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"tens of billions in revenue, hundreds of billions in market value, and entering the top 30 in the global medical device industry" is the five-year goal set by wu qun, the head of yuyue medical, at the beginning of 2021.

the covid-19 pandemic has brought about a wave of drug and device dividends. yuyue medical decisively seized the opportunity and created its best annual performance in history in 2023, with revenue approaching 8 billion yuan, which is just a stone's throw away from the 10 billion yuan revenue. just when the market believed that yuyue medical would take advantage of the opportunity to achieve the goal of 10 billion yuan in revenue this year, yuyue medical's performance reversed.

on august 23, yuyue medical released its 2024 interim report, with both revenue and net profit declining.specifically, yuyue medical's revenue was 4.308 billion yuan, down 13.5% year-on-year; its net profit was 1.12 billion yuan, down 25.02% year-on-year. although such performance is not bad, it undoubtedly makes yuyue medical further away from the goal of 10 billion yuan in revenue. as for the market value of 100 billion yuan? it can only be said that yuyue medical's potential is getting bigger and bigger.

regarding such performance, an investor asked on the interactive platform, "in 2021, the company proposed to achieve a goal of 10 billion yuan in revenue and 100 billion yuan in market value by 2025, and to enter the top 30 in the global medical device industry. is there any pressure to achieve this goal now?" yuyue medical replied, "there will definitely always be pressure, but we will still turn pressure into motivation."

although yuyue medical is full of confidence in the future, the problem now is: the performance moat built by yuyue medical is not solid. it is achieved by relying on "buying, buying and buying". when the extensive growth stagnates, where is the new driving force for yuyue medical?

01

capital accumulation giant

looking back on yuyue medical's rise, this is a typical story of performance growth driven by capital.

the origin of yuyue medical can be traced back to 1998, when it was only a regional enterprise focusing on rehabilitation care products. in 2004, yuyue medical began to create its own brand, and gradually built "yuyue" into a "chinese famous brand" by increasing investment in technology research and development.

however, what really put yuyue medical on the fast track of growth was its subsequent strong mergers and acquisitions.

in 2009, yuyue medical acquired the century-old suzhou medical supplies factory;

in september 2014, yuyue medical acquired 112 million state-owned shares of china resources wandong for rmb 1.142 billion;

in 2015, it acquired 100% equity of shangxie group;

in 2016, shanghai zhongyou was acquired to support the disinfection and infection control business;

in 2017, it acquired germany's primedic to enter the emergency care business;

in 2019, it acquired the ophthalmic equipment company liuliu vision and invested in the contact lens company jiangsu shizhun;

in 2021, the company completed the acquisition of kelit, a company that produces continuous blood glucose meters;

in may 2024, yuyue medical acquired jiangsu lerun contact lens co., ltd.

today, yuyue medical owns several major brands, including "yuyue yuwell", "jie furou", "hwato", "jinzhong jz", "aner iodine", "primedic", "six six vision", etc. except for the "yuyue yuwell" brand, which was developed by the company itself, almost all other brands are acquired.

of course, external mergers and acquisitions are not exclusive to yuyue medical, but a common choice for star medical device companies at home and abroad. for example, medtronic, a medical device giant that started with pacing technology, acquired and merged more than a dozen medical technology companies in the 1980s, allowing the company to enter new fields such as biological heart valves, cardiopulmonary equipment, and centrifugal blood pumps, successfully transforming from a single-product company to a diversified medical technology company.

regarding external mergers and acquisitions, yuyue medical has clearly stated that "industrial integration through external expansion is the only way for domestic medical device companies to develop in the future."

judging from the current operating results, yuyue medical's m&a development has been quite effective. when it was first listed in 2008, yuyue medical had only three subsidiaries; but by 2023, this number had increased to 50.

in the process of continuous capital mobilization, yuyue medical has accumulated a large amount of capital. for example, in 2015, yuyue medical acquired 112 million state-owned shares of china resources wandong for 1.142 billion yuan, holding 51.51% of its shares and becoming the largest shareholder. in the following 6 years, yuyue medical sold 51.09% of wandong medical's equity in two batches through market value management, earning 3.954 billion yuan.

yuyue medical also acquired shanghai medical equipment group for rmb 690 million, extending its products to the fields of medical surgical instruments, medicated plasters, and polymer sanitary accessories. regardless of the operating income, shanghai will implement a new urban plan in 2022 and decide to acquire this land. the compensation alone is agreed to be paid to yuyue medical for nearly rmb 1 billion.

the continuous expansion of scale and investment income has driven yuyue medical's performance to show a sustained growth trend. from 2008 to 2019, yuyue medical's operating income increased from 401 million yuan to 4.636 billion yuan, a growth of more than ten times. in 2015, the company's market value once exceeded 41 billion, reaching a historical peak. since then, yuyue medical's stock price has continued to be around 30 billion, becoming one of the leading players in the industry.

figure: yuyue medical's revenue and growth rate from 2008 to 2019, source: jinduan research institute

however, behind the company's continued revenue growth is a continuous decline in revenue growth. by 2019, the company's revenue growth rate had dropped to 10.82%, which was only slightly higher than in 2013.

however, even in such a situation, the chairman of yuyue medical proposed a goal of achieving revenue of over 10 billion yuan and market value of over 100 billion yuan by 2025 at the 2020 annual meeting.

02

troubled times after great wealth

the reason why wu qun made such bold statements was all because of the "enormous wealth" brought by the new coronavirus pandemic.

since 2020, the demand for products such as ventilators and oxygen concentrators has surged, and these are yuyue medical's core industries, driving a substantial increase in yuyue medical's performance. in 2020, yuyue medical's performance resumed high growth, and the company recorded revenue of 6.726 billion yuan, a year-on-year increase of 45.08%. the net profit attributable to shareholders of the listed company was approximately 1.759 billion yuan, a year-on-year increase of 133.74%.

however, such a high performance growth rate is obviously difficult to maintain for a long time.soon in 2021 and 2022, yuyue medical's revenue growth slowed down again. although in 2023, due to changes in relevant health control policies, yuyue medical's revenue once again saw double-digit growth that year. however, starting from the third quarter of 2023, its quarterly revenue began to decline month-on-month, and until the first quarter of 2024, it not only declined month-on-month for three consecutive quarters, but also declined year-on-year.

figure: yuyue medical's revenue and growth rate from 2020 to date, source: jinduan research institute

especially after yuyue medical announced its 2024 interim report, its revenue and net profit both declined as expected, which indirectly revealed that yuyue medical's original business is facing a growth crisis. to solve this crisis, it is necessary to either increase r&d investment and improve internal productivity, or to conduct external mergers and acquisitions as in the past.

based on yuyue medical's rich experience in capital mergers and acquisitions, it should have been easy to solve the problem. however, with the disclosure of a series of "old events", yuyue medical's capital operations began to show red lights.

it was found that wu guangming, the founder of yuyue medical, had committed a series of violations: behind-the-scenes trading of kao shares and manipulating other people's accounts to short-term trade yuyue medical and wandong medical. wu guangming was not only fined for the illegal gains, but also unsuitable to serve as the chairman of a listed company for three years. this incident directly led to wu guangming's son wu qun being ordered to the front line in october 2020.

in addition, the wu father and son were also involved in the yunnan baiyao incident.

in june 2017, wu guangming invested 5.638 billion yuan in baiyao holdings and acquired a 10% stake in the latter. in november 2018, yunnan baiyao announced that after the company's absorption and merger of baiyao holdings was completed, yuyue technology also became the third largest shareholder of yunnan baiyao. originally thought that this was another successful investment that yuyue medical was proud of, but it turned out to be a time bomb. since may this year, yunnan baiyao has been involved in a "nest case". although yuyue medical has repeatedly distanced itself from the matter, its stock price has inevitably been affected.

since the stock ban was lifted in july 2023, yuyue medical has begun to sell off a large number of yunnan baiyao. from july 2023 to january 2024, jiangsu yuyue sold a total of 35.9366 million shares, cashing out about 1.882 billion. at the same time, from august 14 to september 26, 2023, jiangsu yuyue also sold 35.6681 million shares through block transactions, cashing out about 1.78 billion. as of now, jiangsu yuyue still holds 28.3118 million shares of yunnan baiyao, but the shareholding ratio has dropped to 1.59%, equivalent to a market value of about 1.5 billion. the sum of the previous and subsequent values ​​is less than the investment of 5.638 billion yuan at the time. this deal will most likely end in a loss.

after reaping the benefits of both investment returns and the dividends of the times, it seems that yuyue medical can only rely on its own hard power if it wants to move forward.

03

return to hard power

looking at all of yuyue medical's business segments, the most powerful one is the respiratory therapy solution segment, which is mainly composed of ventilators and oxygen concentrators. however, it is also the segment with the most severe decline in 2024, with a decrease of 28.88%.

this is certainly related to the high base caused by the surge in demand for products such as ventilators and oxygen concentrators in the first half of 2023. however, looking back, the decline was actually foreshadowed. in 2019, the business of related sectors had already shown a downward trend. in particular, the sales of oxygen concentrators and nebulizer products were affected to a certain extent, with sales volume falling by about 10%. however, the sudden health incident not only prevented such a downward trend, but also led to a wave of high growth.

in this semi-annual report, yuyue medical said that the company has "gradually returned to the normal track of sustainable development." however, how to make the strong sectors that have shown signs of decline continue to grow rapidly in the normal situation is still a daunting challenge. yuyue medical's infection control solution business and home electronic testing and in vitro diagnostics business have both declined significantly.

figure: yuyue medical's 2024 interim report revenue by department, source: jinduan research institute

the diabetes care sector has become a surprise in performance, achieving a high growth rate of more than 50%. this is due to the fact that in 2021, yuyue medical acquired a 51% stake in zhejiang kailite medical equipment co., ltd. for 370 million yuan and launched related bgm and cgm products. in addition, the scale of the diabetes track continues to expand, and it is expected to continue to grow rapidly in the future.

however, due to the low base, even at an annual growth rate of 50%, this sector will only generate about 1.5 billion in revenue by 2025, which is not enough to make up for the losses of other slowing sectors, let alone support tens of billions in revenue.

if the existing products are not enough to support future performance, can new products be launched through research and development? this involves another shortcoming of yuyue medical that is often criticized, that is, weak research and development.

in 2023, yuyue medical's r&d investment accounted for only 6%, and both the number of r&d personnel and the proportion of r&d personnel declined. in the first half of 2024, yuyue medical's r&d investment was 270 million yuan, and the r&d amount also declined year-on-year. this is related to yuyue medical's development strategy. due to the focus on c-end sales and products mainly driven by marketing, the technical threshold and r&d intensity are destined not to be too high.

figure: yuyue medical r&d expenses and revenue share, source: jinduan research institute

the neglect of self-developed capabilities has magnified the problems on the product side. since 2019, yuyue medical's products have been reported by market supervision and management departments in many places. the relevant products include oxygen concentrators, gastric lavage machines, ultrasonic nebulizers, electronic blood pressure monitors, etc.

in addition to increasing product supply to find growth points, continuously expanding the market scope on the sales side, especially going overseas, is also one of the common revenue-increasing consensus of pharmaceutical and medical device companies. in the semi-annual report, yuyue medical stated that "the company's overseas business expansion will continue to deepen, and the business in key countries and regions has achieved a relatively comprehensive advancement."

however, since 2020, yuyue medical's overseas revenue and share have continued to decline. in 2023, the proportion of overseas revenue has dropped to single digits, the lowest level in a decade. even with export revenue of 479 million yuan in the first half of this year, a year-on-year increase of 30.19%, the share has only increased to 11%, still at a historical low.

figure: yuyue medical's export share, source: jinduan research institute

by reviewing yuyue medical's business operations in recent years, investors can easily find that yuyue medical has not provided many solutions to the dilemma of increasing performance. however, under the heavy pressure of "tens of billions in revenue and hundreds of billions in market value", this is another topic that urgently needs an answer.

external mergers and acquisitions and independent research and development are two answers to solving the growth dilemma, but it is not easy for yuyue medical at this stage. it can be said to be in a dilemma. how to solve the growth problem? the answer of the management may directly determine the investment value of yuyue medical in the next few years. i hope the final answer is not that investors overestimate yuyue medical.