China Medical on Road to Recovery

| About: China Medical (CMEDQ)

If you took away the stock symbol, I'd think China Medical (CMED) were a gold stock or agriculture crop. The chart is fantastic and the relative strength impressive. It doesn't make huge week to week moves so it does not show up on my weekly "big movers" list, but I've followed this name since it began trading in the US, and after an initial huge "China medical stock" euphoria, it went and did nothing at times for quarters on end (most of 2006 and half of 2007) - but now it is in the middle of a huge run.

I don't want to chase this name, and earnings are out later this week so we'll see how they do. My main concern has been valuation, as the stock is now trading at nearly 30x next year's estimates, but the proof is in the pudding - people want into this name. wrote a nice piece on China Medical (CMED) back in November. It does have nice revenue mix, a bit similar to Intuitive Surgical (on a much smaller scale) - sell the hardware with 1x bonus, but then enjoy aftermarket benefits from selling consumables needed to continue to operate said hardware. I like that.

  • As China emerges into a modern economy, demand for services that most Westerners would consider basic is on the rise. China Medical (CMED) is hard at work filling the healthcare needs from both the treatment side as well as through its diagnostic products. Last year the company received 60% of its revenues from its High Intensity Focused Ultrasound [HIFU] line whose primary function is treating tumors. The ultrasound waves are focused directly on the offending tissue and essentially breaks down the tumor.
  • While HIFU has been the primary bread winner the past few years, a new acquisition in March paves the way for the company to expand its diagnostic line of products. The system that was purchased is called the Fluorescent In Situ Hybridization or [FISH]. The acquisition is part of the company’s strategy to transform itself into an advanced in-vitro diagnostic [IVD] business. The specialized technology allows physicians to spot prenatal disorders as well as cancer occurrences in adults.
  • While the main product line sold to physicians is capital intensive and sales of this magnitude can take time to complete, CMED enjoys a predictable revenue flow from the reagents or consumable inputs needed to run many of its diagnostic tests. This reagent business helps smooth out the peaks and valleys in between the less predictable sales of large equipment. As the company is successful in placing more and more diagnostic products, its base of consumable reagents will create a stronger recurring revenue source.
  • Earlier this month, CMED issued a press release stating that the Korean version of the FDA had approved the HIFU system for treatment of liver cancer, pancreatic cancer and uterine fibroids. This is a positive first step towards the broader global footprint the company is aiming for. Expanding into Korea, Japan and eventually Europe and the US will cause investors to view the stock as a better global expansion play instead of pushing it higher or lower in sync with the China market. The company has partnered with France’s EDAP to sell the HIFU system in Europe and Russia pending approvals.
Disclosure: No position

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Tagged: , Medical Instruments & Supplies, Hong Kong
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