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Riding on proven ability to unlock value via spin-off for IPO

Investment Thesis

BUY on proven capability to boost market cap through spin-off for IPO. Since 2H19, Microport’s share price has been on a run, surging from below HK$10 to >HK$40. This is because the stock exchanges of Hong Kong and mainland China are allowing loss-making hi-tech companies to raise funds and unlock market value through IPO. In 2019 and 2021, Microport had spun off 2 businesses for IPO already. We estimate another 4 to come.

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Long term value creation on strong R&D capability. R&D capability is the basis to create new businesses for spin-off and IPO. This also allows for import substitution. As evidence of its strong R&D, Microport has 21 medical devices placed on the fast track for approval for launch by the China government due to the products innovative qualities. This is the largest number among peers as of Aug 2021.

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Overseas sales to mitigate risk of price cuts in China. Unlike most medical device makers in China which heavily rely on sales in the domestic market, Microport generates >50% of sales from overseas which allows it to mitigate the largest risk for medical devices makers i.e., huge price cuts imposed by the National tender organised by the government.

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Valuation:

Our TP of HK$58 is based on sum-of-the-parts valuation of seven business segments.

Where we differ:

We believe there are 4 more potential IPOs, which would be major share price catalysts.

Key Risks to Our View:

Price cuts imposed by National tender in China.

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