Capsule crisis stirs the stock market

Chinese media reports of some pharmaceutical companies using industrial capsules to pack their drugs caused the shares of some related businesses to experience unprecedented fluctuations in Shenzhen and Shanghai stock markets since the scandal was exposed a month ago. Experts now say the negative effect brought about by the poisonous capsules on the stock market is gradually fading.

Investors unsure how to swallow the news about toxic medicinal coatings

A recent chromium-tainted capsule scandal has been stirring waves in China's medical stock markets, with some seeing share prices doubling and others becoming basket cases.

Industry watchers believe the recent market commotion will result in an industry shake-up in which good companies get bigger and stronger and the bad ones get weeded out.

Tonghua Golden-Horse Pharmaceutical Industry Co, a traditional Chinese medicine maker listed in Shenzhen, is one of the worst hit, with it's share price down more than 10 percent after the scandal broke on April 15. It was trading for 4.42 yuan a share on Wednesday. Shanghai Fudan Forward S&T Co Ltd, a Shanghai-based drug maker, saw its shares plunge around 8 percent after the news but its share price bounced back later. It was priced at 6.56 yuan ($1.04) on Wednesday. Its market capitalization has been cut by 200 million yuan since the scandal emerged.

Another drug maker, Jilin Pharmaceutical Co, said in a statement on Wednesday that it was delisted after regulators found it sold 525,600 chromium-tainted capsules in 2011 and has lost money over three consecutive years.

On April 15, China Central Television revealed in an investigative program that several commonly used medicines were packed into capsules made from industrial gelatin, which contains a much higher degree of chromium than edible gelatin. CCTV singled out nine drug makers, including Tonghua Golden-Horse, that purchased these capsules to save costs.

According to the report, industrial gelatin was made from waste leather at plants in the country's biggest capsule-manufacturing area in East China's Zhejiang province. Ru'ao township has more than 10 capsule-producing factories, which provide about one-third of the output on the Chinese mainland, the report said.

Following the report, police detained 45 people, arrested nine and seized more than 77 million capsules tainted with chromium. A total of 80 illegal production lines were also shut down after a week of inspections centered in Zhejiang, Hebei and Jiangxi provinces.

Many stocks, whose business has little to do with industrial gelatin, took collateral damage, in a market response that analysts say was filled with speculation.

The CCTV report mentioned nothing about Shandong Donge E-jiao Co, a maker of Donkey-hide gelatin, an ingredient in traditional Chinese medicine. But the company saw its share price plunge more than 9 percent in April as investors sold its shares on the mistaken assumption it used industrial gelatin. The company's share price bounced back later and was trading for 40.01 yuan on Wednesday.

A similar scenario happened with Beijing Sanyuan Foods Co. Its share price stabilized after it released a statement clearing itself of any connection with industrial gelatin.

"It's almost a common practice in China that investors speculate on some stocks once really big news breaks," said Wang Jianhui, chief economist with Southwest Securities Co.

The phrase "theme speculation" has been coined to describe the tendency that some stocks are the subject of speculation after certain government policy anouncements and breaking news.

Last month about a dozen stocks surged after the central government announced a pilot scheme in Wenzhou to reform its financial industry but many of them fell back this month and some continue to be volatile. On Wednesday, companies related to the military and shipbuilding industries rallied as China got tougher on the Philippines over tensions in the South China Sea. CSSC Jiangnan Heavy Industry Co, a shipbuilder, hit the 10 percent daily increase limit amid a 1.65 percent fall by the major Shanghai Composite Index.

Speculation in the nation's stock market is such that Guo Shuqing, chairman of China Securities Regulatory Commission, recommended in March that investors make long-term investments on blue-chip stocks. The move is rare because regulators typically don't comment on market trends and investment decisions. Analysts believe it underscores the speculation-oriented mood in China's equity markets.

The story is more dramatic with Shenzhen-listed Dongbao Bio-Tech Co. The company's share price doubled just eight days after the CCTV report came out because investors hoped the gelatin-maker's business would pick up after the illegal ones were shut down. But, in the two following trading days, its shares fell by the 10 percent daily limit.

Then the company suspended trading of its shares after a media report said one of its suppliers was found to have sold the company raw materials that contain excessive amounts of chromium. Then its shares rallied again after it said on May 3 that the report was untrue. On May 7, trading was suspended again after the company said its share price "fluctuated irregularly".

Dongbao's market capitalization was 3.3 billion yuan on May 4, almost double the figure before the scandal.

Zhang Gang, an analyst with Southwest Securities, said Dongbao's earnings are not good enough to support its current high share price.

Dongbao is not the only company in China that can produce edible gelatin, he said, so it might not benefit from the scandal as much as many have expected. Dongbao earned 5.8 million yuan in the first quarter of this year, up 33.74 percent on the same period last year.

Zhang recommends individual investors should avoid speculating on the stock.

A research report by Guangfa Securities Co said that China's gelatin output was 41,000 to 43,000 tons in 2011. Of that, 22,000 to 24,000 tons is edible and the rest is for industrial use. The supply of edible gelatin in China is in short supply to the tune of 16,000 tons annually. The gap is filled by industrial gelatin, the report said, adding that the cases exposed by CCTV are just "the tip of the iceberg".

In the longer term, an industry shake-up will benefit good gelatin companies because the removal of inappropriate gelatins from the market reduces the price pressure on those that conduct themselves well, according to a research report by Rising Securities Co.

Producers of pharmaceutical capsules will benefit as a whole because regulators are expected to raise industry standards and strengthen supervision after the poison capsule scandal, the report said.

gaochangxin@chinadaily.com.cn