Is the 100 billion picture medical overestimated?

Image source @ Visual China

Wen | Damo Finance

Recently, one of the leading players in the domestic medical device industry, the IPO application of Lianying Medical was accepted by the Shanghai Stock Exchange, which also kicked off the prelude to the changes in the medical device industry.

United Shadow Medical was founded in 2011 by Xue Min, 65, now. Prior to the IPO, Xue Min controlled 31.88% of the equity of United Film Medical through United Film Group, Shanghai Film Ascend and Shanghai Shadow Wisdom, and was the actual controller.

United Pictures Medical is a leading player in the field of medical imaging segmentation in China, and is recognized in the industry as a local medical imaging equipment leader that can compete against the three foreign giants of GE Healthcare, Philips Medical and Siemens Medical.

Some people believe that Lianying Medical is one of the most anticipated stocks in the science and technology innovation board, and its landing on the science and technology innovation board will bring a demonstration effect to high-end medical equipment manufacturing enterprises, attracting more industrial chain companies to gather on the science and technology innovation board, which is of symbolic significance.

In terms of the scale of fundraising, after exercising the over-allotment right, The IPO of Lianying Medical plans to raise no less than 12.48 billion yuan by issuing 115 million shares, with an offering valuation of more than 100 billion yuan. Once successfully listed, it will be the only two hundred billion companies in the industry with another medical device giant, Mindray Medical.

What is the quality of the much-watched United Pictures Medical? It's worth a good look.

The epidemic has led to a turnaround in performance

Lianying Medical has always been focusing on high-end medical equipment and has realized the integrated layout of diagnosis and treatment. By the end of 2021, Lianying Medical has launched more than 70 products to the market, of which high-end medical imaging diagnostic equipment and radiotherapy equipment such as CT, magnetic resonance, radiation therapy system and radiotherapy equipment are the core product lines of Lianying Medical, accounting for more than 97.5% of revenue for a long time.

In contrast, Mindray Medical's product line focuses on three categories: life information and support, in vitro diagnosis and medical imaging, the first two business lines contribute more than 70% of revenue, and medical imaging business revenue accounts for only about 20%.

United Shadow Medical has not been able to get rid of losses for many years. In 2018 and 2019, the revenue of Lianying Medical was 2.03 billion and 2.98 billion, respectively, and the net loss attributable to the mother was 126 million and 0.74 billion.

Before 2020, Lianying Medical will maintain losses within a certain range, and government subsidies will play an indispensable role. From 2018 to the first half of 2021, United Pictures Medical received government subsidies of 233 million, 306 million, 348 million and 207 million respectively, accumulating 1.094 billion. During the period, the net profit attributable to the mother of United Pictures Medicine was 1.35 billion, and the proportion of government subsidies reached 80%. Even in 2020 and the first half of 2021, when profits have already been realized, government subsidies still account for 30.11% and 27.34% of the total profits of the current period.

The epidemic has become a turning point in the performance of Lianying Medical. As X-ray imaging and CT are important devices for diagnosing COVID-19 infection, the epidemic has led to a significant increase in market demand, which in turn has led to a significant increase in sales for Lianying Medical.

In 2020, the sales volume of the CT series of United Pictures Medical reached 1277 units, an increase of 663 units over 2019, bringing more than 1.5 billion yuan of incremental revenue. At the same time, the sales volume of Therapical X-ray imaging series products showed a multiple increase, bringing more than 460 million yuan of incremental revenue.

Thanks to the substantial increase in sales of core products, the performance of Lianying Medical in 2020 exploded, with revenue reaching 5.761 billion yuan in that year, an increase of 93.39% year-on-year; net profit attributable to the mother reached 903 million, an increase of more than 13 times year-on-year. In the first half of 2021, the revenue of United Shadow Medical reached 3.09 billion yuan, and the net profit attributable to the mother reached 64,700 yuan.

Can growth be sustainable?

The question for the industry is: Will the hospitals built to detect COVID-19 be oversupplied after the pandemic? Will it lead to a decline in sales of companies such as Lianying Medical in the upstream of the industrial chain?

Market analysis believes that from the current situation, the impact on Lianying Medical in the short term is very small. The main customer of Lianying Medical is the top three hospitals, and the prospectus shows that the medical products of Lianying medical products have been settled in nearly 900 top three hospitals across the country. Nationwide, top three hospitals have always been scarce. In 2019, the top three hospitals accounted for only 8% of the total number of hospitals in the country, but the total number of outpatient clinics accounted for more than 50% of the national total. From this point of view, the scarcity of the top three hospitals is not reduced, and As an upstream supporting manufacturer, Lianying Medical has enough incremental space.

However, the key to whether Lianying Medical can stand at a valuation of 100 billion yuan depends on whether its continuous breakthroughs in the high-end market and overseas markets can be smoothly realized.

From the perspective of industry prospects, under the two-wheel drive of market demand and policy dividends, China's medical imaging equipment market will continue to grow. According to the data of China Insight Consulting, the market size of China's medical imaging equipment has reached 53.7 billion yuan in 2020, and it is expected to grow to 110 billion yuan in 2030.

From the perspective of industry competition, the high-end medical imaging market is mainly monopolized by foreign-funded enterprises. In the field of CT equipment, the localization rate of CT below 64 rows has reached 65%, while the localization rate of 64 rows and above is only 35%. Although Lianying Medical is the largest CT equipment manufacturer in China, it only maintains the first market share of CT market below 64 in China, while in the market above 64, Lianying Medical has only the fourth market share.

This means that In the domestic market, Lianying Medical not only has to compete with competitors such as Mindray and Neusoft, but also faces competition with overseas technology-based enterprises.

In contrast, Lianying Medical has been slow to open up overseas markets. From 2018 to the first half of 2021, the overseas sales revenue of Lianying Medical was 43.2963 million yuan, 98.8185 million yuan, 240 million yuan and 180 million yuan, accounting for 2.18%, 3.37%, 4.21% and 5.89% of the total revenue, respectively, making a limited contribution to the overall performance.

It is worth mentioning that Lianying Medical has not been able to get rid of the dilemma of outsourcing core components, and the core components of its core products such as medical imaging diagnosis and radiation therapy need to be purchased from overseas suppliers such as Philips, Wanruishi, canon and other overseas suppliers or their domestic subsidiaries.

The core components of Lianying Medical cannot be produced by themselves, but are only purchased from foreign manufacturers, and then sold abroad after completion of assembly, and it is difficult to compete with foreign leading players in terms of cost performance and cutting-edge strength in the industry.

In order to improve the controllability of core raw materials, Lianying Medical's R&D investment has continued to increase. From 2018 to the first half of 2021, United Shadow Medical invested 666 million yuan, 690 million yuan, 850 million yuan and 499 million yuan in research and development expenses, accounting for 32.73%, 23.17%, 14.76% and 16.17% of the operating income, respectively.

It is worth mentioning that in the process of development, Lianying Medical has cooperated many times inside and outside the industry:

In April 2016, after Mindray privatized and returned to China, United Pictures Medical signed a framework agreement with it, stipulating that the two sides would carry out long-term strategic cooperation in the fields of medical equipment and services such as product integration, collaborative innovation, and complementary advantages of domestic and foreign channel resources.

In July 2016, Lianying Medical reached a cooperation with Shangrong Medical, which has abundant hospital resources, and agreed to provide technology and customer exclusive prices, and Shangrong introduced hospital customers to Lianying.

Subsequently, Lianying also reached a cooperation with Huawei on a one-stop graded diagnosis and treatment overall solution, and reached a cooperation with the German ITM company to achieve supporting drug solutions.

Although Lianying Medical tries to avoid internal friction by "combining vertical and horizontal" inside and outside the industry, after it lands on the capital market, it cannot avoid short contact with domestic and foreign competitors.

From the performance point of view, the net profit attributable to the mother of United Shadow Medical in 2020 is only one-seventh of Mindray Medical, but the valuation has reached one-fourth of Mindray Medical. It is not excluded that the listing valuation has prepended a part of the growth space, and whether it can continue to maintain a high valuation in the later stage depends on the performance of Lianying Medical after listing.