Big Prospects for China's Medical-Device Makers

In today's Wall Street Journal Asia Edition, Nicholas Zamiska describes a rosy outlook for China's medical device-makers in HEARD IN ASIA: Beijing Policy Shift May Boost Local Medical-Device Companies.

China's medical-device makers continue to be dominated in their home market by giants like General Electric's GE Healthcare and Philips Electronics' Philips Medical Systems, where imports are said to account for 85%-90% of a market valued at an estimated $2.7 billion this year. However, China's smaller and less technologically advanced device-makers are poised to capitalize on their size and technology if all goes well with China's latest five-year plan in which the government will invest 21.7 billion yuan ($2.72b) in health care -- 6.8 billion yuan ($853m) of which will be for medical equipment. It's expected smaller hospitals will receive a sizable chunk as Beijing hopes to improve healthcare in more rural areas. These smaller hospitals in turn are expected to fuel demand for low-cost medical devices, essentially providing local device makers with a huge advantage.

Comment: As the article points out, China Medical Technologies (CMED) -- which is listed on the Nasdaq -- is one firm ready to exploit the new investment as it is targeting approximately 17,000 second- and third-tier hospitals among the nations 18,000 hospitals. China Medical is still very small however, with two product lines and a net profit of 199 million yuan ($25m) on sales of 371.8 million yuan ($47m) for the year ended March 31st. General Electric (GE) reportedly cut its stake in CMED to under 3% this year after holding as much as 15%, which has kept downward pressure on its share price. The WSJ article says a Credit Suisse analyst has a $31.70 12-month price target on CMED and a Goldman Sachs analyst has a $28.50 target with a "buy" rating. Also, the article mentions Shenzhen Mindray Bio-Medical Electronics, which isn't publicly traded but according to a Hong Kong newspaper, intends to apply for a Nasdaq listing. This news of government investment should not negatively impact GE (GE) and Philips (PHG) business in China, at least not in the near-term with government investment seemingly doing more to increase interest in medical technology and likewise creating opportunities via those hospitals ready to upgrade equipment.