Eye on China Medical Technologies

China Medical Technologies (CMED) is one of the small cap Chinese stocks I’ve been watching recently. Before I talk about CMED’s product line and future growth prospects, check out MSN’s company report on the stock.

China Medical Technologies, Inc. Company Report:

China Medical Technologies, Inc. (China Medical) is a medical device company that develops, manufactures and markets products using high-intensity focused ultrasound [HIFU] for the treatment of solid cancers and benign tumors in China. As of March 31, 2006, the Company had two products. The Company’s main product, the HIFU therapy system, is an ultrasound-guided acoustic ablation system that is used for the non-invasive treatment of solid tumors. Its second product, the enhanced chemiluminescence [ECLIA] system, is an enhanced chemiluminescence immunoassay in-vitro diagnostics [IVD] system that can be used to diagnose and analyze a variety of diseases and conditions, including various thyroid disorders, diabetes, hepatitis disorders related to reproduction and growth, various types of tumors, as well as to assess the effect of digoxin, a drug for the treatment of heart failure. In March 2007, the Company completed the acquisition of a fluorescent in situ hybridization [FISH] business. (Source: CMED Company Report)

CMED’s Product Line

China Medical Technologies, Inc. manufactures two different products: the high intensity focused ultrasound [HIFU] tumor therapy system and enhanced chemiluminescence immunoassay system.

High Intensity Focused Ultrasound Tumor Therapy System Details

HIFU cancerous tumor therapy is used to treat cancer tumors by heating the tissue area to around 70 degrees Celsius and above. The intense heat transmission kills the cancer cells instantly. No anesthesia is required, and the procession causes little side effects or serious complications. Over 40,000 trails have been completed, and HIFU stands as one of the most affective non-evasive cancer eliminating techniques around.

HIFU tumor therapy revenue in 3Q FY 2006 increased 38.2% from the same quarter in 2005. CMED also increased the average selling price of the HIFU tumor therapy system by 6%, which lead to better margins through the year.

Enhanced Chemiluminescence Immunoassay [ECLIA] System Details

CMED’s second product is a bit more complicated. First off, Chemiluminescence is the process of transforming chemical energy into light energy. An immunoassay is a biochemical test that measures level of substance in a liquid using antibody-antigen reactions as an indicator. So when put together, “Its principle is to take the luminescent substance to release the light to magnify the signal and directly determine the immunobinding in vitro with its luminous intensity, (Source: CMED Products Description).” Thus, ECLIA can detect specific substances in the blood stream like drugs, proteins, etc.

ECLIA sales grew 64.4% in 3Q FY 2006 from the same period in 2005. ECLIA systems are distributed as reagent kits; kits that detect Down Syndrome and liver fibrosis hit the markets last month.

Acquisition of FISH business

China Medical recently acquired a Fluorescent in situ Hybridization business for $136 million to further diversify their revenue streams. I found a good article on how CMED can successfully integrate the FISH business into their existing business model.

China Medical Technologies Key Statistics

CMED’s strength lies in its robust 51% operating margin. Other key statistics of note include:

36% 3-Year Return on Equity Average - the company made some strong equity gains over the past 3 years.

10.3 Current Ratio - CMED’s debt is well under control.

46% YoY Quarterly Revenue Growth - large gains in HIFU sales has boosted revenue growth.

125% Retained Earnings growth in 3Q 2007 from 3Q 2006 - zero short term debt requirements allow CMED to pocket a good chunk of their earnings.

Unexpected Resignation of COO Minshi Shen

Corporate resignations are a strong sign of company disarray, especially when business is becoming very profitable. COO Minshi Shen resigned from position as chief operating offer in January 2007 to start his own medical device distribution and supply business. In fact, he plans to utilize CMED’s HIFU tumor therapy and ECLIA systems as well. This could spell bad news for China Medical since any COO would be very familiar with the company’s leading technologies. The last thing CMED needs is another direct competitor during their early growth stages.

Future Outlook for CMED

China Medical Technologies is a great play on the China’s growing medical device industry. CMED already has two strong products in their pipeline, and the FISH acquisition will only improve the matters. Management thinks the FISH business could become the #1 revenue producer in less than two years. Shares of CMED appear fairly valued, and if you’re long CMED, consider buying some shares. My only concern is the COO resignation and his goal to directly compete with CMED using the same technologies. Fortunately for China Medical, they have a stable customer base, and own the FISH business, which the former COO will have trouble duplicating.

CMED 1-yr chart

Disclosure: I don’t own any shares of CMED

Comments

[The YellowRose StreetBeat]

The COO resignation is a concern. Also... why did GE eliminate its stake in CMED? This is also a concern. I am watching this company closely. However, I also do not own shares at this time.