Sumai Medical Withdraws IPO Amid High Distributor and Overseas Sales, Low R&D Investment

Text: IQHCJ Researcher Zhu Li

Compiled by: Xu Hui

On April 4, Zumax Medical Co., Ltd. (referred to as "Zumax Medical"), which planned to withdraw its application for a ChiNext listing, is under the sponsorship of Haitong Securities. The company intends to issue no more than 15.4607 million new shares, accounting for no less than 25% of the total share capital after issuance. The company plans to invest the raised funds of 508 million yuan in projects including Phase I of the Annual Production Expansion Project of 10,000 Surgical Microscopes, the R&D Center Upgrade Project, and the supplementation of working capital.

As of the end of June 2023, the company's total assets amounted to 412 million yuan, with net assets at 329 million yuan. The company’s project to expand its annual production capacity of surgical microscopes to 10,000 units (Project No.: [2023]138, filed with the Suzhou New District) has a total investment of 500 million yuan. The project will be implemented in two phases, with the first phase involving the construction of civil works and an expanded production line for 6,000 surgical microscopes annually. The total investment for the first phase is 298.3 million yuan.

Zumax Medical: Four Shareholders Control Over 60%, Large Dividends Followed by Capital Supplement Raises Questions on Rationality; Overseas Sales Account for More Than Half, Product Portfolio Relatively Single, Gross Margin Fluctuates; R&D Expense Ratio Below Industry Peers' Average, Fast Growth in Management and Sales Expenses; Distributor Revenue Represents Nearly 90%, Significant Changes in Top Five Clients, High Inventory Levels.

Four People Hold Over 60%, Large Dividends Before Capital Injection, Reasonableness Questioned

The predecessor of the company, ZumaxMedicalEstablished on April 15, 2005, Zumax Medical Co., Ltd. was founded by Zumax Optoelectronics and Wang Zhenming as a limited liability company with a registered capital of 300,000 USD, all in cash contributions. In January 2009, Wang Zhenming and Suzhou Gao Tou transferred all their shares in Zumax Medical to Zumax Optoelectronics, making Zumax Medical a wholly-owned subsidiary of Zumax Optoelectronics. The company type changed from "Sino-foreign joint venture" to "domestic enterprise." In January 2021, the establishment of the joint-stock company.

As of the date of signing the prospectus, Li Xiangdong, Wang Jilong, He Jin, and Zhou Weizhong collectively hold 55.16% of the company's equity directly. Through four employee shareholding platforms—Sumax Innovation, Sumax Vision, Huijia No.1, and Huijia No.2—they indirectly control 9.02% of the company’s equity. In summary, Li Xiangdong, Wang Jilong, He Jin, and Zhou Weizhong collectively control 64.18% of the company’s equity.

During the reporting period, Li Xiangdong consistently served as the Chairman of the Board and legal representative of the company, Wang Jilong consistently served as a director and general manager, He Jin consistently served as a director and deputy general manager and has concurrently served as the Secretary of the Board since December 2020, and Zhou Weizhong consistently served as a director and deputy general manager. The four individuals jointly oversee the company's operational management and have consistently provided unified voting opinions in all resolutions at each of the company’s shareholder meetings and board meetings. In summary, the actual controllers of the company are Li Xiangdong, Wang Jilong, He Jin, and Zhou Weizhong.

Prior to this issuance, the company's actual controllers, Li Xiangdong, Wang Jilong, He Jin, and Zhou Weizhong, collectively controlled 64.18% of the company’s shares and signed the "Acting in Concert Agreement." If the actual controllers breach the terms of the "Acting in Concert Agreement" during the agreed period, or if they do not renew the agreement after it expires, or if shareholders reduce their holdings, the company issues securities, or undergoes business restructuring after an IPO lock-up period ends, the control of the company may face instability risks, potentially adversely affecting the company’s operations and management.

IQHCJ Finance noted that from 2020 to 2022, the company's cash dividend amounts were RMB 40.5 million, RMB 15 million, and RMB 14.9814 million respectively, with a total dividend amount of RMB 70.4814 million. The total dividends accounted for 49.82% of the net profit from 2020 to 2022. In addition, this fundraising aims to supplement RMB 100 million of working capital.

The CSRC requires the company to explain: the specific situation of cash dividends during the reporting period, including but not limited to the decision-making process, dividend plan, and its legality and compliance; in conjunction with the company’s cash dividend policy and implementation standards, as well as the cash flow and asset-liability status during the reporting period, explain the necessity and reasonableness of cash dividends during the reporting period; the flow and use of funds from cash dividends, and whether there are situations such as off-book capital circulation forming sales receipts or bearing costs and expenses; explain the calculation basis for replenishing working capital, and in combination with the company's financial and operational conditions, explain the necessity and reasonableness of using raised funds to replenish working capital.

Export sales account for more than half, product line is relatively单一, gross margin fluctuates

Zumax Medical is a high-tech enterprise specializing in the research, development, production, and sales of surgical microscopes. Since its establishment, the company has been focusing on the field of oral medicine, with dental surgical microscopes as its core product. From 2020 to the first half of 2023, the company's operating revenues were RMB 176.2 million, RMB 223.2 million, RMB 274.3 million, and RMB 153.7 million, respectively; the net profits for each period were RMB 38.1257 million, RMB 43.0487 million, RMB 60.2981 million, and RMB 27.2395 million, respectively.

During the reporting period, the company's main business revenue was primarily derived from dental surgical microscopes, surgical microscopes, and optical diagnostic instruments. Among these, the sales of surgical microscopes were the core revenue source. Revenue from surgical microscopes amounted to 144.5 million yuan, 182.6 million yuan, 232 million yuan, and 132.6 million yuan, accounting for 82.15%, 81.83%, 84.72%, and 86.28% of the main business revenue, respectively.

Surgical magnifiers, headlamps and other medical optical diagnostic instruments account for more than 10% of the revenue in each reporting period; in addition, products such as dentist chairs and extraction kits for separation instruments that the company sells to meet downstream customer needs account for less than 5% of the revenue in each period.

The company has a large scale of overseas sales. Its main model products have passed the certification of the U.S. FDA and EU CE, and are exported to multiple countries and regions such as the United States, Europe, Japan, and Russia. During the reporting period, the company's overseas sales revenue was 82.0442 million yuan, 1.031 billion yuan, 1.374 billion yuan, and 84.3097 million yuan, respectively, accounting for 46.65%, 46.21%, 50.16%, and 54.85% of the main business income, which is relatively high.

During the reporting period, the company's overseas income was relatively dispersed, and there were no significant changes in the import policies of the main sales countries or regions. There were no special trade restriction policies. Since 2018, the U.S. government has announced a 25% tariff increase on certain list goods imported from China, including medical device products. The U.S. tariff policy had a relatively small overall impact on the company’s sales in the U.S. market. During the reporting period, the company’s revenue from the U.S. market continued to grow. If there are any significant adverse changes in trade policies in the U.S. or other countries/regions in the future, it will have some adverse effects on the company’s operating performance.

During the reporting period, the company's sales revenue in Russia was 14.317 million yuan, 16.9921 million yuan, 26.8249 million yuan, and 26.3935 million yuan, respectively, showing rapid growth. If the ongoing regional conflict continues to impact Russia, leading to increased war effects and a downturn in economic consumption levels, it will have an adverse impact on the company’s continued expansion in the Russian market.

At the global market level, Germany's Zeiss and Germany's Leica are the two leading enterprises in the dental surgical microscope industry, occupying the majority share of the international market. Companies like CJ-optik, Global Surgical, and LABOMED belong to the second tier. From 2020 to 2022, Zumax Medical Co., Ltd. accounted for approximately 40% to 50% of the domestic dental surgical microscope market share in China. The three brands—Zumax, Germany's Zeiss, and Germany's Leica—occupied over 80% of the market share in the dental microscope bidding market.

During the reporting period, the gross profit margin of the company's main business was 54.22%, 50.84%, 51.46%, and 50.49%, respectively, which was lower than the average of comparable peers at 53.70%, 54.80%, and 58.22% from 2021 to the first half of 2023.

R&D expense ratio is lower than the average of comparable peers, with rapid growth in administrative and sales expenses.

Zumax's official website states: The company focuses on "microscopic, minimally invasive, and precision," the main theme of clinical medicine in the 21st century, with the vision of "becoming the Chinese benchmark in the global micro-medical equipment field." It is dedicated to the clinical promotion of microscopic technology, experiencing and enjoying the entire process of dental microscopic technology from inception to fruition, establishing a leading position in China's dental medicine niche market.

Unfortunately, this leading company does not have a high level of R&D investment. As of the end of the reporting period, the company has a total of 30 R&D personnel, including four core technical staff members. The company’s full-time R&D personnel account for 10.31% of the total number of employees, merely meeting the basic personnel requirements for high-tech enterprises.

During the reporting period, Zumax's R&D expense ratios were 6.73%, 6.59%, 6.47%, and 6.76%, respectively, which were lower than the average levels of comparable listed companies in the same industry at 11.39%, 10.80%, 11.22%, and 8.95%. With personnel and expense investments below the average of comparable peers, how can one achieve a leading position in the industry?

As of the end of the reporting period, the company had obtained 142 patent authorizations, including 20 domestic invention patents and 9 foreign invention patents. Notably, during the reporting period, the company was involved in patent-related litigation with DentiFly. The company had disputes over 9 patents with DentiFly, 8 of which were declared invalid by the China National Intellectual Property Administration.

During the reporting period, the company's sales expenses were 20.82 million yuan, 25.92 million yuan, 28.44 million yuan, and 19.35 million yuan, respectively, with sales expense ratios of 11.82%, 11.61%, 10.37%, and 12.59%. The employee compensation in the company's administrative expenses showed an increasing trend, amounting to 8.39 million yuan, 14.34 million yuan, 18.68 million yuan, and 10.57 million yuan, respectively, mainly due to the increase in the number of management personnel.

During the reporting period, the company's sales personnel increased from 45 in 2020 to 57 in January-June 2023, representing a growth of 26.67%. During the same period, managerial staff grew from 38 to 84, marking an increase of 121.05%. From 2020 to 2022, the company’s sales expenses increased by 36.59%, while administrative expenses rose by 88.45%. The company has not adequately explained the reasons and rationale for the significant differences in growth rates between managerial staff, sales personnel, and related period costs.

Distribution revenue accounts for nearly 90%, significant changes in the top five, large inventory

The end customers of the surgical microscope industry are mainly medical institutions, universities, and clinics. During the reporting period, the company primarily conducted sales through a distribution model, with distribution revenue accounting for 86.01%, 89.58%, 89.87%, and 86.85% of the main business revenue, respectively, making it the company's primary sales model.

IQHCJ, a financial news outlet, noted that during the reporting period, there were some changes in the company's top five clients. As of the date of the signing of the prospectus, the counterparties to the significant sales contracts currently being performed by the company included: BST-3 LTD, Pentron Japan Inc., Beijing Shikeming Commerce Co., Ltd., Albert Waeschle Partnership, Chengdu Hongxin Medical Equipment Co., Ltd., and ENOVAILLUMINATION, INC.

Wuzhou Aoshun Trading Co., Ltd. was a direct sales customer of the company in 2021, and it has invested in Guangxi Aoshun Instrument Co., Ltd. Albert Waeschle Partnership was a direct sales customer of the company in 2022, and Shanxi Medical University became a direct sales customer in the first half of 2023. All three entered the top five, with smaller contract amounts, and there were significant changes in the company's top five.

At the end of each reporting period, Zumax's accounts receivable balance from BST-3LTD was 1.869 million yuan, 3.5889 million yuan, 5.0012 million yuan, and 18.0206 million yuan, respectively, while its operating revenue was 13.7211 million yuan, 16.2881 million yuan, 24.7476 million yuan, and 25.5585 million yuan, respectively. The accounts receivable increased with the growth of operating revenue.

As of the end of each reporting period, the carrying amounts of the company's inventory were RMB 55.7291 million, RMB 72.9889 million, RMB 79.0346 million, and RMB 88.3858 million, respectively. During the reporting period, the company’s inventory turnover rates were 1.46, 1.70, 1.75, and 1.82, which were lower than the industry average of 2.32, 2.36, 2.01, and 1.57 from 2020 to 2022.

As of the end of each reporting period, the company's inventory balance increased year by year, and the coverage rate of on-hand orders to inventory was 11.42%, 40.79%, 43.33%, and 29.34%, respectively. Additionally, the post-period transfer ratio for inventory over one year was 58.87%, 51.21%, 37.33%, and 33.13%, respectively.

As of the end of each reporting period, the amounts of externally loaned products listed under inventory were RMB 8.9934 million, RMB 7.3881 million, RMB 3.9319 million, and RMB 5.7859 million, respectively; the amounts of externally loaned products listed under fixed assets were RMB 2.6261 million, RMB 2.3820 million, RMB 2.1052 million, and RMB 2.3035 million, respectively. The CSRC requested the company to further explain the reasons and rationality for the low coverage of on-hand orders for inventory and the low post-period transfer ratio of long-aged inventory, considering the company’s procurement, production, and sales models as well as the subsequent transfer situation of inventory.

Under the registration-based system, IPO companies should pay more attention to the quality of information disclosure. Whether their operating indicators can meet the listing requirements and their subsequent sustainable operating conditions are not fully elaborated due to space limitations. This article, from the perspective of Weighing Finance IQHCJ, aims to remind stakeholders and investors to focus more on potential corporate risks, and should not be taken as a comprehensive reference.

       Title: Zumax Medical Withdraws IPO, High Dependency on Distribution and Export Sales, R&D Ratio Lags Behind Peers