Jia Shi Tang "Mine Clearing" Underway: Unresolved Historical Burdens, Can the New Owner Tong Ren Tang Turn the Tide?

Question: How did internal control deficiencies at AI Jiashitang lead to eight years of tax evasion concealment?

Our reporter Zhao Wenjuan and Na from China Times (chinatimes.net.cn) Beijing report:

A tax payment that had been “dormant” on the books for nearly ten years ultimately triggered a financial compliance crisis at Jiashitang (002462.SZ). Recently, this pharmaceutical distribution listed company disclosed an announcement regarding the correction of prior accounting errors. Due to a value-added tax (VAT) owed by its controlling subsidiary, Beijing Jiashishengshi Medical Equipment Co., Ltd. (“Jiashishengshi”), which had been delayed for nearly a decade, the company had to retrospectively adjust its financial reports for eight consecutive years from 2017 to 2024.

This long-standing “sleeping debt” went unnoticed for eight years. The “core reason,” according to Liu Zhigeng, a well-known tax and finance expert, is that the company did not incorporate tax matters into its internal control key points and lacked an effective financial monitoring mechanism for subsidiaries. This included issues such as broken internal control processes, disjointed financial reporting, and oversight by external audits. The company equated “non-payment” with “no need for confirmation,” violating the accrual principle, reflecting weak compliance awareness and superficial internal control implementation.

This large-scale financial “mine clearance” not only exposed the long-term absence of internal control processes but also worsened an already strained operational situation. At a critical juncture when the controlling shareholder was about to change to Tongrentang Group, the handling of this historical old debt became a test of the new and old management’s handover and governance capabilities.

Late Fees Mounting: An Old Debt That Has Dragged Down Eight Years of Profits

The trigger was Jiashitang’s 51%-owned subsidiary, Jiashishengshi. According to the announcement, as early as August 2017, Jiashishengshi received a notice from tax authorities requiring the transfer-out of input VAT of 28.2632 million yuan for the period from September 2015 to October 2016. At that time, Jiashishengshi had paid only 2.9505 million yuan, leaving 25.3128 million yuan unpaid, which was left unresolved for nearly eight years until August 2025, when the tax authorities ordered a deadline for payment. The company then paid the tax and surcharges totaling over 28.4 million yuan in early 2026.

However, the real financial risk was not the principal amount but the huge late fees generated by this overdue tax. Calculated at a daily rate of 0.05%, these late fees have accumulated over nearly ten years, likely reaching or exceeding the principal tax amount. This means that once the late fees are confirmed and paid in the future, Jiashitang will face additional expenses of tens of millions of yuan, further eroding profits and cash flow.

This “oversight” directly revealed serious flaws in Jiashitang’s financial reporting process. Because this significant liability was hidden for eight years, the company had to make “major revisions” to its past financial statements. Although the company claimed that the profit and loss nature of each year remained unchanged, the net profit in 2017 was adjusted downward by 37.1378 million yuan, and from 2018 to 2024, annual net profits were reduced by about 5 million yuan each year. By the end of 2024, undistributed profits were adjusted downward by 36.6213 million yuan. This incident undoubtedly added a heavy financial burden to Jiashitang, which was already struggling with poor performance.

“Four consecutive declines” in performance: growth struggles under centralized procurement

Alongside this “man-made disaster,” Jiashitang’s operations also faced difficulties amid industry changes. The 2025 annual report shows revenue of 19.525 billion yuan, down 18.71% year-on-year; net profit attributable to shareholders was 111 million yuan, down 29.57%. This marks the fourth consecutive year of decline in net profit attributable to shareholders.

(Screenshot from 2025 annual report)

In terms of business segments, the company’s decline is pervasive. The pharmaceutical wholesale business, accounting for 96.32% of revenue, fell 16.79% year-on-year, becoming the main drag on overall performance. The pharmaceutical logistics and pharmacy chain segments experienced “cliff-like” drops, with revenues decreasing by 69.13% and 40.35%, respectively.

(Screenshot from 2025 annual report)

Under the accelerated expansion of centralized procurement policies for medicines and high-value medical consumables, profit margins in circulation have been sharply compressed. Jiashitang admitted in its announcement that the pharmaceutical business can only “strive to consolidate core existing markets,” while the medical device business faces “development difficulties.” The retail sector hopes to “expand cooperation with multiple medical institutions” to create new growth curves. The impact of centralized procurement has shifted from merely diluting profits to fundamentally reshaping the company’s business structure.

Amid the overall gloom, net profit excluding non-recurring gains and losses (扣非净利润) became one of the few bright spots. In 2025, this figure was 92 million yuan, up 14.55% year-on-year. This growth was mainly due to significant cost reductions—sales expenses, management expenses, and financial expenses decreased by 49.59%, 25.33%, and 36.98%, respectively, with labor costs in sales and management expenses down by 24.97% and 21.25%.

Impairment of goodwill: legacy of past acquisitions

In addition to tax liabilities and procurement pressures, the risks associated with goodwill from past acquisitions also surfaced in 2025. The company recognized impairment provisions totaling 48.9412 million yuan for goodwill assets formed through acquisitions, further dragging down current net profit.

(Screenshot from 2025 annual report)

This impairment mainly involved three subsidiaries. Guangzhou Jiashijijian Medical Equipment Co., Ltd. had 29.4412 million yuan of goodwill written down due to procurement impacts, reducing its goodwill to zero. Sichuan Jiashirongjin Medical and Sichuan Jiashi Xinshunhe Medical Equipment also recognized impairments of 14.3 million and 5.2 million yuan, respectively. The company used the discounted cash flow method for testing, and the results showed that the recoverable amounts of these asset groups were far below their book values.

Meanwhile, Jiashitang also disposed of 51% stakes in six medical device subsidiaries—Jiashijiacheng (Wuhan), Jiangsu Jiashi Guokang, Jiangsu Jiashi Jimei, Hangzhou Jiashi Huagu, Sichuan Jiashi Xinhong, and Jiashi Jiaxin Health—and canceled six other subsidiaries including Liaoning Jiashitang Pharmaceutical, Beijing Jiaben Yuhua Pharmacy, Guangzhou Jiashi Fukang Health, Jiangsu Jiashi Supply Chain, Guangzhou Runye Trading, and Shanghai Jihecheng Medical. The acquisitions made to expand the network and channels in previous years faced fundamental changes in operational expectations under ongoing procurement policies, and past capital operations are now suffering from industry cycle backlash.

Pre-dawn changes: can Tongrentang’s involvement bring new life?

Amid the dual pressures of financial “mine clearance” and declining performance, Jiashitang experienced a key change in controlling ownership. In February this year, the company announced that Tongrentang Group planned to acquire a controlling stake at a total transaction price of about 1.46 billion yuan. With the Beijing State-owned Assets Supervision and Administration Commission becoming the actual controller, Jiashitang will soon be incorporated into Tongrentang’s corporate structure.

For Jiashitang, this change of ownership is a “timely rain.” As a traditional Chinese medicine brand with deep industry resources and influence, Tongrentang’s entry is expected to create synergies with Jiashitang’s distribution channels and upstream industrial resources. Especially given the increasing industry concentration in pharmaceutical distribution, the backing of state-owned capital will provide stronger credit support and funding.

However, the new owner also faces significant challenges. How to properly handle the overdue late fees left by Jiashishengshi? How to reshape profitability under normalized procurement policies? How to digest and address past acquisition issues and optimize asset structure? These are practical issues facing Tongrentang.

During this sensitive period of ownership change, whether this historical debt will become a focal point of negotiations remains uncertain. Lu Dingliang, a lawyer at Beijing Jingshi Law Firm, told China Times that “whether the transaction terms include compensation mechanisms or price adjustment clauses for past tax liabilities, and whether the valuation has considered asset quality, have not been publicly disclosed. But the impact of tax payments and late fee settlements on profits and cash flow cannot be ignored, and this will definitely be an important part of the asset transfer agreement.”

For Jiashitang, 2025 is undoubtedly a tumultuous year. The retrospective adjustment of tax liabilities, continuous decline in performance, and goodwill impairments are testing the company’s governance and resilience. But with Tongrentang’s involvement, the company may be standing at a critical point before dawn. Whether the new shareholder’s entry can lead to governance optimization and strategic realignment will determine if Jiashitang can escape the mire and achieve a real turnaround.

We contacted Jiashitang for an interview. The company’s secretary office replied: “All relevant matters have been announced on the designated information disclosure platform, and the content is true, accurate, and complete. To ensure fairness in information disclosure, we are not convenient for an interview at this time. The company will strictly fulfill its disclosure obligations according to regulatory requirements.”

Editor: Jiang Yuqing Chief Editor: Chen Yanpeng