While the world attention is on the fight against Coronavirus in
China, Blue Orca is concerned about other things at the same time.
This time, this foreign short selling agency aimed at a
high-quality Chinese pharmaceutical company.
According to Zhitongcaijing APP, recently, Blue Orca targeted China
Medical System (867.HK), a well-known Chinese pharmaceutical
company, by releasing a short selling report against the company on
the morning of February 6, pointing out that this Chinese
pharmaceutical company "is simply uninvestable".
Influenced by this report, the share price of China Medical System
fell sharply by 12.7% from its peak at HK$ 10.72 to HK$ 9.36.
However, due to the insufficient evidence of the allegations and
the suspicion that Blue Orca had engaged in malicious short
selling, a short selling report was not enough to shake investors'
confidence in this high-quality company. The company's share price
rebounded sharply after hitting the bottom of HK$ 9.35 at 11:03
a.m.. Moreover, before the suspension of trading, it rebounded by
9% to HK$ 10.2 in just 14 minutes at 11:17 a.m.
In recent years, it has been common for foreign short selling
agencies to short sell Chinese companies, even for high-performing
stocks such as BoSiDeng and ANTA Sports. In 2019, only Blue Orca
itself has issued short selling reports against companies such as
Kasen International, Ausnutria and NOVA Group.
However, by analyzing the market data on trading days before the
release of Blue Orca's short selling report, Zhitongcaijing APP
found that the short selling ratio of China Medical System had
increased significantly, thus making this short selling incident
worth pondering. Consequently, it's necessary for investors to
rationally analyze this short selling report and correctly
understand the intrinsic value of China Medical System.
Part 1 "Untenable" reasons for short selling
Short selling agencies commonly create notions of "guilt" at the
beginning of their reports to guide investors decisions about a
company regardless the authenticity of the evidence and data.
Therefore, Blue Orca wrote "China Medical System is simply
uninvestable" at the beginning of the report.
Next, the report listed four reasons why Blue Orca believed that
the company had "fraud and corruption": 1. The company's filings in
China indicated net profit was 49% less than the number reported in
its annual report; 2. There were problems in Malaysia's tax
benefit; 3. The company secretly funded the R&D expenses for
chairman's private company; 4. Drug development pipeline: trading
transactions between the company and the chairman.
For challenges raised by Blue Orca, investors are most concerned
about the truth. Faced with the aggressiveness of Blue Orca, China
Medical System promptly clarified and refuted the relevant charges.
Investors can conclude from the company's announcement in response
to the short selling report that the allegations made by Blue Orca
were untenable. Zhitongcaijing APP also summarized the following
information according to the company's reply.
Regarding the company's financial inflation: the business of
Malaysia subsidiary actually exists.
Blue Orca doubted the existence of China Medical System's
subsidiary in Malaysia and believed that China Medical System used
its subsidiary's tax benefits to inflate its profits.
In fact, as an international pharmaceutical company, the business
of China Medical System is divided into international business and
domestic business. The international business section includes CMS
Pharma (Malaysia) and Sky United Trading Limited, and the domestic
business includes Shenzhen Kangzhe and Tianjin Kangzhe.
According to the clarification announcement of China Medical
System, the company's international business functions are now
mainly undertaken by its Malaysian subsidiary. These functions
include: investment and introduction of new products, screening and
evaluation of production plants, quality and supply chain
management and control, the strategy formulation of macro promotion
of products, and all risks related to the functions. The business
and performance of the subsidiary really exist and enjoy local
preferential tax policies. In addition, the company also stated
that it has repeatedly discussed with professional tax consultants
the issue of ensuring that the pricing of related transactions is
reasonable and in line with the provisions of the domestic taxation
It's pretty simple to verify the authenticity of the company's
performance, since the financial statements of China Medical System
have continually been audited by one of the "Big Four"
international accounting firms. Therefore, if there were inflated
profits, Blue Orca would not have been the first to notice the
In addition, to verify the company's profit, Zhitongcaijing APP
reviewed its dividend payout in recent years. In recent years, the
company has maintained a dividend payout ratio of 40%, with a
dividend of RMB 729 million in 2018, accounting for 41% of the
company's current free cash flow. This mainly thanks to the
company's stable profitability. In light of this, if there was a
large range of actual profit fluctuation, the company could not
distribute such high dividends. The Blue Orca's allegation against
China Medical System can also be refuted from this side.
China Medical System secretly funded research expenses for its
chairman's private company and that the chairman then "resold
intellectual property rights" to the company? False.
Taking advantage of information asymmetry to win the trust of
investors has always been a common practice for short selling
agencies, and Blue Orca made the most of it in this allegation.
Blue Orca devoted the biggest portion of its report to "struggle"
with the industrial and commercial information of Kangzhe R&D
and used it as evidence against China Medical System. This is
exactly how they took advantage of information asymmetry.
As can be seen from China Medical System's clarification
announcement, Kangzhe R&D does incur operating expenses, and
thus chose not to disclose relevant information to the public when
submitting operating expenses data to China's State Administration
for Industry and Commerce (SAIC) in accordance with relevant
In addition, Blue Orca also cited a series of cases about companies
such as Helius and Faron, so as to allege the chairman of China
Medical System of using the resources of China Medical System for
his personal gain, rather than participating in drug
The core of Blue Orca's allegation is that "the chairman [was]
seeking personal gain," but if there was no such personal gain,
this charge is meaningless.
In fact, none of the projects mentioned by Blue Orca being
"suspected of reselling" required the company to pay down payments,
the relevant payments for registration, sales milestone fees, or
R&D expenses. Even though the projects, such as the Faron and
Helius, were not finally approved, China Medical System did not
bear any risks and costs.
According to the short selling report, it is clear that Blue Orca
did not understand the practice of Lam Gang, the Chairman of China
Medical System. After all, it is not in line with the "principle of
a rational person" to bear the risks for the benefit of
shareholders. This misunderstanding, however, is because Blue Orca
does not understand what a "a doctor's sense of mission"
In fact, some people, including Chairman Lam Gang, from the
management were former doctors. Therefore, contrary to the
allegations of Blue Orca, it is precisely that Lam Gang understands
doctors and patients with the feelings of medical practitioners and
hopes to introduce highly innovative, professional and clinically
demanding drugs into Chinese market for the benefit of Chinese
patients and families. Therefore, in the early stage of innovative
drug investment, Lam Gang always bore higher risks himself.
Furthermore, among early projects invested by him, NRL-1 (Diazepam
Nasal Spray) has been approved for launch in the United States, and
Helius project is also ready for application to the FDA again for
marketing authorization. Therefore, it cannot be concluded that
investments made by Lam Gang have all ended in failure.
In addition, in the context of the deepening of China's medical
system reform and the increasing support for the development of
innovative drugs, the company's development strategy has expanded
from products that have already launched to the market to
unlaunched innovative products in China. Therefore, the active
arrangement of innovative drugs is pivotal to the rational
transformation and upgrading of pharmaceutical enterprises, which
is in stark contrast to the "misleading development" mentioned in
Blue Orca's report.
In conclusion, the allegation of Blue Orca against China Medical
System was insufficient in both the viewpoint and the proof, so it
could hardly function as a rigorous short selling report, thus not
worthy of investors' reference.
However, the purpose of Blue Orca may not be simply issuing a short
selling report that was not rigorous.
Part 2: A premeditated "short selling operation"
It is worth our attention to consider that agencies issue short
selling reports for their own profits rather than for those of the
In the 41 pages extensive short selling report, Blue Orca had to
mention in the disclaimer that "we will make money if the price of
China Medical System stock declines." This is a common trick of
short selling agencies: issuing short selling reports, triggering
panic sales by investors, and then leaving after quickly making a
large amount of money.
The data presented by the Zhitongcaijing APP clearly showed that
from December last year to January 7 this year, the historical
average short selling ratio of the company remained around 5%, with
a minimum of only 0.17%, and the amount of short selling totaled
only HK$ 22,200. This normal short selling reflects investors'
bullish sentiment towards China Medical System.
However, on January 9, the company's short selling ratio suddenly
rose to 53.62%, with an amount of HK$ 70,929,600. In the following
month, the company's short selling ratio mostly fluctuated between
On February 3, before the report was released, the company's short
selling ratio rose sharply to 38.32%, with amount of HK$
50,866,700. In the next three days, while the ratio decreased, it
still remained over 30%. Therefore, combined with Blue Orca's
report and the short selling performance of the market, we cannot
rule out that this was a "planned" short selling operation.
But for investors, it is also a good time to buy when the stock
price of a company that suffered from short selling fluctuates. If
investors want to make profits after this short selling incident,
they need to have a clear understanding of the intrinsic value of
China Medical System.
Part 3: Investment opportunities: when undervalued companies are
To invest in a mature and innovative pharmaceutical company in the
Hong Kong stock market, there are two core elements of value
judgment: business with stable cash flow and reasonable arrangement
of innovative drugs.
Investors need to start from these two core elements to understand
the foundation of stable valuation of the company, and its
development potential behind the rich pipeline of innovative drugs.
These are also the core logic from which investors analyze the
internal value of China Medical System.
Since IPO, the steady performance of the company has always been a
highlight attracting investors.
According to Zhitongcaijing APP, China Medical System has been
maintaining a high-speed revenue growth since it was listed on the
main board of Hong Kong Stock Exchange in 2010. By the end of 2018,
the company's turnover excluding the effects of two-invoice system
reached RMB 6.135 billion, with CAGR of 28.1% in the past 10 years
and the CAGR of the company's net profit reached 32.9% in the same
In terms of key financial indicators, the return on equity (ROE) of
the company has remained above 20% since 2010; in 2018, the
dividend yield of the company reached 4.9%.
In recent years, with the deepening of national pharmaceutical
reform, the pharmaceutical industry has gradually entered a stage
of comprehensive adjustment. The reason why China Medical System
could maintain steady performance growth throughout the changing
policy context was that the policy has few impacts on the
In the period of "two-invoice system," since "the first invoice can
be directly given to a national exclusive agent of imported drugs
since it can be treated as the original manufacture," China Medical
System is regarded as a standard "two-invoice system enterprise,"
which means it is not subject to two-invoice system basically.
Since 2017, the two-invoice system policy has been implemented in
China, and China Medical System's performance growth tended to be
stable. The company's revenue excluding the effects of two-invoice
system increased by 14% and 10% in 2017 and 2018 respectively, and
by 14% in the first half of 2019.
Moreover, in 2019, the supply side related policy, which "expand
the scope of centralized procurement" with "price reduction", had
minor impact on China Medical System in the short term. It is worth
noting that the majority of nine major products, which account for
more than 90% of the company's total revenue, are exclusive
products, meaning they face no competition from generics. Only
Plendil and Deanxit may be affected. However, currently in domestic
market, none of the domestic generics for Plendil has passed the
consistency evaluation while only one competing generic has passed
for Deanxit. Based on the product selection rules of "there shall
be three or more generic drugs to pass consistency evaluation" in
the third round of centralized procurement, the impact of
centralized procurement on Plendil and Deanxit will be delayed.
This is undoubtedly good news for China Medical System as it is
actively making arrangement of new products.
The ability to avoid risks and stabilize performance growth in the
changing "deepening area" of pharmaceutical reform fully
demonstrates that China Medical System has a strong capability to
judge industry trends and make development plans.
While vigorously developing its existing business, China Medical
System is actively making arrangement of innovative drugs and
generics with sufficient market competitiveness.
As a pharmaceutical company with international development ability,
China Medical System is moving towards another important path to
meet huge unmet medical needs with its excellent drug searching
ability and the integration of international resources to cultivate
its innovative drugs pipelines. Up to now, the pipeline of China
Medical System includes 19 innovative drugs in various fields
including ophthalmology, dermatology, nervous system, anti-tumor,
immune system, digestive system, anti-infection and endocrine
system. Six of the products have been approved for launching
overseas, one is under the FDA's review process, and the other five
products have entered the phase III clinical trial stage. With this
arrangement, China Medical System will be able to constantly launch
innovative products to the market in the short, medium and long
A number of innovative products that either have been launched in
the Europe and the United States or prepared for marketing
application are as follows:
Name / Indication / Overseas Registration / Market Potential
ILUMYA(Tildrakizumab) / Moderate to severe plaque psoriasis /
Approved for marketing in the U.S. / RMB5-6 billion
CEQUA(Cyclosporin A Ophthalmic Solution) / Increasing tear
production in patients with dry eyes / Approved for marketing in
the U.S. / About RMB3 billion
NRL-1(Diazepam Nasal Spray) / Patients of 6 years of age and older
with acute repetitive seizures /
Approved for marketing in the U.S. / Over RMB3 billion
Taclantis(Paclitaxel Injection Concentrate for Suspension) /
Metastatic breast cancer, locally advanced or metastatic non-small
cell lung cancer and metastatic adenocarcinoma of the pancreas /
NDA submitted to the FDA / Over RMB3 billion
According to Zhitongcaijing APP, the main advantages of
Tildrakizumab are to provide psoriasis patients with the most
cost-effective option, a novel monoclonal antibody drug
specifically targeting IL-23, as well as to reduce patients' pain
with less injection times. Its market potential can reach RMB5-6
The main advantages of Cyclosporin A Ophthalmic Solution are: it's
the globally first cyclosporine ophthalmic eye drops, which is
clear and preservative-free, and adopted Nanometer miceller
formulation technology to improve in tissue. Its market potential
can reach about RMB3 billion.
The important advantages of NRL-1 (Diazepam Nasal Spray) is that
it's convenient to use at home as it quickly takes effect for the
treatment of acute and repetitive seizures. Its potential market
potential can reach over RMB3 billion.
The important advantages of Paclitaxel Suspension Injection
Concentrate are: Cremophor and albuimin-free, one-step dilution and
no premedication. Its market potential can reach over RMB3
Combined with the company's academic promotion ability, both
revenue and profits of the company will be greatly increased after
these blockbuster drugs are approved for marketing in China.
In China, there is a huge market demand for imported generics with
proven quality and affordable prices. Therefore, while actively
making arrangement of innovative drugs, China Medical System is
also making arrangement of generics clusters with high market
According to Zhitongcaijing APP, China Medical System's development
strategy for generics is to establish strategic cooperation with
the global leading pharmaceutical companies via the light assets
mode, so as to make arrangement of generic drug clusters with high
In August 2019, China Medical System announced that it signed
in-licensing agreements with Sun Pharma to acquire seven generic
products and one highly competitive complex generic drug. In
September of the same year, the company signed an in-licensing
agreement with Biocon for three generics. If these drugs enter the
Chinese market in the future and participate in centralized
procurement, they will create a huge incremental market for the
As a well-known pharmaceutical company in China, enjoying a
nationwide sales network guarantees the stable valuation of China
Data shows that the number of hospitals covered by direct network
of the company increased from 17,000 in 2014 to 57,000 in the first
half of 2019. The network fully covered all provincial-level and
the majority of prefecture-level districts, and almost covered all
class III & class II hospitals as well as the major therapeutic
departments of class III hospitals in China.
It is worth noting that China Medical System has adopted the
academic promotion with line division mode which is similar to
international pharmaceutical companies. From 2013 to 2018, selling
expense ratio of China Medical System remained below 23%. After
excluding the effects "two-invoice system" in 2018, the selling
expense ratio was only 22.4%, even lower than the standard of
selling expense ratio of international pharmaceutical
These data indicated that China Medical System has strong
capabilities of marketing and product commercialization, which can
certainly provide strong support for its commercialization of
innovative products in the future.
However, it has been undervalued by the market for a long time.
Zhitongcaijing APP observed that as of the close of trading on
February 7, the share price of China Medical System was HK$ 10.2
and PE (TTM) was 10.99. Compared with the company's valuation data
in the past three years, it is easy to see that the present share
price of China Medical System has been far away from the median of
the valuation, and obviously been undervalued. In addition, as
mentioned above, the dividend yield of the company in 2018 reached
as high as 4.9%, which gives another proof that the company has a
high investment value based on its attractive valuation, and its
reliable performance growth.
Just as a Chinese idiom "pure gold fears no fire", the turnover of
China Medical System achieved the stable growth and the key
financial indicators maintained reliable. In addition, the company
also possessed the strong risk resisting capabilities at a time of
pharmaceutical reform in China, and the strong strength and
sustainable development driving force in the development of the
specific business and innovation deployment. With these
capabilities, the company does not fear malicious provocation by
short selling agencies. At present, China Medical System stands at
a status of serious undervaluation, which is a rare target with low
valuation in the pharmaceutical sector of the stock market in Hong
Kong. If investors can seize this opportunity, they will surely
receive rich investment returns as the business performance is
continually growing and the pipelines of innovative drugs are
gradually launching to the market.
Copyright 2020 JCN Newswire . All rights reserved.
China Medical System (GM) (USOTC:CHSYF)
から 10 2020 まで 11 2020
China Medical System (GM) (USOTC:CHSYF)
から 11 2019 まで 11 2020