Weisi Medical's Major Customers Shift Sharply in First Half of 2019: Three of Top Five Clients Lack Social Insurance Records

Original Title: VISHEE’s Major Customers Changed Abruptly in the First Half of 2019; Three of the Top Five Had No Social Security Records

Source: National Business Daily

Reporter: Wu Zhibang

From 2016 to 2018, the company achieved compound annual growth rates (CAGR) of 47.19% and 64.61% in its operating revenue and net profit, respectively. The performance growth of VISHEE, which is engaged in the research and development, production, and sales of rehabilitation medical devices and products, has been remarkable. On December 19, the company disclosed its prospectus for the initial public offering (IPO) on the STAR Market (draft for declaration) (hereinafter referred to as the “Prospectus”), with the intention of listing on the STAR Market.

A reporter from National Business Daily, while reviewing the prospectus, noted several noteworthy aspects of VISHEE’s sales operations behind its strong performance growth. Although the prospectus consistently emphasizes that the company is an innovation-driven enterprise centered on product research and development, its selling expenses as a percentage of operating costs exceeded 25% in each reporting period, whereas total R&D expenditures amounted to only about one-third of selling expenses. Regulatory authorities have long focused on the business ethics concerns underlying the high selling expenses prevalent in pharmaceutical and healthcare companies.

Furthermore, the company's top five customers in the first half of 2019 were all entities that had not appeared in its customer list over the preceding three years; among them, three customers had low paid-in capital and no social security contribution records.

Gross Margin Exceeds 70%! Sales Expenses Approximately Three Times R&D Expenses

Categorized by product lines, VISHEE’s primary revenue streams are derived from rehabilitation medical devices and products, including electrical stimulation, magnetic stimulation, and electrophysiology equipment, as well as consumables and accessories. In its prospectus, the company stated that it is committed to providing safe and effective rehabilitation products and comprehensive solutions to healthcare and professional institutions in specialized fields such as pelvic floor and postpartum rehabilitation, neurological rehabilitation, and psychiatric rehabilitation.

According to the prospectus data of VISHEE, from 2016 to 2018 and the first half of 2019, VISHEE achieved operating revenues of RMB 95.9038 million, RMB 144 million, RMB 208 million, and RMB 140 million, respectively. The corresponding gross profit margins for its core business reached 73.34%, 73.66%, 74.10%, and 73.02%, respectively. The ratio of selling expenses to operating revenue was 33.43%, 29.02%, 25.59%, and 24.10%, respectively.

From the specific data and composition of selling expenses, the company's selling expenses from 2016 to 2018 and the first half of 2019 were RMB 32.0649 million, RMB 41.9299 million, RMB 53.1696 million, and RMB 33.7733 million respectively, mainly consisting of employee compensation and marketing promotion fees.

An executive at a pharmaceutical company told a reporter from National Business Daily: “Marketing expenses here, including academic promotion fees, have always been a key focus of regulatory authorities.” In its prospectus, VISHEE pointed out that during the reporting period, the company established a sales channel network covering China, building a strong brand image and an academic promotion system.

In terms of R&D investment, although the company has consistently emphasized in its prospectus that it adheres to tracking cutting-edge technologies and continues to invest in the research and development of next-generation magnetic stimulators and rehabilitationRobotsuch as new rehabilitation medical technologies and products, this investment shows a significant gap compared to sales expenses and operating costs. In particular, the total R&D expenses during the reporting period were only about one-third of the aforementioned sales expenses.

Three of the Top Five Customers Had No Social Security Records

In terms of growth, from 2016 to 2018, VISHEE achieved compound annual growth rates (CAGR) of 47.19% and 64.61% in revenue and net profit, respectively. In the first half of 2019, the company’s revenue already reached 67.43% of its full-year 2018 revenue. Judging by the current performance trend, VISHEE is likely to continue delivering a record of steady growth in 2019.

However, upon reviewing the list of VISHEE’s top five customers for the first half of 2019, the reporter found that all of them were new faces compared to the company’s top five customers in 2017 and 2018. More puzzlingly, business registration records indicated that several of these new customers had low paid-in capital and no social security contribution records.

Taking Zhengzhou Guanrui Medical Technology Co., Ltd., the largest customer in the first half of 2019, as an example, the company’s paid-in capital was RMB 3.01 million; information regarding its senior management, legal representative, and corporate address changed frequently, and it had no social security contribution records. The industrial and commercial annual report information for the second-largest customer, Fujian Zhiyuan Medical Investment Co., Ltd., showed that the company was established in July 2018 and was not set up with monetary capital contributions; it also had no social security contribution records. The annual report information for the fifth-largest customer, Chongqing Yiou Medical Device Co., Ltd., similarly indicated that it had low paid-in capital and no social security contribution records. It should be emphasized that none of the aforementioned three companies had any subsidiaries.

The head of a bookkeeping agency told reporters, “Some companies indeed lack social security contribution records, but this does not mean they have no revenue or employees. It may simply be that they have not paid social security contributions for their employees, or they are companies established temporarily specifically to undertake certain business projects. However, they are undoubtedly all small-scale enterprises.”

An industry insider who previously served as a senior executive at a publicly listed medical device company stated, “During business operations, it is indeed common to establish certain peripheral shell companies or collaborate with local entities possessing resources, entrusting them with handling bidding and tendering for projects within their respective regions to secure orders for the parent company; therefore, such practices are not necessarily problematic. However, it is indeed rare to see such significant changes at VISHEE in 2019, as partners are generally quite stable.”

Regarding the aforementioned situation, a reporter from National Business Daily sent an interview request to Vishee Medical; as of press time, no response had been received.

Responsible Editor: Chen Zhijie