxi Youbang a first-tier subsidiary of Kanghui.
Affected by factors including intensified industry competition, Shaanxi Youbang incurred long-term losses and completely halted production in September 2025. Subsequently, Shaanxi Youbang applied for bankruptcy restructuring on the grounds of insolvency and lack of solvency but possessing restructuring value. The restructuring process is currently underway.
It has been noted that as Kanghui has only received 2.8 million yuan in代为compensation payment, it has initiated arbitration to recover the remaining approximately 266 million yuan in compensation from Lai Xinsheng.
Another subsidiary, Pufengtang Pharmaceutical, failed to complete its performance commitments for 2023 and 2024, leading a Kanghui subsidiary to similarly initiate arbitration. The case was heard on March 31, 2026, with no arbitration ruling received yet. Concurrently, a 6 million yuan loan to Pufengtang became overdue. Affiliate company Kelaivei also had equity disputes with Kanghui, resulting in litigation. A series of M&A "aftershocks" are now manifesting simultaneously.
Fourth Consecutive Annual Net Loss, Q1 Performance Artificially Boosted by Asset Sales
Kanghui's main business covers pharmaceutical manufacturing and distribution. The pharmaceutical manufacturing segment focuses on the R&D, production, and sales of proprietary Chinese medicines, supplemented by the R&D, production, and sales of prepared herbal slices and pharmaceutical intermediates. The pharmaceutical distribution segment primarily involves the wholesale of biological products (excluding vaccines), blood products, pharmaceuticals, and Chinese medicinal herbs, along with a small amount of pharmaceutical retail. The R&D, production, and sales of proprietary Chinese medicines currently constitute the company's most significant business segment.
As an established pharmaceutical company, Kanghui's operational pressures have intensified: from 2022 to 2024, the company's net profit attributable to shareholders recorded losses of 63.06 million yuan, 26.16 million yuan, and 89.63 million yuan respectively.
In September 2025, Kanghui's actual control changed, with Jiaxing Yuehe Zhichuang Technology Partnership (Limited Partnership) becoming the controlling shareholder, and the couple Li Hongming and Wang Xuefang ascending as the new actual controllers. A new board of directors was formed and executives were appointed. Subsequently, the company was renamed "Kanghui Pharmaceutical Co., Ltd.," aiming to retain the "Kanghui" brand while using "Pharmaceutical Co., Ltd." to convey a clearer development positioning.
However, Kanghui's full-year 2025 operations remained dismal: revenue reached 471 million yuan, down 16.09% year-on-year, net profit attributable to shareholders recorded a loss of 333 million yuan, and net profit after deducting non-recurring items recorded a loss of 212 million yuan, with the loss magnitude expanding. Shaanxi Youbang became a significant drag. Due to its shutdown and restructuring application, the company provisioned for bad debts on loans receivable from Shaanxi Youbang using the specific identification method, combined with its operating losses, impacting the company's performance by approximately 241 million yuan in total.
Simultaneously, affected by pharmaceutical industry policy adjustments and the macroeconomic environment, Kanghui strategically adjusted its sales approach, increasing investments in channel and brand building. Although sales volume of the parent company's products increased, sales revenue still declined by about 5% due to changes in the product mix. Furthermore, as new production bases operated concurrently with three old ones during a product transfer phase, overall operating costs remained proportionally high. These factors collectively contributed to the company's performance loss in 2025.
In the first quarter of 2026, Kanghui achieved revenue of 93.3563 million yuan, a decrease of 23.07% year-on-year, while net profit attributable to shareholders surged 221.12% year-on-year to 20.8798 million yuan.
It has been noted that Kanghui's return to positive net profit was not due to operational improvement but stemmed from a one-time asset disposal gain. On March 6 of this year, Kanghui decided to sell a batch of computer-related equipment, with a total transaction value of 114 million yuan. This transaction was estimated to bring about 41.6 million yuan in net profit, positively impacting Q1 performance. By the end of the first quarter, delivery of all equipment was completed, and the full transaction amount was collected.
Excluding this non-recurring gain, Kanghui's net profit after deducting non-recurring items for Q1 2026, despite a 16.18% year-on-year increase, still showed a loss of 15.4359 million yuan, indicating that its core profitability has not been substantially restored.