233.hk & 8058.hk - reply to cwmraychan

Here's cwmraychan ching's question, originally posted in my 2010 福布斯中国潜力企业榜 post.

wah c hing. What do you think about 233?

I am not so familiar with companies in the medical industry. But i notice in your previous comments, you did have some good insight about 809. i have investigate a bit about 233. They have stable income and profitability through out past year. And their main sales/profit is coming from the sale of their protein chip tech testing product to major hospital throughout China. I think the medical service/product demand will increase soon coming years as people are more health consious nowadays. What do you know about these "protein chip tech" and "gene chip tech"? Could you share about your insight?

Also, any comment on 8058?

Note: both 233 and 8058 are listed in that 2010 福布斯中国潜力企业榜.

And 809 is not in medical industry.  Although it's a biochemical company, its products are mainly used in agricultural/industrial applications.

Let me discuss 233 and 8058 one by one.

233 Mingyuan Medicare

233 is an interesting company which I have looked into before.  Protein chip and Gene chip are great technologies with great potential applications, especially in diagnosis and prevention of genetic diseases such as cancer, hepatitis B, etc.   There is a world-wide trend that government and people are spending more on disease prevention than actual treatment of diseases, so the long-term demand of such products should be really great.  The protein/gene chip field is still developing rapidly and far from being mature, there's still a lot of potential application of such technology.  And so far as I know there's no other company listed in HK engaged in such technologies except 233.

But that doesn't automatically mean 233 is a great investment choice.  One greatest draw back is, so far as I know, the company does not conduct any R&D, which is crucial to any medical companies.  Instead, it paid a (large) sum of money to various research institutions for the license to use their technology.  This mode, in my mind, is certainly not a mode that great growth company should adopt since if the product is really great, the research institutions won't sell it cheap to 233.  So, in the past 1-2 years 233 has paid large amount of cash to buy such technologies.

I think 233 is adopting a business strategy that create the distribution channel for preventive care products, rather than actually developing such product.  Evidence for such strategy include the fact that company does not do its R&D, and company's expansion in Medical Centre Management business that require large capex and produce a low GP.  In my view, developing a great product that everyone want to sell/use can growth faster than building a sales channel bit by bit.  So if you are looking for a great growth company that require little cash to growth, then 233 doesn't seems to be a good choice.  Growth for 233 is at a great expense up front to buy technology licenses.  The reason for 233 to adopting such a strategy may include:

1. The company is not good at doing R&D.  This can be reflected by the fact that all executive directors (including founders) of the company are businessmen, without any scientists. There's only one senior management with a real hardcore knowledge in gene-chips.

2. The sales channel for preventive care products in China is not well-developed yet.  In order for the company to sell more IVR products, it has to build the sales channel itself.

But 233 should still observe a moderate growth as more hospitals use their products and launching of new products.  But the actual growth rate is very much dependent on how fast 233 develops its sales channel, rather than how fast it develop new products or how good its products are.  And sadly, I think the new products it acquired, the HPV DNA kits and TB screening chips, have much lower potential than its C-12 product.  So in conclusion, i think the IVR business for 233 will growth at speed of around 20% per year in the near future, which is a respectable but not explosive growth. 

Besides protein chips and preventive care product/services, it's quite surprising to see 233 moves into traditional pharmaceutical business by acquiring a cancer drug NCPP (see news here).  I didn't look into the drug in great detail but it seems to be some how promising.  However, moving the business focus from preventive care product is a bad sign for me as I think there should still be a lot of growth opportunities in protein chip/diagnosis product segment.  Diverting from its original business focus may signal that 233 cannot find attractive protein chip technology license to buy anymore.  Also, 233 has no experience in making a drug before, so it may take quite a lot resources for 233 to become an efficient and competent player in traditional pharmaceutical sector.

Considering its PE of ~20 times, reasonable growth rate and bad business strategy moves, I think the potential for its share price to rise in short to mid term substantially is quite limited.  And I will not recommend holding this one for long term.  You may find a better opportunity elsewhere.

8058 Shandong Luoxin Pharmacy

I must admit my knowledge for 8058 is far less than that of 233.  Actually the management discussion section for 8058 is extremely poorly written, with a lot of "water" inside but nothing concrete.  At the same time, the company website also doesn't provide much thing useful for me to analyze its business (maybe my knowledge on pharmaceuticals are too limited).

Anyway, from the financial numbers I can see that 8058 seems to be growing faster than 233, and growing consistantly.  And the fact that 8058 will build a new drug factory is also a good indicator that 8058 is growing healthily (news here).  Unlike 233, 8058's growth model does not depend on regular cash outlays to buy technology licenses, which help 8058 to achieve a sustainable, healthy organic growth.  I see no factor that can substantially harm 8058's business fundamental and it is reasonable to assume 8058 will continue to growth at a healthy double digit rate, if not higher than that of 233.

Considering the business strategy and fundamentals between 8058 and 233, I think 8058 should be a better pick.  While whether 8058 is the best investment pick between all pharmaceuticals is another question, which I have no plan to reveal in near future (I have the answer in mind... =P)