Is Now the Time to Double Down on MicroPort as It Plans Subsidiary Spin-off and IPO?

Recently, market rumors have emerged that MicroPort (00853.HK) plans to spin off its subsidiary, MicroPort CardioFlow Medtech Corp. (Shanghai MicroPort CardioFlow Medical Technology Co., Ltd., hereinafter referred to as “MicroPort CardioFlow”), for an IPO this year. The company aims to raise $200–300 million, with a post-spinoff valuation reaching $1 billion. Citigroup and JPMorgan Chase have been engaged to arrange the listing.

“This industry is still in its early stages of development, with competition just beginning and profitability not yet a primary focus. Listing on the STAR Market would likely present a favorable opportunity,” said a prominent healthcare investor to Time Finance.

Spin-offs Facilitate Value Discovery

Publicly available information shows that MicroPort CardioFlow was established in 2015 and is a holding subsidiary of MicroPort Medical, which currently holds a 64.72% stake. MicroPort CardioFlow specializes in the research and development, manufacturing, sales, and related technical consulting services of high-end interventional medical devices in the field of heart valves. The company incurred losses of RMB 30.776 million and RMB 51.63 million in 2017 and 2018, respectively.

Although MicroPort CardioFlow has yet to generate revenue, its growth prospects in the heart valve market cannot be dismissed. “This industry is still in its early stages, competition has just begun, and profitability is not yet the primary focus,” a prominent medical investment expert told Times Finance.

Publicly available information indicates that MicroPort CardioFlow’s independently developed products, including the VitaFlow transcatheter aortic valve system, the Alwide™ balloon-expandable catheter for transcatheter heart valves, and the Alpass™ introducer sheath kit, have received approval from the National Medical Products Administration (NMPA) and are commercially available. Meanwhile, clinical trials for the second-generation retrievable VitaFlow II transcatheter aortic valve system have commenced, with market launch anticipated in 2022.

“Spin-off listings facilitate value discovery. After the spin-off, the previously commingled businesses of the listed company can be assessed independently, avoiding mutual interference. For the subsidiary, the market gains access to more comprehensive financial and operational information, thereby enabling a proper valuation of both the parent and subsidiary companies,” Zhang Aoping, Managing Director at Rushi Capital, told Times Finance on the 26th.

It is reported that the research and development (R&D) of high-value medical consumables is similar to that of pharmaceuticals, generally requiring approximately 8 to 10 years.

In fact, MicroPort had already begun its strategic layout in the field of transcatheter heart valve interventions as early as 2010, initiating the independent research and development of the VitaFlow system. It was not until July 2019 that the VitaFlow transcatheter aortic valve and delivery system obtained the NMPA registration certificate and production license, with the first post-market implantation completed on August 28, 2019.

It is understood that MicroPort has consistently directed its profits toward research and development (R&D) in recent years, resulting in relatively low financial metrics for the listed company as a whole, such as return on equity (ROE) and net profit margin. In the first half of 2019, MicroPort’s R&D expenses amounted to USD 68 million, representing a year-on-year increase of 62.6%, with the R&D expense ratio rising from 13.5% to 17.3%.

Zhang Aoping believes that “after the spin-off, subsidiaries can also raise funds directly from external sources, and high-tech companies with high growth potential can directly access venture capital through the capital market, thereby expanding financing channels.”

Speculation on Listing on the STAR Market

“From a business perspective, the most critical factor is that the business unit targeted for spin-off listing typically boasts strong growth prospects; its value might not be fully realized if it remains within the listed company. From a capital market perspective, it operates relatively independently from the listed company’s core business, allowing for independent development opportunities. Following an independent listing, its valuation tends to be higher, and incentive mechanisms for relevant personnel are also more effective,” analyzed Qian Liming, founder of Maorong Investment, in an interview with Times Finance.

Speculation on the Listing Venue of MicroPort CardioFlow: Qian Liming, like the aforementioned luminaries in the medical investment sector, mentioned the STAR Market. Qian Liming stated, “High-end medical devices inherently have high technical barriers, and there is now an opportunity for import substitution. The prospects for listing on the STAR Market are quite promising.”

In the medical device industry, high-value medical consumables are considered one of the most promising sectors for the next decade. Driven by policies such as centralized procurement, innovation, and Diagnosis-Related Groups (DRGs), along with factors like domestic substitution, the industry is projected to maintain a rapid annual growth rate of 20% over the coming ten years. Furthermore, this sector exhibits distinct competitive advantages, including lengthy administrative approval processes, high technical barriers, and economies of scale in the market.

What excites investors most is that in a technology-driven industry, the emergence of a new technology can often open up a niche market.

Taking MicroPort’s most mature coronary stent product as an example, its annual profit reaches approximately USD 100 million, with a year-on-year growth rate of 30%. Currently, MicroPort’s market capitalization has exceeded HKD 29 billion.

“Medical device companies align with the positioning of the STAR Market and possess substantial attributes of technological innovation. Whether they can achieve continuous value growth through an initial public offering (IPO) on the STAR Market depends on their long-term value creation capabilities.” Zhang Aoping also drew associations with the STAR Market.

In addition to planning to spin off its heart valve business, MicroPort also spun off its aortic and peripheral vascular interventional business—its subsidiary, MicroPort Endovascular Tech, last year.

In July 2019, MicroPort Endovastec was listed on the STAR Market, demonstrating strong financial performance. According to its financial report, the company achieved revenue of RMB 334 million in 2019, a year-on-year increase of 44.4%, and net profit attributable to shareholders of RMB 142 million, a year-on-year increase of 56.4%.

Based on the sum-of-the-parts valuation method, and referencing Venus Medtech (Hangzhou) Inc. (Stock Code: 02500.HK), a company with business operations similar to MicroPort CardioFlow, which had an IPO issuance valuation of HK$110–130, a 70% discount is temporarily applied based on the lower end of the issuance valuation range, resulting in a valuation for MicroPort CardioFlow of HK$7.7 billion. Considering MicroPort’s 64.72% shareholding and a potential equity dilution of approximately 10%, MicroPort CardioFlow’s contribution to the current market capitalization is approximately HK$4.4 billion, equivalent to US$570 million.

From the perspective of stock price trends, MicroPort is currently at its highest historical level in the ten years since its listing. Recently, MicroPort has again seen significant capital inflows with major investors increasing their holdings.

According to the Hong Kong Stock Exchange, on March 6, Hillhouse Capital increased its stake in MicroPort by 47.734 million shares at HK$13.51 per share, for a total amount of approximately HK$645 million. After the increase, Hillhouse’s holdings amounted to 114 million shares, representing a 6.61% ownership stake. On March 10, MicroPort saw an additional stake increase of approximately HK$824 million by JPMorgan Chase.

So, is now the best time to invest in MicroPort Medical?

(Editor:Wang Xing）

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