The "land sales blood transfusion" capital situation of MicroPort

The "MicroPort System" listed companies are currently bulk purchasing land and properties from MicroPort Medical (0853.HK).

In August of this year, MicroPort Medical first sold land and properties to its subsidiary, HeartLink Medical (2160.HK), with a transaction amount exceeding 300 million yuan; just four months later, its subsidiary Shanghai MicroPort Orthopedics Medical Technology Co., Ltd. (hereinafter collectively referred to as "MicroPort Medical") sold properties to its joint venture company, MicroElectrophysiology (688351.SH), with a transaction amount of 49 million yuan.

Strangely, as innovative medical device companies, HeartLink Medical and MicroElectrophysiology are currently directing more of their funds towards research and commercialization, yet they are now using these funds to buy land and properties.

The answer may lie in the cash pressure faced by MicroPort Medical.

In April of this year, MicroPort Medical encountered liquidity risks due to the redemption of multiple convertible bonds issued in the past, leading to Chairman Chang Zhaohua's efforts to raise cash from various sources.

Although MicroPort Medical eventually received assistance from Hillhouse Capital, if it does not meet the corresponding profit targets, it will still need to repay its debts early.

Selling properties to HeartLink Medical and MicroElectrophysiology can objectively bring more cash to MicroPort Medical, thereby alleviating its financial pressure.

However, whether this action by the "MicroPort System" listed companies constitutes a "blood transfusion" to the parent company is being met with increasing skepticism from the market.

Bulk Purchase of Land and Properties

MicroElectrophysiology plans to purchase the usage rights of buildings 1-28, No. 588 Tianxiong Road, Zhoupu Town, Shanghai, and 7 underground parking spaces from MicroPort Medical, with a transaction price of 48.5 million yuan.

Excluding the area of the underground parking spaces, the property purchased by MicroElectrophysiology has an area of 2,586.85 square meters, with an average transaction price of 18,700 yuan per square meter.

Before this acquisition, MicroElectrophysiology primarily rented this property from MicroPort Medical for use as a factory to produce catheters, with rental expenses of 2.3171 million yuan in 2023.

This is roughly equivalent to the depreciation expense. Based on a 20-year depreciation period for industrial properties, the annual depreciation expense would be 2.425 million yuan.

From this perspective, the difference between renting and buying is not significant, yet MicroElectrophysiology chose to purchase the property with a large amount of cash, which is quite unusual.

On one hand, MicroElectrophysiology's current income mainly comes from the three-dimensional cardiac electrophysiology mapping system and catheters, with a relatively limited performance scale; the purchase price is equivalent to the total profit for the first three quarters of this year.

On the other hand, more of MicroElectrophysiology's funds still need to be used to promote the research and development of various catheters and to advance sales.

In the first three quarters of 2024, the research and development expenses and sales expenses were 57 million yuan and 81 million yuan, respectively, accounting for 19.59% and 27.84% of revenue.

"The shareholders are currently interested in selling this building. We have been renting this building since 2016, and our production lines and workshops are inside. If we don't buy it, we will have to relocate." A person close to MicroElectrophysiology told TradeWind (ID: TradeWind01), "Rental costs are one aspect. On the other hand, because we are a medical device manufacturing company, we also need to handle environmental assessment procedures. So relocation may affect our production operations. After comprehensive consideration, we decided to buy the building." Earlier this year, MICROPORT also sold land to its subsidiary, Xintong Medical.

In August this year, Xintong Medical spent 360 million yuan to purchase land and related buildings located at No. 501 Newton Road, Zhangjiang Science City, Pudong New District, Shanghai, under MICROPORT. The land area is 13,300 square meters, and the area of the three buildings is 8,781.03 square meters.

It is worth noting that Xintong Medical has yet to turn a profit.

Xintong Medical focuses on medical devices related to structural heart disease. Although several TAVR (transcatheter aortic valve replacement) products, such as VitaFlow, have been approved for sale, the net loss in the first half of 2024 still reached 56 million yuan.

Indirect "Blood Transfusion" to the Parent Company?

The recent acquisition of properties and real estate by two listed innovative medical device companies under the MICROPORT system may not be coincidental.

Various signs indicate that asset sales are bringing more cash flow to MICROPORT and can alleviate financial pressure to some extent.

In March this year, MICROPORT faced a liquidity crisis due to the need for 743 million dollars in cash to redeem convertible bonds and repay loans.

As a result, the auditing firm KPMG even marked significant uncertainties regarding MICROPORT's ability to continue as a going concern in its financial report.

Subsequently, Chang Zhaohua sought help from various sources and finally found a knight in shining armor—Hillhouse Capital.

Hillhouse Capital and Jumbo Glorious, controlled by Chang Zhaohua, provided a total of 150 million dollars in convertible term loan financing to MICROPORT at an annual interest rate of 5.75%. Additionally, Hillhouse Capital provided an extra loan of no more than 50 million dollars.

This only temporarily alleviated the urgent situation, and MICROPORT still faces certain financial pressures.

On one hand, Hillhouse Capital's generous support comes with potential conditions: the net profit targets for MICROPORT from 2024 to 2026 are -275 million dollars, 55 million dollars, and 90 million dollars, respectively.

If these targets are not met, Hillhouse Capital has the right to demand early repayment of the 50 million dollar loan and related interest, which matures in five years.

Chang Zhaohua also acknowledged that the company's strategy will shift from focusing on research and development to prioritizing profits.

In the first half of 2024, MICROPORT's net loss still reached 696 million yuan, but it has reduced losses by more than 40% year-on-year.

On the other hand, with the slowdown in the IPO pace of the domestic capital market and strict regulations on spin-offs, MICROPORT's previous path of incubating loss-making subsidiaries through the capital market also faces challenges.

In 2019, MICROPORT spun off Xinmai Medical (688016.SH) to list on the Sci-Tech Innovation Board, and in 2021, it spun off Xintong Medical and MICROPORT Robotics (2252.HK) to list on the Hong Kong Stock Exchange. In 2022, it similarly spun off and promoted its subsidiary MICROPORT Brain Science (2172.HK) and joint venture MICROPORT Electrophysiology to list on the Hong Kong Stock Exchange and Sci-Tech Innovation Board, respectively.

Frequent spin-offs have alleviated the financial pressure on MICROPORT to incubate innovative businesses, but when this path becomes difficult, it means that more cash support is needed for the development of loss-making businesses However, similar to MICROPORT, these unlisted loss-making subsidiaries are also under certain debt pressure.

In July 2021, MICROPORT's subsidiary, MICROPORT Cardiac Rhythm Management Co., Ltd. (hereinafter referred to as "MICROPORT Cardiac Rhythm"), introduced Hillhouse Capital and other institutions, but it was agreed that if MICROPORT Cardiac Rhythm fails to go public by July 2025, and the market value after listing does not reach USD 1.5 billion or raise less than USD 150 million, then Hillhouse Capital and other institutions have the right to require MICROPORT Cardiac Rhythm to redeem shares.

In 2023, MICROPORT Cardiac Rhythm submitted IPO application materials to the Hong Kong Stock Exchange, but its financial information had long expired and there has been no new progress.

If MICROPORT Cardiac Rhythm cannot go public in 2025 or fails to meet expectations, it will also need to pay USD 227 million to Hillhouse Capital and other institutions.

Another subsidiary of MICROPORT, MICROPORT YouTong Medical Technology (Jiaxing) Co., Ltd., is facing the same predicament.

It has agreed with investment institutions that if it fails to go public before 2028, it will need to fulfill the buyback obligation, involving an amount of USD 21 million.

Perhaps for this reason, selling assets to already listed subsidiaries is the most direct and simple way for MICROPORT to realize cash in the short term.

In the 2024 semi-annual report, MICROPORT also acknowledged that one of the ways to raise funds is through asset sales.

In this regard, TradeWind (ID: TradeWind01) also sought confirmation from MICROPORT Electrophysiology regarding the massive investment in real estate, whether it was aimed at alleviating the difficulties of MICROPORT, which they denied.

"We are not very clear about the internal situation of the shareholders, but we are completely considering this matter based on our own production needs," a person close to MICROPORT Electrophysiology pointed out.

How Did It Come to This

From a financial perspective, MICROPORT Electrophysiology and Xintong Medical indeed have the capability to "take over."

Regarding MICROPORT Electrophysiology, although as of the end of September this year, the balance of cash and cash equivalents was only RMB 233 million, there was still RMB 732 million of IPO fundraising that had not been used as of the end of June this year.

To improve the efficiency of idle funds, MICROPORT Electrophysiology also used RMB 574 million of IPO fundraising to purchase bank wealth management products, etc.

Xintong Medical also has a certain scale of cash reserves, with a cash balance still reaching RMB 801 million as of the end of June 2024.

Currently, MICROPORT Robotics, Xinmai Medical, and others are still leasing properties from MICROPORT for office use, etc.

Whether MICROPORT will sell assets to other "MICROPORT system" companies in the future remains a point of ongoing market attention.

From historical situations, excessive "blood transfusion" from listed companies to the parent company can lead to endless troubles, sometimes even dragging down the listed company.

ST Meigu (000615.SZ) is the best example.

In November 2021, ST Meigu spent RMB 79 million to acquire three commercial property assets located in Panyu District, Guangzhou, from a subsidiary controlled by the major shareholder Aoyuan Group.

This caused a certain degree of controversy at the time, although as of September 30, 2021, ST Meigu's monetary funds still reached RMB 703 million, making it not difficult to pay this amount However, during the pandemic, the significant purchase of commercial properties amidst the impact on offline store operations raises questions. ST Meigu's actions are also seen as "blood transfusion" for its major shareholder, Aoyuan Group—at that time, Aoyuan Group faced default risks on multiple private placement products and was negotiating extensions with relevant parties.

Subsequently, ST Meigu has repeatedly provided guarantees for related parties of Aoyuan Group, and it has now been ruled by the court to undergo reorganization due to overdue debts.

This year has indeed been tough for the "MicroPort system."

Recently, Xinmai Medical lost its high-tech enterprise qualification due to failing to report its annual development situation for two consecutive years, which directly led to the recovery of approximately 60 million to 70 million yuan in tax benefits and late fees.

The question of why MicroPort, which once aimed to benchmark against Medtronic, has come to this situation has lingered in the market.

From a product perspective, the innovative medical devices of the MicroPort system are indeed "resilient."

The core product of micro-electrophysiology, the Columbus® 3D cardiac electrophysiology mapping system, ranks just behind international giants Johnson & Johnson, Abbott, Medtronic, and Huatai Medical (688617.SH);

MicroPort's "Honghu Orthopedic Surgical Robot" is the only domestically produced surgical robot listed in China, the U.S., and Europe;

Xintong Medical and Qiming Medical (2500.HK), Peijia Medical (9996.HK) are hailed as the "three giants of TAVR" in China, and TAVR therapy is also an important alternative to surgical procedures for artificial biological heart valves.

However, blind expansion has always been a Damocles sword hanging overhead.

At this year's shareholders' meeting, Chang Zhaohua admitted, "We did not spend money on IRR calculations, strategic errors, and blind expansion. In the past, we focused too much on technology and did not pay attention to capital return issues."

This indeed reveals the root cause of MicroPort's current predicament.

Although Chang Zhaohua is working hard for MicroPort, the largest shareholder Otsuka Holdings Co. seems to no longer want to continue "running alongside."

In October of this year, Bloomberg reported that Otsuka Holdings is planning to sell its shares.

As of the end of June this year, Otsuka Holdings still held 20.87% of MicroPort's shares.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk