There are a little over 1.3 billion people living in China today. To put this in its proper perspective, there are only 6.7 billion people in the world today. China represents a full 20% of the world's population, so one in every five people on the planet is a resident of China.
Moreover, the strong pressure within China to show the world it is an economic force is obvious with the grandiosity that is the Beijing Olympics. This new mindset, coupled with a new health care reform plan, has provided a unique opportunity for companies to obtain a presence within this new health care system. The opportunity has always been there, yet it has been always difficult to pinpoint the right company to obtain a government backing. Understanding the Chinese system is paramount point for western corporations seeking to obtain a preeminent and worthwhile position to generate above average return on capital investments.
This is where Zoll Medical Corp. (ZOLL) comes in.
The corporation has already obtained government backing and orders for many products from major hospitals in China. More important, the health care system is developing a synergy with Zoll's product line.
Taking a step back: Focusing on Health Care Structure
Now that China has moved into a more capitalistic, entrepreneurial era, hospitals have been told that they have to finance some of their own costs. This is not an easy process for hospitals or for patients. Patients are now being asked to pay for some of their care. There is currently no system of private health insurance, although many firms are looking to start such programs. The alarming thing in China is the almost total absence of primary care. Even in cities, there are no independent doctors' offices or neighborhood clinics, so people have to go to the hospital for every health care need. Since there is little in the way of appointment systems, crowding and confusion occur. An enormous amount of resolve and money would be needed to correct this problem.
The new health care reform scheme features basic concepts including adhering to the orientation of serving the people, ensuring the "non-profit" nature of public medical institutions, cutting hospitals' involvement in drug sales, increasing governmental responsibility and input, and establishing a basic medicare network for the whole population.
The spread is higher
Large cities such as Beijing are well served with both general and specialist hospitals. Specialist hospitals, which are equivalent to tertiary care referral centers in the West, have excellent equipment and technology: they routinely perform cardiac surgery, angioplasty, and transplant surgery. In many rural areas, there is a structured system of local and county hospitals with increasing levels of expertise as you go up through the system. However, there are areas of extreme poverty where the level of care leaves much to be desired. In the provinces furthest from Beijing, hospitals have little in the way of modern equipment, or even modern plumbing.
Zoll designs, manufactures, markets, and sells non-invasive resuscitation devices and related software solutions in the United States and internationally.
The company announced today that the ZOLL M Series® defibrillator has been installed in a number of high profile EMS centers and hospitals in the People's Republic of China. Given the health care structure, the lack of direct access from patients to a full-service medical facility allows Zoll's products to shine and become a primary brand. Moreover, Zoll is the premier provider during the Beijing Olympics; in terms of strategy and execution the company has situated itself well with the government to become an integral aspect in the country's desire to reform and expand health care.
Already, a number of hospitals and emergency medical service centers in China have adopted its non-invasive cardiac support pump.
The Chelmsford, Mass.-based medical device company reported that its AutoPulse cardiac support pump was approved by China's State Food and Drug Administration late last year. Since then the Beijing EMS Center, the Shenyang EMS Center, the Xinjiang EMS Center, the Shanghai Zhongshan Hospital and the Guangzhou Nanfang Hospital have installed the device.
Perception is Everything
While many companies are said to be expanding into Asia, how many of them have executed? How many of them have the trust and backing of the communistic regime? How many of them have premier hospitals adopting them, thus establishing themselves as a recognized brand?
The answer is that there are many who expand into China in hope of obtaining a "Chinese premium" in valuations, but few have established a brand name and established government backing of their product lines. First movers into this territory usually obtains the higher premium and edge in competition. We see this in Yum Brands (YUM) [owners of KFC, Pizza Hut and Taco Bell], which moved years ahead of its competition and is now one of the premier and better establishments of Western fast food in Asia. This same effect from Zoll's unique early movement and rapid adoption at the time of the Beijing Olympics not only establishes the company's viability but also its brand, which is the most important asset to any company. Listed as an intangible on the balance sheets, brand is really what separates the high growth from the medium profitable company.
Other divisions of ZOLL are equally strong. I do not want to overly focus on one or two products and lose sight of the overall picture. While the Chinese market is certainly compelling, we must also focus on whether or not the entire management team is competent and whether the firm, overall, is capable of sustaining higher income.
The company, to date, has succeeded with strong revenues and earnings in its recent quarter report. While guidance was on the low end, that should be lauded as a smart decision by management (rather than promising high expectations and failing to perform later). While the overall investment community may fail to realize the importance of this, some of the major catalysts for equities are 1) overdelivering, 2) analyst initiations, and 3) increasing volume from market cap expansion.
In Zoll we have the ingredients for all three factors to influence the stock as the equity grows and matures (meaning appreciating in price over time). First, it makes perfect sense for a leader to remain duly conservative given the current global economic backdrop. This tells me he is honest with himself and the firm. I view honesty and integrity to be major factors in assessing leaders. And as a CEO, you are the face of your firm. As far as I am concerned, the management team at Zoll should be commended for making the right decision for the firm in the long run rather than satisfying the models and desires for profit by the shareholders.
When investing, remember, we are trading symbols and electronic letters that represent the underlying collateral that is the business under review. It pays no value to the prospects of these electronic symbols if the consistency of the collateral is in question. This is why I value consistency of earnings as superior to rapid short term growth that comes at the expense of many wise decisions. Capital flows and cost management by the firm are the most important views in my fundamental analysis. There are others, but I rank these two factors very high.
Secondly, the firm is not well covered by any major institutional player. The only one that comes to mind is RBC, which covers ZOLL. But even there, the firm's analysis is often short, and incomplete in my opinion. Moreover, many fail to consistently update the firm and only release reports during earnings season, which is a must by default.
Lastly, in terms of the pricing theory of equities, the company is expanding and establishing a new level with increasing volume. This tells me there are prospects of firms picking this up more. I use a more complex financial theory to view markets, but in a general sense, we can say that the price movement from $10-$35 is being established, with a strong risk/reward ratio in being one of the best performing stock in terms of price performance in its group.
Establishing a strong acceptance from China to be used in its premier hospitals during the Beijing Olympics not only creates a premier brand for Zoll, but also a premier brand in the eyes of Asian regulators who seek to expand their health care program. Moreover, conservative and competent management decisions will bode well for Zoll as a stock, and create the necessary catalyst and perceptions to let Zoll become a performing stock in its group.
Stock position: Long.