Red Weekly Intern Reporter | Zuo Xingyue
Not long ago, Jiangsu Weikang Jiejing Medical Equipment Co., Ltd. (hereinafter referred to as "Weikang Medical") updated its prospectus and applied for listing on the GEM.
In fact, as early as October 2017, Weikang Medical began its own A-share IPO, and the sponsors were also changed again and again. The sponsor in 2017 was Debang Securities , and in June 2019 it was replaced by Zhongyuan Securities . In this IPO, Weikang Medical's sponsor became Dongwu Securities again.
Four years have passed. Judging from the latest prospectus released by Weikang Medical, there are still many problems that have not been solved. Not only is there insufficient R&D investment, but the products have been punished for quality problems many times.
It is worth noting that Weikang Medical also derived a new company from the original company and split it. However, the office space in which the company was divested, so after the assets were divested, Weikang Medical needed to lease the place from the divested company. Therefore, the rationality of its divested assets is questionable.
core technology is suspected to be not recognized by major overseas customers
Weikang Medical's main business is the research, development, production and sales of disposable medical consumables. The main products are medical polymer materials such as suction tubes, suction tubes, nasal oxygen tubes, drainage bags, (including anti-countercurrent drainage bags, precision drainage bags), etc.
2018-1st quarter of 2021 (hereinafter referred to as the "reporting period"), Weikang Medical's operating income was RMB 240 million, RMB 262 million, RMB 254 million and RMB 60.7019 million respectively; net profit attributable to shareholders during the same period was RMB 68.8242 million, RMB 69.0439 million, RMB 54.705 million and RMB 13.1872 million respectively. Weikang Medical's performance has not made much progress in recent years. The operating income and net profit attributable to shareholders in 2020 are even on a downward trend, and the development prospects are not optimistic.
Figure 1: Financial Summary of Weikang Medical (Unit: 10,000 yuan)
Image source: wind
It is worth noting that from 2018 to the first quarter of 2021, Weikang Medical's R&D expenses were RMB 7.0837 million, RMB 7.9142 million, RMB 6.8119 million and RMB 1.5795 million, respectively, accounting for 2.95%, 3.02%, 2.69% and 2.59% of operating income, respectively. During the reporting period, the company's R&D expense investment became lower and lower, and the relevant ratio was also on a downward trend overall, which means that the company does not pay enough attention to R&D.
So what is the situation of companies in the same industry? The companies listed in the prospectus of Weikang Medical include Weikang Co., Ltd., Conrad, Sanxin Medical, Weili Medical and Gongdong Medical. The average R&D expense ratios of these companies are 3.28%, 3.92%, 4.16% and 4.22% respectively. In contrast, Weikang Medical's R&D expense ratio is significantly lower than that of its peers.
Table 1: R&D expenses to operating income (unit: %)
Image source: Prospectus
So, what core technologies does Weikang Medical have? prospectus introduces that Weikang Medical has 6 core technologies, namely PVC pellet formulation technology, catheter extrusion molding technology, balloon molding and bonding technology, drainage bag welding technology, catheter tip molding technology and fully automatic accessories assembly technology. Disposable medical consumables produced and processed by Weikang Medical's core technology account for 80% of Weikang Medical's operating income.
However, among the core technologies that Weikang Medical relies on for survival, except for the drainage bag welding technology and fully automatic accessories assembly technology to obtain utility model patents and invention patents , the other four technologies have not obtained patents. Moreover, "PVC pellet formula technology", one of its core technologies, does not seem to have been recognized by major overseas customers.
prospectus disclosed that during the reporting period, Weikang Medical's largest customer was Cardinal, mainly selling to its sales. During the reporting period, the company's tax-exclusive sales amounts to Cardinal were RMB 59.6192 million, RMB 70.7918 million, RMB 54.2355 million and RMB 15.0399 million, respectively, accounting for 25.38%, 27.83%, 21.97% and 25.50% of the main business income, respectively.The main raw material of
suction pipe is PVC pellets. However, the company has two sets of standards for purchasing PVC pellets. According to the prospectus, the company's raw material PVC pellets directly exported to Cardinal and other overseas companies are mainly purchased from Changzhou Hengfangda Polymer Materials Technology Co., Ltd., which does not involve "PVC pellet formula technology". The raw material PVC pellets for domestic sales of suction pipes are mainly produced by Weikang Medical.
Since the attraction pipe sold to overseas companies such as Cardinal needs to purchase PVC pellets from third parties, the cost of related products is also relatively high, which will undoubtedly lower the overall gross profit margin of exported goods. Data shows that during the reporting period, the gross profit margins of direct export of attraction tubes were 34.24%, 32.76%, 33.82% and 30.98%, respectively, while the gross profit margins of domestic distribution-related products were as high as 49.41%, 54.70%, 51.68% and 48.13%, respectively. Obviously, the gross profit margins of exported products are much lower than the gross profit margins of domestic distribution-related products.
So the question is, using self-produced supporting products can reduce costs and earn more profits. Why does Weikang Medical need to purchase PVC pellets exported to overseas from third parties instead of products produced by its own supporting products? Does this mean that the PVC pellet formula technology that it invented independently does not meet the requirements of overseas customers? In this regard, Weikang Medical needs further explanation.
Table 2: Comparison of direct export and domestic sales gross profit margin (unit: yuan/piece, %)
Picture source: Prospectus
It is worth mentioning that during the reporting period, Weikang Medical's products also had quality problems many times.
On September 20, 2018, The State Food and Drug Administration issued an announcement showing that a batch of vacuum control devices produced by Weikang Medical that used suction tubes did not meet the standards. The Jiangsu Provincial Drug Administration imposed a fine of 20,000 yuan on Weikang Medical and required rectification measures to modify the mold and carry out verification.
In addition, on February 25, 2021, the Jiangsu Provincial Drug Administration issued an "Administrative Penalty Decision" to Weikang Medical. Because the company produced a one-time use dressing package that did not meet the registered product standards requirements (the unqualified item is the residual amount of ethylene oxide ), it imposed a fine of 35,000 yuan for administrative penalty . Later, Weikang Medical recalled 818 packages of unqualified products and destroyed them.
The quality of product is one of the important factors that determine whether the company can develop in the long term, especially the medical consumables industry, which is related to the health of the people. Therefore, the industry has stricter requirements for product quality. Weikang Medical has frequent quality problems, showing that Weikang Medical does not pay enough attention to R&D and does not keep a close eye on product quality supervision. This is a very worrying issue.
In addition, the product has many quality problems, which will affect the company's brand reputation and in turn affect the company's future performance. Therefore, Weikang Medical needs to further improve its R&D level, keep a good grasp of quality, and reduce the occurrence of quality problems in order to be invincible in future market competition.
There are doubts about the asset divestiture on the eve of IPO
prospectus disclosed that Liu Chunliang and Liu Lijie and his daughter controlled 100% of the voting rights of Weikang Medical through direct and indirect methods. They are the actual controllers of the company. The company's equity is completely concentrated in the hands of both father and daughter. It is worth noting that on the eve of the IPO, Weikang Medical derived a new company, and Weikang Medical derived a split of this company was to divest some of its assets.
On January 2, 2021, Weikang Medical held an extraordinary general meeting of shareholders. The company was divided into Weikang Medical and a newly established company through derivative separation. The newly established company name is Jiangsu Shengfanming Industrial Development Co., Ltd. (hereinafter referred to as "Jiangsu Shengfanming", and later renamed "Minor (Suzhou) Building Materials Co., Ltd."). Before the separation, Weikang Medical had a total registered capital of 55 million yuan. After the separation, Weikang Medical's registered capital was 45 million yuan and Jiangsu Shengfanming's registered capital was 10 million yuan.In addition, Weikang Medical's property was also divided accordingly. Its long-term equity investment of its subsidiary Yiao Building Materials was changed to the name of Jiangsu Shengfanming, and Yiao Building Materials shareholders were changed from Weikang Medical to Jiangsu Shengfanming. Liu Chunliang and Liu Lijie and Liu Lijie hold 100% of the company's voting rights. As for the purpose of separation, Weikang Medical stated in its prospectus that in order to improve asset use efficiency and focus on its main business, the company decided to divest its subsidiary Yiao Building Materials by deriving and splitting it.
Figure 2: Schematic diagram of derivative separation
Picture source: Prospectus
Generally speaking, companies with diversified operations often divest other businesses that are not related to their main business during their listing process. This is also to meet relevant requirements and make the IPO process smoother. Therefore, it is also a good way to adopt the restructuring method of enterprise separation and division of business segments.
However, there are doubts about the separation of Weikang Medical.
Since May 2020, Weikang Medical's subsidiary Suzhou Weikang has begun to rent real estate under Yiao Building Materials (8th Floor, Building 8, Shishan Tianjie Times Square, Suzhou High-tech Zone) for office use. Before the divestment of assets, all the two companies were Liu Chunliang and Liu Lijie and holding . The subsidiaries rented property from each other, which was also a transaction between the left and right hands. Naturally, there was no problem. However, after Yiao Building Materials was divested, Suzhou Weikang leased the property from Yiao Building Materials, which had a different meaning. After all, Suzhou Weikang is in an IPO. Once it is successfully listed and issued, it will involve the interests of other small and medium shareholders.
According to the data disclosed in the prospectus, the annual rent amount for this leasing business is 1.2419 million yuan, and the lease term is from March 1, 2021 to February 28, 2023. In other words, before the division, they were originally assets of Weikang Medical. However, after the division and divestiture, Weikang Medical's assets not only reduced, but also paid more than one million yuan in rent to the affiliated companies under the actual controller every year. Moreover, if the lease is to continue after the expiration of the two-year contract, the annual rent increase of and is the final say of the actual controller. It is difficult to guarantee that there will be no possibility of transferring benefits in the form of "high-priced rent".
In addition, it is worth noting that the registered address of Suzhou Weikang is No. 89, Wangmi Street, High-tech Zone, Suzhou City, which is the same as the registered address of Yiao Building Materials. The registered address of Weikang Research Institute, another wholly-owned subsidiary of Weikang Medical, is also the same address. It can be seen that although Yiao Building Materials has been divested, there is still an inseparable connection with listed companies.
In other words, since Weikang Medical's subsidiary needs to rent Yiao Building Materials' real estate office, why doesn't it keep this part of its assets at Weikang Medical but divested it? Is it just to facilitate the actual controller to collect more rent? If this is true, the rationality of the stripping of Yiao Building Materials is questionable.
(The article mentions stocks for example analysis only, and does not make trading suggestions.)
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