Without the boost from the pandemic, is the medical device industry still a good business?

What kind of industry can be called a "good industry"?

First, the market space must be large enough. As the saying goes, "big water breeds big fish." A sufficiently large market provides companies with a large enough growth boundary. For example, the internet industry ten years ago has produced countless giants today.

Secondly, there must be a certain threshold. Businesses without thresholds can be done by anyone, resulting in fierce competition and making it difficult to profit. Of course, industries without thresholds can also choose to burn money to gain an advantage, creating a threshold for themselves.

Third, there must be sufficient certainty, the ability to weather cycles, and to continuously deliver value. An industry will inevitably experience ups and downs, but with a long-term perspective, you can discover a rigid human need that has remained unchanged from ancient times to the present—survival, and better, healthier survival.

Data shows that the proportion of the elderly population (65 years and older) in China has risen from 7.9% in 2009 to 11.4% in 2019, and is expected to reach 15.9% in 2030.

According to calculations by Shanghai Pudong Development Bank Silicon Valley Bank, the number of treatable people in China is expected to reach four times that of the United States in 2030. The medical and health industry will also usher in a golden period of development in the next ten years.

It is said that "the best businesses in the world are selling hope to teenagers, youth to women, health to the elderly, and lifestyles to the middle class." The "great health industry" basically encompasses all these "best businesses in the world."

In this vast ocean, many big fish can undoubtedly swim. Judging from the revenue growth rate of the seven sub-sectors of the pharmaceutical and biological industry in the Chinese market (A-shares), medical devices may be the fastest-growing among these fish.

According to data from the National Bureau of Statistics, in 2019, China's pharmaceutical manufacturing industry's large-scale industrial enterprises achieved operating revenue of 2390.86 billion yuan, a year-on-year increase of 7.4%.

The "China Medical Device Blue Book (2020 Edition)" shows that the market size of the medical device industry was 634.1 billion yuan, with a year-on-year growth of 19.55%, significantly higher than the pharmaceutical and biological industry and other sub-sectors within the industry. China's far lower drug-device consumption ratio compared to the global average (in 2015, China's drug-device consumption ratio was 1:0.33, while the global average was 1:0.7, and developed countries were 1.02:1) ensures the sustainability of this high-speed growth.

"Drug-device consumption ratio" refers to the ratio of pharmaceutical and medical device consumption. In other words, for every 1 yuan spent on medicine, only 0.33 yuan is spent on medical devices.

So, who can get a bigger share of the pie from the development of China's medical device industry?

01. Market Trend: Home Use Explosion, Business Shift

Medical devices have many subcategories, ranging from large-scale in-hospital medical equipment to disposable items such as masks and bandages. According to the usage scenario, medical devices can be roughly divided into two categories: home use and hospital use.

Home medical devices have the attributes of health consumer products and are less affected by medical reform policies such as centralized procurement, making them have huge potential. As the medical industry gradually transitions from treatment to rehabilitation and prevention, the medical device field is gradually showing a trend of development from medical use to home use.

According to the analysis of the Medical Device Research Institute, in the medical equipment market, the proportion of medical medical equipment decreased from 68.54% in 2018 to 66.98% in 2019; while the proportion of home medical equipment increased from 31.46% in 2018 to 33.02% in 2019.

In developed countries, the market share of home medical devices accounts for about 40% of the entire medical device industry, while in China, it is only 13.8%. This shows that the Chinese home medical device market has not yet reached its growth ceiling. After all, you may not have an X-ray machine at home, but you usually have an electronic thermometer.

After reviewing the development prospects of the home medical device industry, let's talk about related companies in the industry.

With the continuous expansion of the market size, more and more companies are eyeing this piece of the pie. Among the existing listed companies, more than 20 medical device companies specialize in the home use sector.

However, among the top ten A-share listed medical device companies, only Yuwell Medical has both home and hospital medical devices as its main business. In Yuwell Medical's revenue contribution over the past five years (2015-2020), the home use sector has consistently had a higher proportion.

On August 11 this year, Yuwell Medical announced its first-half financial report. Revenue reached 3.593 billion yuan, a year-on-year increase of 5.03%. Against the backdrop of a high performance base in the same period last year due to the epidemic, it still achieved positive growth that exceeded market expectations.

At the same time, compared with the same period last year, Yuwell's business focus and growth momentum have shifted from meeting epidemic needs to expanding the regular market, and the revenue share of non-epidemic-related products has gradually increased.

In Yuwell Medical's performance this time, the home use sector still made a significant contribution in terms of both revenue and profit. However, we noticed that in the 2021 semi-annual report, Yuwell Medical has reclassified its business sectors and changed its business accounting.

In my opinion, this change not only reflects Yuwell Medical's achievements in product category expansion but also clarifies Yuwell Medical's strategic planning. The company's strategic layout has shifted from "defense" to "attack," from mature assets to growth businesses.

In the past, Yuwell focused on mature businesses. The new strategy focuses on three growth areas: "respiration," "blood glucose and POCT," and "disinfection and infection control." These three core tracks have large market space, low domestic penetration rates, good interaction between in-hospital and out-of-hospital markets, and Yuwell Medical has a good product reputation.

Meanwhile, the gross profit margin of the three core business segments all exceeds 50%, and the proportion is increasing year by year, which will undoubtedly greatly enhance Fish跃's profitability. In addition, Fish跃 will continue to incubate high-potential businesses such as emergency rescue, ophthalmology, and intelligent rehabilitation, enriching the product matrix and providing continuous impetus for the company's long-term and stable development.

02. Multi-pronged Approach: Focusing on the Present, Internal and External Growth

China's medical device development started relatively late. Looking at domestic medical device manufacturers, they generally have the characteristics of small scale and single products. Unlike most domestic medical device companies, Fish跃 Medical has numerous products and a wide coverage.

This is because, in terms of growth path, Fish跃 Medical has chosen a two-pronged approach of "internal growth + external expansion".

In terms of internal growth, Fish跃 Medical continues to increase R&D investment. In 2020, Fish跃 Medical's R&D investment reached 402 million yuan, accounting for about 6% of the total revenue in 2020, which is close to the R&D expense ratio of the top ten large medical device manufacturers in the world (consistently at 6%-6.7%), becoming a strong support for further improving the technical barriers and product added value.

Achievements are the best return on investment. Recently, the State Intellectual Property Office of China announced the list of winners of the 22nd China Patent Award, and Fish跃 Medical's utility model patent "A type of ventilator" won the China Patent Gold Award.

For a long time, overseas brands have occupied the main share of the global ventilator market and have formed a "bottleneck" situation for the domestic ventilator industry through a large number of patent layouts. Relying on multiple national and ministerial-provincial scientific research platforms, Fish跃 Medical has taken the lead in delivering satisfactory results. According to the 2021 semi-annual report, Fish跃's respiratory therapy solutions segment achieved revenue of 1.32 billion yuan, an increase of 13.52% year-on-year.

In terms of external expansion, Fish跃 Medical, like many international medical giants, is focusing on mergers and acquisitions, entering new fields and acquiring new technologies by acquiring core technology companies. Since 2015, Fish跃 Medical has successively completed mergers and acquisitions or layouts of companies such as Shangxie Group, Shanghai Zhongyou, German Mangish Metrax, Amsino Medical, Jiangsu Shizhun, Liu Liu Vision, and Kaitlite, completing a threshold-crossing technological accumulation in medical devices.

According to the annual report, Fish跃 Medical currently has more than 600 product categories and nearly 10,000 product specifications. The multi-category product structure allows Fish跃 Medical to continuously improve its competitiveness and risk resistance through various methods such as product combination sales, synergistic expansion of marketing channels, and commonality of market promotion.

In the first half of this year, the "disinfection and infection control" segment (Shanghai Zhongyou) of Fish跃 Medical achieved an operating income of 445 million yuan, a year-on-year decrease of 7.36%. In addition, there is the "diabetes care solutions" segment (Kaitlite) with a revenue growth rate of 130.15%, and the sales of "emergency rescue" (Pumekang AED) products are also continuously improving... They will become important growth engines for Fish跃 Medical in the future.

Mr. Wu Qun, Chairman of Fish跃 Medical, pointed out in response to reporters' questions at the shareholders' meeting in May this year:

(Fish跃) In the past, whether it was investment, mergers and acquisitions, or independent research and development, it basically focused more on capturing mid-term or immediate opportunities. However, facing the next five to ten years, China is returning more to the essence of value. As a medical device company, innovation, technology, quality, and stability are more important factors, ultimately returning to the value of the product itself.

03. Unlimited Future: Leading the Industry, Setting Sail Overseas

In terms of overseas achievements, the staggered outbreak of the COVID-19 pandemic has given Fish跃 Medical's ventilators and other epidemic-related products the opportunity to go global, and has also brought substantial breakthroughs to Fish跃's export business. In 2020, Fish跃's export business directly "soared", accounting for 27.93% of total operating revenue, a year-on-year increase of 135.78%.

Relying on the overseas sales channels established and expanded during the epidemic, in the first half of 2021, Fish跃 achieved overseas revenue of 720 million yuan, accounting for 19.99% of total revenue. Compared with the exaggerated growth of the same period in 2020, there was a slight decline, but it was still a very good achievement compared with the same period in 2019, with a 48% increase. After excluding the boost from the epidemic, it is still a very good achievement, indicating that the Brand's influence overseas has been further enhanced.

Domestically, orders for Fish跃's epidemic-related products remain buoyant, and the conventional product business lines are also steadily growing, with market share steadily increasing, and Achievements gradually returning to the normal growth track.

The basis of all businesses is ultimately built on common sense. After clarifying the data research, many judgments become relatively easy. After decades of accumulation, Fish跃 Medical has proven its excellence to the market.

As a leader in the household medical device industry, its Achievements have always been upward in the long term. Although there have been some fluctuations, these are merely "knee-jerk reactions" after all the negative news has been released. Short-term fluctuations do not change the long-term logic, and our vision should be long-term. Time will prove that Fish跃 is still a high-quality enterprise with both certainty and growth potential.

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