Not vested. From UOBKH:-
Golden Meditech HoldingsForerunner of blood solutions
We initiate coverage on Golden Meditech with a BUY recommendation and target price of HK$2.76 based on sum-of-the-parts valuation, which implies 20x FY11F PE and 16x FY12F PE, a 20% discount to its peers.
Stock ImpactGolden Meditech Holdings (GMH) develops, produces and sells autologous blood recovery system (ABRS) machines and disposable chambers. Through its subsidiary Golden Meditech Hospital Management, GMH
manages China’s largest private haematology hospitals in Beijing and Shanghai. GMH also holds a 44% stake in China Cord Blood Corporation (CCBC), which provides storage and accessory services for blood stem cells
extracted from the umbilical cords of newborn babies.
Dominant position in ABRS market. GMH’s first-mover advantage enables the company to dominate the industry with a market share of about 80%. There is a limited number of such suppliers in the market. The technology is easy to replicate, but intellectual property protection and the long and stringent approval process create hurdles for potential entrants.
Favourable policies to fuel ABRS growth. Although GMH has sold over 10,000 ABRS machines to 2,000 hospitals, autotransfusion volume is estimated at merely 5% of total blood transfused during surgeries. The
Ministry of Health requires the use of autotransfusion to reach at least 20% in Level 3 hospitals and 10% in Level 2 hospitals. We believe this will boost consumable sales to over 30% CAGR for the next three years.
In addition, the Ministry is likely to make it mandatory for each surgery room in above county level hospitals to be equipped with ABRS machines. Should this policy be carried out officially, machine sales could grow at high double digits in the following years instead of our single-digit projection, given only over 2,000 hospitals out of a total of 12,961 hospitals are currently equipped.
Cord blood bank a major near-term growth driver. CCBC holds two of the six exclusive licenses for operating cord blood banks in Beijing and Guangdong. It has a 19.92% stake in Shandong Cord Blood Bank.
Guangdong and Shandong have huge populations and are among the most affluent provinces in China, but penetration rates in both areas are very low – below 2% and 0.5% respectively – compared to 14% in Beijing which is a more developed market.
In addition, China’s one-child policy, which eliminates the chance of transplanting bone marrow between siblings, will support the adoption of stem cell storage. Industry growth for the next 3-5 years is expected to clock a CAGR of over 30%, and Guangdong and Shandong operations are likely to grow at a faster rate given their very early stage of development and low penetration rates.
Hospital management could be a rising star. Public hospital reform will call for solid hospital management expertise to help public hospitals improve their services and profitability. GMH is tapping this market as one of the firstmovers with officially granted licenses and strong management expertise, especially in the area of haematology.
We project about 40% top-line growth for this segment for next three years but do not expect a significant revenue contribution in the near term due to relatively low base. We, however, believe the segment could achieve sustained high growth and become another growth driver over a longer time horizon as the reform deepens and more and more public hospitals bring in external management teams to help them improve profitability.
Valuation/RecommendationWe arrive at our target price of HK$2.76 based on sum-of-the-parts valuation. Our target price implies 20x FY11F PE and 16x FY12F PE, which are at a 20% discount to other Hong Kong- and US-listed Chinese medical device manufacturers.
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