HeartCare Medical's Operating Cycle Lengthens Sharply vs Peers, Stock Plummets Nearly 90%, Sitting on Excess Cash While Planning A-Share IPO to Raise RMB 1.4 Billion | Chapter 18A Watch

Stock trading depends onGolden Qilin Analyst Report, authoritative, professional, timely, comprehensive, help you explore potential theme opportunities!

Source: Sina Finance Research Institute of Listed Companies

Author: Tianli

In April 2018, the Hong Kong Stock Exchange (HKEX) implemented significant policy updates, introducing Chapter 18A, "Biotech Companies," into its Main Board Listing Rules. This allows Biotech companies without revenue or profit to submit listing applications on the HKEX. The establishment of Hong Kong's Chapter 18A has opened a "fast track" for start-up biopharmaceutical companies to access the capital market, greatly enhancing the flow of capital into the industry and directly fostering the emergence of numerous start-ups.

But the lower hard threshold has also sparked capital's arbitrage enthusiasm. Since the secondary market generally has a higher premium compared to the primary market, by utilizing Rule 18A, primary market investors can almost profit and exit without bearing subsequent risks, leading to the frequent occurrence of the phenomenon of "passing the parcel" to the secondary market as soon as possible for the purpose of IPO.

Behind the premature push of startup Biotechs into the capital market lies the transfer of R&D and market risks, which should have been borne by venture capital firms and other primary market investors, to secondary market investors. Against the backdrop of high premium issuance, the buying behavior of secondary market investors has become a "gamble," with almost no hope for dividends, and relying on stock price increases for capital gains is equally bleak. Even if R&D progresses smoothly, subsequent commercialization results will need to first deflate the valuation bubble before further driving stock price increases. If R&D or commercialization falls short of expectations, a sharp drop in stock price has almost become an inevitable outcome.

Wind data shows that, since 2021, all Hong Kong-listed biopharmaceutical companies that went public under Rule 18A, except for Kelun Botai, have now fallen below their IPO prices. Among them, HeartCare, one of the star enterprises in the neurointerventional medical device sector, had already reached a valuation of 3.4 billion RMB in October 2020, prior to its IPO.

The IPO price of the company reached as high as HK$171.00 per share, corresponding to a total market value of approximately HK$6.6 billion, with a premium of over 60% between the primary and secondary market valuations. In 2021, the company's price-to-research ratio was 53.54, far exceeding the median of 19.39 and the average of 43.85 for 18A companies during the same period, indicating a relatively high valuation at the time of listing. Currently, the company's stock price has fallen nearly 90% compared to the issue price.

Source:Tonghuashun

The continuous decline in stock price is attributed to two main factors: on one hand, the company's poor financial condition, with consecutive losses since its listing, accumulating to a total loss of 488 million yuan from 2021 to 2023. On the other hand, intensifying industry competition has led to weakening value logic under the expectation of product centralized procurement.

In terms of recent financial performance, HeartCare achieved a revenue of 232 million yuan in 2023, representing a year-on-year increase of 26.94%. This growth rate has significantly slowed compared to 103.17% in 2022 and 518.66% in the previous years. In terms of profitability, the company's total loss for the year amounted to 94 million yuan, narrowing by 53.08% year-on-year. Based on the surface data, although HeartCare’s growth momentum is weaker than in previous years, the overall performance still maintains an upward trend, with a significant reduction in losses.

However, further analysis of the financial data reveals that the company still has many hidden concerns in its financials. First, trade receivables surged by 200.62% year-on-year, far exceeding the growth rate of revenue. Although the aging structure shows that all accounts receivable are within one year, the significantly higher growth rate of receivables compared to revenue may indicate that the company had to adopt a more lenient payment policy in order to maintain its performance growth amid market competition.

Source: Announcement

While trade receivables surged, the company's inventory turnover ratio and accounts receivable turnover ratio also declined significantly. In 2023, HeartCare's inventory turnover ratio and accounts receivable turnover ratio were 0.49 and 4.54 respectively, showing a marked decrease compared to the same period last year. The company’s operating cycle extended dramatically from 208.83 days in 2021 to 809.3 days in 2023.

Source: wind

Generally speaking, a decline in inventory turnover rate and accounts receivable turnover rate, along with a more lenient credit policy, often indicates weaker bargaining power for a company in the market, relatively poor product sales, and can lead to price reductions that lower gross profit margins. However, HeartCare's gross profit margin performance in recent years has not decreased but increased instead, reaching 61%, 67.93%, and 70.48% in 2021, 2022, and 2023 respectively, which is quite puzzling.

From the perspective of cash flow, HeartCare has shown net cash outflow since its listing. The company's free cash flow was -RMB 397 million, -RMB 243 million, and -RMB 221 million in 2021, 2022, and 2023, respectively. This also reveals that although the company's losses have narrowed significantly, the pressure of cash outflow remains high and has not aligned with profit performance.

It is worth mentioning that the company's current balance of cash assets, including monetary funds and financial assets held for trading, is 721 million yuan, which is already higher than its market capitalization of 516 million yuan. However, the company has not taken any repurchase actions. The company’s rock-bottom market value may negatively impact its future refinancing, especially as companies in the neurointerventional sector are mainly developing towards a comprehensive and large-scale layout, with relatively strong funding needs.

HeartCare also has its own plans. On October 10, 2022, HeartCare announced that it proposed to submit an application for listing on the Shanghai Stock Exchange's STAR Market, planning to apply for the issuance and offering of no more than 13 million A-shares. According to the information in the announcement, after deducting the issuance expenses, the total amount of funds raised from the A-share issuance will reach 1.432 billion yuan. At that time, the company's total market value was only about 1 billion yuan.

On October 19, 2023, the company announced that it had decided to extend the resolution on the issuance of A-shares and the listing on the STAR Market to November 7, 2024. A large amount of funds raised from the Hong Kong stock market remains unused, and now the company plans to raise over 1.4 billion yuan in the A-share market, with 400 million yuan intended for supplementing working capital. The reasonableness of this move is questionable.

From the perspective of industry competition, for a long time, the domestic neurointerventional market has been dominated by foreign enterprises. The first tier of competition mainly consists of internationally leading companies such as Medtronic, Stryker, Johnson & Johnson, and MicroVention, which have a wide range of product types, strong R&D capabilities, high technical standards, and superior product quality, representing the pinnacle of the neurointerventional sub-sector.

And with the continuous improvement of neurointerventional technology in China, domestically produced enterprises are developing rapidly. In recent years, several new neurointerventional listed companies have emerged, including HeartCare, GuiChuang TongQiao, MicroPort NeuroTech,Sino Medical, Peijia Medical, etc. The core value logic that makes relevant companies promising is the replacement with products produced in China.

However, at the same time, the pioneers who have successfully landed in the capital market have also attracted many followers who want to replicate their path, specifically manifested by a significant increase in the speed of obtaining certifications for neurointerventional products. In 2022, 122 products in the neurointerventional field obtained certifications, accounting for 5% of the products reviewed by the NMPA. In the first half of 2023, the number of certified products in the neurointerventional field increased by 26% year-on-year, with 20 certificates issued only in March.

The surge in the number of certified products from Chinese companies has also led to increasing competition in this sector, prompting the implementation of centralized procurement. Currently, centralized procurement has fully covered the three major categories of devices in the neurointerventional field (access, ischemic, and hemorrhagic). In terms of results, according to the same data criteria, four leading companies—MicroPort NeuroTech, Guichuang QT, HeartCare, and Peijia Medical—held only 3.85% of the Chinese market share in 2020. By 2022, their market share had increased to 17%.

Although the localization rate has improved, overseas companies still firmly dominate the majority of the market, and it will take a long time to achieve domestic substitution. Currently, a limited market share has to accommodate a large number of new players, leading to significant internal competition within the industry. In the increasingly fierce market competition, HeartCare's performance may not stand out.

Horizontally speaking, before 2023, HeartCare's gross profit margin was lower than that of comparable companies, indicating weaker profitability. In 2023, it barely caught up but still remained at a relatively low level. Meanwhile, while there was no significant change in the operating cycle of comparable companies, HeartCare’s operating cycle significantly lengthened. From this perspective, the authenticity of its barely passing gross profit margin is questionable.

Editorial Responsibility: Company Observation