Zhenghai Bio IPO Highlights Focus on Regenerative Medicine; CMBI’s Typical Pre-IPO Investment Case

On May 16, 2017, Yantai Zhenghai Biotechnology Co., Ltd. (stock code: 300653, hereinafter referred to as “Zhenghai Biotechnology”) was listed on the ChiNext Board of the Shenzhen Stock Exchange. The stock opened at RMB 15.47 and hit the daily upper limit for four consecutive trading days, closing at RMB 22.47 on May 19. Zhenghai Biotechnology issued a total of 20 million shares in this initial public offering, with the proceeds earmarked for projects including the upgrade and construction of its bio-regenerative materials industrial base, the establishment of an R&D center, and the development of its marketing network and information systems.

Mi Bohai, Chairman of Zhenghai Biotechnology, stated: “Zhenghai Biotechnology will continue to focus on the field of regenerative medicine and is committed to the in-depth research and development as well as industrialization of high-value-added products such as bio-regenerative materials.”

Since the second half of last year, the review process for initial public offerings (IPOs) has significantly accelerated. However, regulatory authorities have not lowered their scrutiny standards; on the contrary, examinations of pharmaceutical companies have become even more stringent. Several pharmaceutical firms have had their IPO applications rejected this year. Nevertheless, Zhenghai Biotechnology took less than a year and a half from filing its IPO application to obtaining approval, making it a typical pre-IPO investment case for CDH Investments in the healthcare sector.

Zhenghai Biotech, established in 2003, is a leading enterprise in the fields of regenerative medicine and biomaterials for trauma repair in China. With over a decade of deep engagement in the regenerative medicine industry, the company’s core business focuses on the research and development, manufacturing, and sales of bio-regenerative materials. Its main products include soft tissue repair materials such as oral reconstruction membranes and biological membranes, as well as hard tissue repair materials like bone graft substitutes. These products are widely applied in various medical specialties, including dentistry and neurosurgery.

In 2015, Zhenghai Biotech prepared to bring in a round of external investment before its IPO. Institutions flocked to participate, including many “connected” parties. “It is a happy thing for a beautiful girl to be pursued by many handsome young men, but making the final decision is painful,” said Wang Lin, Founding Partner of CDH Investments. Ultimately, Zhenghai Biotech chose CDH Investments to lead the round.

At the appreciation dinner banquet celebrating Zhenghai Biotech’s IPO, Mi Bohai revealed that although dozens of investment institutions had extended offers to Zhenghai Biotech, the company ultimately selected CDH Investments to lead the investment round based on long-term strategic considerations.

First, CDH Investments, as an investment institution with a large assets under management (AUM) scale, possesses strong brand influence in the market. Second, the CDH Investments team is highly professional and has provided robust support for the development of Zhenghai Biotechnology. Third, CDH Investments boasts extensive resources in the healthcare sector, which will play a positive role in promoting Zhenghai Biotechnology’s future development, including mergers and acquisitions.

To date, CDH Investments has been deeply engaged in the healthcare sector for over a decade. Within its healthcare portfolio, the firm has systematically invested in more than 30 companies, including nine in healthcare services, nine in pharmaceuticals, twelve in medical devices, and three in healthcare TMT and mobile health. Zhenghai Biotechnology is the ninth listed company among CDH Investments’ healthcare portfolio companies. Previously, other portfolio companies such as Luye Pharma Group, Kanghong Pharmaceutical, Kangning Hospital, Hemei Medical, New Century Healthcare, and Poly Pharm have already gone public.

In the niche segments of the medical device industry, CDH Investments conducts a “matrix-style” classification and scan of the sector along two dimensions: product functionality and product form factor/model. This approach aims to identify subsectors worthy of long-term tracking and to systematically invest in the best teams and industry leaders within those niches. Zhenghai Bio-Tech is one such company identified by CDH Investments during its industry scan as a leader in its respective niche segment:

First, technological and product advantages. The company boasts a diverse product portfolio, robust independent R&D capabilities, and strong advantages in technology commercialization. For instance, its marketed products have consistently maintained leading market shares over competitors, with steady performance growth: its oral repair membrane holds a monopolistic position in the maxillofacial surgery market; its dental implant membrane ranks second in domestic market share; and its dural repair membrane, primarily used in neurosurgical and orthopedic procedures, ranks third in China. According to the company’s prospectus, as of December 31, 2016, Zhenghai Biotech held a total of 30 granted patents, including 19 invention patents.

Another advantage lies in the sector itself. Regenerative medicine represents a highly attractive investment track. Theoretically, all human organs can be regenerated. As a leader in this niche segment, Zhenghai Biomedical boasts substantial market potential and is poised to become a scarce platform in this field.

Data shows that China’s medical device industry accounts for a relatively small proportion of the overall pharmaceutical and healthcare sector, yet the industry is experiencing rapid overall growth. Globally, the revenue ratio between the pharmaceutical industry and the medical device industry is approximately 1:0.7, while developed countries and regions such as Europe, the United States, and Japan have reached a ratio of 1:1.02. In contrast, China’s revenue ratio between the pharmaceutical industry and the medical device industry stands at 1:0.19, merely 20% of that in developed nations, indicating substantial room for future growth in the medical device market.

Driven by demographic shifts in China, supportive national industrial policies, and the continuous growth of the national economy alongside rising living standards, demand for medical devices—including bio-regenerative materials—has surged. In recent years, bio-regenerative materials have experienced rapid development, with an annual growth rate exceeding 20%.

Secondly, Zhenghai Biotech possesses a well-developed sales channel and a robust, stable pricing system. Its marketing team demonstrates outstanding capabilities, with coverage extending to over 1,000 hospitals across China. “It is extremely challenging to secure an effective sales channel in the medical device sector. Leveraging this channel for future mergers and acquisitions will help transform the company into a capital platform,” said Zhang Haifeng, Partner at CDH Investments’ Innovation and Growth Fund.

At the listing celebration dinner held on the 15th, Lu Meijiao, Board Secretary of Zhenghai Biotech, shared the company’s development journey and its path to going public. What CDH Investments values most is the innovation awareness and forward-thinking mindset of Zhenghai Biotech’s management team, particularly the entrepreneurial, innovative, and pragmatic spirit demonstrated by Chairman Mi Bohai over more than two decades—qualities that epitomize the type of entrepreneur CDH admires most.

As early as the 1980s, during the era of the planned economy, when many enterprises lacked awareness of advertising and marketing, Mi Bohai, then holding a position at a state-owned enterprise, invested RMB 1.2 million in prime-time advertising on China Central Television (CCTV). This move clearly demonstrated his innovative spirit and forward-thinking mindset.

In 2003, as policies on the restructuring of state-owned enterprises were relaxed, Mi Bohai led the management team to seize the opportunity and thoroughly restructure Zhenghai Group, laying the foundation for its innovative development.

In terms of industrial transformation, Mi Bohai has also gained significant insights. He expanded Zhenghai Group from watches and electronic mesh screens into new materials, regenerative medicine, and other fields. He believes that this approach can mitigate and hedge against the cyclical risks associated with a single industry.

Under the leadership of Mi Bohai, Zhenghai Group has evolved from its origins as the Yantai Electronic Mesh Factory into a corporate group with core industries spanning electronic information, new materials, biotechnology, and automotive interior components, while also expanding into financial services, and has successfully listed two subsidiaries on public stock exchanges.

Zhenghai Biologics is the second listed company spearheaded by Mi Bohai. Previously, he spent over two decades transforming Zhenghai Magnetic Materials, which originated from a state-owned enterprise, into China’s largest supplier of neodymium-iron-boron (NdFeB) permanent magnet materials for wind power applications, leading to its listing on the Shenzhen Stock Exchange six years ago.