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Winner Medical: An Undervalued Growth Stock

|Includes: KMB, Winner Medical Group Inc. (WWIN)

Investment Highlights:

  1. The revenue generated from medical dressings exported to Europe, the United States, and Japan with OEM products is growing steadily and has been ranking 1st among all Chinese competitors for nine consecutive years.
  2. Medical materials sold in Chinese market under the brand name "Winner®" are getting more and more recognition for their superior quality, and expects to account for 20pc of the sales revenue in three years.
  3. Four jumbo roll production lines installed at their Huanggang factory, which manufactures pure cotton spunlace nonwoven fabric, are operating at 100pc capacity. The revolutionary advantage of this new fabric has won orders from world renowned companies such as Zara's parent company Inditex, Marlboro, and HengAn.
  4. retail stores have been opened in Beijing, Shanghai, Shenzhen,and Hong Kong. Nearly 400 SKU products made with the new technology are on display in the stores, including cotton tissues, baby diapers, sanitary napkins, and other PurCotton® consumer products.
  5. Strategic cooperation with drugstores, supermarkets, and shopping malls has been formulated and implemented since fiscal year 2012. Cotton tissues, baby diapers, and sanitary napkins produced by Winner Medical are going to be available to customers nationwide soon.

Key Statistics (September 30, 2011):

Symbol Share(ten thousand) Float Price EPS PE Earnings Growth PEG
WWIN 2413 577 3.17 0.56 5.66 22.64% 0.25
Market Cap Sales PS PB CFPS P/CF Current Ratio Quick Ratio
76.52 114.99 0.66 0.64 0.72 4.4 3.01 2.01

1 Company Profile

2 Business Units

2.1 Medical Dressings

2.1.1 Industry

2.1.2 Winner

2.1.3 Capacity

2.2 Non-Woven Spunlace Fabric Made From 100% Cotton

2.3 Consumer Products

3 China's Kimberly-Clark?

3.1 Cotton Tissues

3.2 Cotton Baby Diapers

3.3 Cotton Sanitary Napkins

4 Financial Analysis

4.1 Financial Statements

4.2 Competitor Analysis

4.3 Intrinsic Value

5 Key Risks

5.1 OTCBB Background

5.2 Shareholder Structure

5.3 Management

5.4 Research & Development

5.5 Cotton Price

1 Company Profile

Winner Medical is a leading China-based exporter and retailer of high-quality medical dressings and consumer products made from 100% cotton. For nine consecutive years the company has ranked as the biggest medical dressing and disposal exporter in China, with North America, Europe, and Japan as its major markets according to industry trade association statistics. In addition, the Company distributes under its own "Winner®" and "PurCotton®" brand names in China.

The company has fourteen wholly-owned subsidiaries and four joint ventures. With a vertically integrated supply chain ranging from spinning fabric to finished goods, Its products include those with FDA, CE mark, TUV and other global standard certifications and the Company holds 54 domestic and international patents. Winner Medical has been listed on the NASDAQ since April 6th, 2010.

Figure 1, holding company structure (source: annual report 2010)

2 Business Units

2.1 Medical Dressings

2.1.1 Industry

Medical dressing is used to clean or protect the wound and is traditionally classified into the following categories: natural materials, synthetic materials, medicines, bandages, gauze and other materials. On the one hand, it is part of the broader industry of the medical devices and when compared with MRI and PET/CT, medical dressing and disposal are low value-added. On the other hand, if we divide the textile industry into three segments according to application, for instance clothing textiles, home textiles, and business textiles, medical dressing should be defined as some sort of business textile.

Figure 2, product structure (source: company website)

The future of the industry will be largely determined by the aging population, as well trends in diabetes and obesity. These demographics consume most of the medical dressing inventory. It is forecasted that global population above 65-years-old will increase to 970 million in 2030. Of which 70% will live in developing countries, with 71.5 million in the United States and 124.5 million in Europe.

The medicine journal Lancet predicted last year that the number of adult diabetics was approaching 350 million: with China at 92.4 million and India at 50.8 million. In regards to the obesity rate in European countries, the World Health Organization statistics show that it has tripled sine the 1980s.

Figure 3, high-end market share in 2010 (source: independent market research)

In conclusion, the demand for medical dressing and disposal will experience rapid growth over the next decade in both developed and developing countries, especially the latter.

Asides from Winner Medical, Bastos Viegas from Portugal, Intergaz from the Czech Republic, and Premier Enterprise and Sri Ram Products from India are major players in middle-end wound care market. European companies' strength is quality and logistic cost, production cost is inevitably their weakness. The reverse is usually true for India, with production cost much lower leading to products that are generally price-competitive, but quality is often considered below-par.

China Shenzhen Aumei, Zhejiang Zhende, Jiangsu Jianerkang, Qingdao Hartmann
Asia Premier Enterprise, Sri Ram Products
Europe Bastos Viegas,Intergaz, S.R.O., TZMO S.A.

Table 1, major competitors in middle-end market (source: annual report 2010)

2.1.2 Winner

The European market has been the biggest one for Winner Medical since 2004. Sales tripled from $ 16.95 million in 2004 to 42.278 million in 2010 and the CAGR is 16.45%. North and South America exceeded Japan in 2009, with geographical revenue expanding five times over the six years from 5.37 million to 24.48 million with CARG at 28.77%. As for Japan, the market where the company initially started, sales in 2010 were 22.308 million. The Chinese market has undoubtedly grown fastest over the past six years, with CAGR at 43.17%.



  04Sales/Percentage 05Sales/Percentage 06Sales/Percentage 07Sales/Percentage
North America 5.37 12.13% 7.5 12.85% 7.62 11.93 8.82 12.55%
Europe 16.95 38.28% 22.39 38.37% 25.01 39.16% 30.97 44.07%
Japan 13.43 30.33% 15.12 25.91% 16.65 26.05% 15.18 21.6%
Others 5.94 13.41% 6.41 10.98% 6.81% 10.67% 6.78 9.65%
China 2.59 5.85% 6.94 11.89% 7.78% 12.18% 8.53 12.14%
  08Sales/Percentage 09Sales/Percentage 10Sales/Percentage 11Sales/Percentage
North America 12.403 14.51% 18.824 19.13% 24.48 21.28% 33.643 22.44%
Europe 40.582 47.46% 39.599 40.25% 42.278 36.75% 52.1 34.76%
Japan 16.34 19.11% 17.607 17.9% 18.226 15.84% 21.402 14.28%
Others 5.217 6.1% 5.753 5.85% 7.739 6.73% 7.196 4.8%
China 10.963 12.82% 16.602 16.87% 22.308 19.39% 35.555 23.72%

Table 2, revenue by geography (unit: million dollars)

The Chinese government announced that 850 billion RMB will be spent on reforming the healthcare system in the coming years. In view of the demand triggered by a series of relevant policies, management team is confident CAGR for domestic sales in medical dressings will not drop below 30%.

The times of local hospitals purchasing directly from family workshops and illegally recycling medical disposals is becoming a thing of the past in China. The obsolete and prohibited products in developed countries like operating gowns made from cotton fabric are gradually being replaced by non-weaving cloth products gradually. No doubt Winner Medical will play a vital role in this process through technological advances and enhancement of people's purchasing power and health awareness.

Henan Piao'an is the company's core competitor in the domestic market. Its sales channels and relationship with hospitals are stronger and better than Winner Medical, likely giving Piao'an a headstart, however, the lack of quality control system is their greatest weakness, giving Winner an advantage of its own. Sanitary napkin manufacture, HengAn, for example, cancelled jumbo roll contract with Piao'an and swung to Winner Medical, making the decision solely based on pollution and raw material consumption concerns.

Winner Medical maintains strict and comprehensive quality assurance and quality control system. The Company has already established three quality management systems: ISO9001:2000 quality management system, ISO13485:2003 medical devices quality control system and 21CFR Part 820, Medical Device Quality System Regulation.

The company has migrated away from their previous direct sales model to an agent based model since fiscal year 2011 in order to penetrate the domestic market more effectively. This also helps to reduce the specific risk for a listed company. As of June 30 2011, Winner Medical has signed contracts with more than 80 dealers around the country.

Besides marketing under the brand name "Winner®" in China and other developing countries, the company offers OEM products under private label programs to customers in the United States, Japan and the European Union. This approach enables the company to capitalize on its customers' branding strengths and established market channels.

Dependency analysis: The biggest customer is a Japanese agent called Sakai Shoten whose market share contribution has been declining over the past seven years, with annual market share contribution numbers of 24.5%, 21.6%, 19.15%, 15.66%, 14.78%, 12.16%, and 12% respectively. Another customer contributing over 10% of total sales is Tyco Healthcare in Canada, with market share contribution of 10% in 2011 and 10.09% in 2010.

Figure 4, well-known international customers (source: annual report 2010)

2.1.3 Capacity

If we assume the CAGR of medical dressing demand will be above 30% over the next few years, the next question would be whether the existing production capacity owned by Winner Medical can match it? Management team estimates that all workflow capacity, from the procurement of raw materials to spinning, weaving, bleaching, and making of finished goods, is well-prepared.

Take a look at Hubei Winner Textile, a subsidiary based in Tianmen city. It is the raw materials supply base for medical gauze products. The building area is around 60,000 square meters. All spindles are operating 24 hours a day and 7 days a week, and can produce 6,500 tons of cotton yarns annually. General Manager Ping Luo also confirms empty lot has been reserved for the extra demand, "so we can even handle a flood of orders beyond expectation."

Hubei Winner had 140 million RMB sales in 2007 with 1100 employees. After four years of development, sales revenue increase by 80% to 250 million RMB while the number of employees decreased by a quarter to 820. Luo attaches this achievement to lean manufacturing method. He estimates productivity per person will be improved substantially along with another 300 employees coming up on retirement age in three years.

Figure 5, Hubei Winner Textile

Winner Medical has spent 30 million RMB on ERP system from SAP since 2005. The implementation of IT infrastructure is critical in linking subsidiaries and branches in Shenzhen, Hubei, Beijing ,Shanghai, Guangzhou and Hong Kong to coordinate orders, raw materials preparation, production, quality control, cost control, inventory management, and logistic with seamless integration.

2.2 Non-Woven Spunlace Fabric Made From 100% Cotton

It cost merely $ 1.25 million for the company to acquire 9140 acres lands at Huanggang city in 2005. Price is incredibly low owning to this innovative project is interpreted by local government as a symbol of their willingness to attract investments from coastal areas. Since then, Winner Medical has invested another $31.52 million into facilities and equipment. Four production lines of non-woven spunlace fabric made from 100% cotton are operating at full capacity. The average age of their 400 employees is approximately 30.

Figure 6, Huanggang factory

Xingfu Qian is the general manager of Huanggang company and a veteran with more than two-decade industry experience. From his point of view, the difference between traditional textiles and pure cotton non-woven spunlace fabric is huge. Unlike traditional technology formed by spinning, weaving, bleaching and processing which normally takes a month and a half from receiving orders to delivering goods, this new technology compresses the chain of procedures into one step with a one day turnaround.

The new fabric combines the superior characteristics of both natural cotton and advance nonwoven technology, and has many advantages over woven cotton or synthetic nonwoven fabric such as low lint, no looseness, high absorbency, bacteria-resistance and naturally decomposition, and therefore can be widely used for surgical dressings, bandages, tissues, towels, baby diapers, sanitary napkins, underclothes, and facial masks.

Asides from trial orders from Japanese cosmetics firms and American precision instrument enterprises, customers include world renowned companies like Zara's parent company Inditex, tobacco tycoon Marlboro, and hygiene products manufacture HengAn. For example, jumbo rolls made of the new fabric are purchased by HengAn to produce its Space 7 branded sanitary napkins.

Figure 7, comparison with non-woven chemical fabric (source: Guoyuan Securities)

It is time-consuming to register the patent in more than fifty countries and get approval from each bureaucracy to manufacture and sell the new fabric as well as finished goods. However, the financial performance of this unit has been quite good during the past five years. Annual sales revenues were $0.27 million, 1.359 million, 5.468 million, 10.128 million, and 19.098 million respectively. CAGR is 190.01%.

  2007 2008 2009 2010 2011
revenue 270 1359 5468 10128 19098
percentage of the total 0.38% 1.59% 5.56% 8.8% 12.74%
gross profit / 95 1452 3411 6030
gross profit margin / 6.99% 26.55% 33.68% 31.57%
net income / -1197 198 799 -2489
net income margin / -88.08% 3.62% 7.89% -13.03%
Table 3: financial performance of non-woven spunlace fabric made from 100% cotton (unit: thousand dollars)

2.3 Consumer Products

Chairman Jianquan Li intended to apply the new technology to revolutionize the medical dressing industry, however, doctors and patients were used to fictitious graticule-styled medical products other than lumpish spunlace fabric. Sales team passed negative feedback over to research and development division and helped them set the goal of inventing fictitiousless graticule-styled spunlace fabric.

At the same time, Winner Medical decided to enter the consumer market. Targeting mid to high-end female consumers aged 25-45 who prefer premium products. Besides increasing the rate of capacity utilization at Huanggang factory, the company will be capable of achieving a higher profit margin with jumbo roll and finished products.

Figure 8, consumer products development plan (source: internal publication)

Management team considers it a blue ocean strategy and believes consumer products will bring astonishing growth. In order to build and market the PurCotton branded products in China, they set up a wholly-owned subsidiary, Shenzhen PurCotton Technology. Main distribution channels consist of "PurCotton®" chain stores and a B2C E-commerce website.

The company opened its first retail store in Shenzhen on December 31, 2009. As of September 30, 2011, the Company has 43 stores in major coastal cities. Stores are primarily located in downtown shopping malls ranging in size from 160 to 650 square feet. Visual branding of the stores is quite similar to a mini version of the Japanese retailer MUJI.

Figure 9, "PurCotton®" retail store

Data from their investor relations department: average capital expenditure on a store is $50,000. Rent accounts for 35% of the total early-stage investment, renovation costs account for another 35%, equipment and inventory 25%, and the remaining roughly 5% is attributed to employees' salaries and insurance.

  12-31-09 03-31-10 06-30-10 09-30-10
store number 3 17 17 23
revenue 866
average revenue per store per month 3.1377
percentage of total revenue 0.75%
membership number /
website users /
  12-31-10 03-31-11 06-30-11 09-30-11
store number 29 34 37 41
revenue 939 868 1374 1798
average revenue per store per month 10.7931 8.5098 12.3784 14.6179
percentage of total revenue 2.79% 2.61% 3.31% 4.34%
membership number / 16000 19000 27000
website users / 29000 / /

Table 4, data from "PurCotton®" chain stores (unit: thousand dollars)

"PurCotton®" stores are not direct competitors with convenience stores, super markets, shopping malls or department stores. PurCotton branded products such as cotton tissue, baby diapers, sanitary napkins, facial masks, and undergarments are all under negotiation to be placed on these other retailers' shelves.

Chairman Li outsourced the E-commerce website project to a third party company in 2010. The total project funding was 10 million RMB. Data collected at the end of June 2011 showed daily sales from the self-built website at 15,000 RMB.

Figure 10, home page of the B2C website

3 China's Kimberly-Clark?

Winner Medical could easily be considered a value investment target if the company focuses on the medical dressing industry. However, when taking the jumbo roll made new fabric into consideration, most are inclined to define this company as a growth stock. Along with PurCotton consumer products that have shown promising business prospects, it brings to mind the legendary history of Kimberly-Clark and Unicharm. For this reason, I attach a "ten bagger candidate" label to it.

Incorporated in Delaware in 1928, Kimberly-Clark is the second largest consumer products company in the United States. It has approximately 57,000 employees throughout the world and 36 production facilities in 36 countries. Four business units are as followed: personal care, family care, professional products, medical & health care, in which personal care can be divided further into baby and child care, feminine care, and adult care.

Kimberly-Clark is keen on innovation: Scott branded toilet paper appeared on the market in 1890, the first piece of tissue paper in 1907, Kotex branded sanity napkin in 1920, Kleenex facial tissue in 1924, Wypall utility wipes in 1975, Huggies disposable diapers in 1978, and Depend adult diapers were invented in 1980.

Maybe it is crazy to dub Winner Medical as China's Kimberly-Clark, but enthusiasm for technological progress and strict quality control appear to be shared attributes.Realistically, Winner Medical is more alike Johnson & Johnson which was founded as a medical dressing company with the knockout product Band-Aid.

According to Japanese giant Unicharm, the company was established on February 20 1961. It is an expert in non-woven technology and pressure formed water-absorbent material. The brands portfolio ranges from Baby & Mom diapers to Sofy sanity napkins, Silcot cotton puff, and incontinence products.

PurCotton consumer products can be divided into four sections: baby and child care, feminine care, family care, and medical care products under the following brand names, Nice Baby, Nice Queen, Nice Princess, and Winner respectively.

Figure 11, category of consumer products (source: company website)

Let us compare the unit cost and piece price of PurCotton products with those made by Winner's major competitors.

3.1 Cotton Tissues

Brand Company Raw Material Specification Piece Price
PurCotton Winner Medical 100% Cotton 100 pieces/20cm*10cm 0.16 RMB
Protégé Kimberly-Clark 100% virgin wood pulp 75 pieces/20cm*19.21cm 0.129 RMB
Tempo P&G 100% virgin wood pulp 90 pieces/20cm*21cm 0.097 RMB
Virjoy APP 100% virgin wood pulp 150 pieces/20.6cm*19.5cm 0.064 RMB
Feel Vinda Paper wood pulp 120 pieces/19cm*20.7cm 0.046 RMB
Pino Hengan virgin wood pulp 120 pieces/19cm*21cm 0.042 RMB
Face C&S wood pulp 150 pieces/20cm*15.5cm 0.037 RMB

Table 5, high-end tissue products in China (source: the lowest sales price among Lotus Supermarket, Carrefour, and E-MART)

PurCotton branded products are no doubt the highest priced. Piece price is 24.03% higher than Protégé by Kimberly-Clark which is the second most expensive product and 64.95% higher than Tempo by Procter & Gamble which has a long history standing in Germany. Of course this may not be a fair comparison because the raw material for PurCotton is Texas cotton while the others just use wood pulp.

3.2 Cotton Baby Diapers

Brand Company Raw material Specification Total Price/Piece Price
PurCotton Winner Medical 100% cotton 10 pieces 106/10.6 RMB
Merries Kao non-woven fabric 54 pieces 188/3.481 RMB
GOO.N Baby GOO.N non-woven fabric 38 pieces 118/3.105 RMB
Pampers P&G non-woven fabric 46 pieces 131/2.848 RMB
Huggies Kimberly-Clark non-woven fabric 46 pieces 119/2.587 RMB
Fitti DSG non-woven fabric 50 pieces 106/2.12 RMB
MamyPoko Unicharm non-woven fabric 44 pieces 71.9/1.634 RMB
Sealer SCA non-woven fabric 44 pieces 61.5/1.398 RMB
Anerle Hengan non-woven fabric 46 pieces 63/1.37 RMB

Table 6, high-end baby diaper products in China (Source: the lowest sales price among Lotus Supermarket, Carrefour, and E-MART)

PurCotton branded baby diapers are made from 100% cotton and its piece price is undoubtedly the highest, at least tripled that of anyone else. Merries by Kao and GOO.N by Baby GOO.N rank 2nd and 3rd unexpectedly, Pampers by P&G and Huggies by Kimberly-Clark are very popular nationwide but their pricing is comparatively conservative.

3.3 Cotton Sanitary Napkins

Brand Company Raw Material Specification Total Price/ Piece Price
Nice Queen Winner Medical non-woven spunlace fabric made from 100% cotton 8 pieces/29cm 12.9/1.613 RMB
ABC ABC KMS non-woven chemical fabric 8 pieces/24cm 10.5/1.314 RMB
Whisper P&G non-woven chemical fabric 16 pieces/24cm 16.9/1.056 RMB
Sofy Unicharm non-woven chemical fabric 16 pieces/23cm 16.2/1.013 RMB
Kotex Kimberly-Clark non-woven chemical fabric 18 pieces/24cm 15.9/0.883 RMB
Space 7 Hengan non-woven spunlace fabric made from 100% cotton 10 pieces/24.5cm 8.5/0.85 RMB
Laurier Kao non-woven chemical fabric 20 pieces/22.5cm 16.1/0.805 RMB
Stayfree Johnson&Johnson non-woven chemical fabric 20 pieces /24cm 15.9/0.795 RMB
Elis Baby GOO.N non-woven chemical fabric 18 pieces/24cm 13.5/0.75 RMB

Table 7, high-end sanitary napkin products in China (Source: the lowest sales price among Lotus Supermarket, Carrefour, and E-MART)

The piece price of Nice Queen sanitary napkins is 1.613 RMB and 22.75% higher than that of ABC. Market research also shows that sanitary napkin products has 90% penetration rate in developed countries while in China the ratio is just under 70%. Trade up will play a vital role.

4 Financial Analysis

4.1 Financial Statements



  20 2005 2006 2007 2008 2009 2010 2011
revenue 44.28 58.36 63.87 70.28 85.51 98.39 115.03 149.9
gross profit 11.47 16.3 17.54 17.41 20.31 27.94 34.56 40.85
gross margin 25.9% 27.93% 27.46% 24.77% 23.75% 28.4% 30.04% 27.25%
operating profit 5.14 7.76 6.49 5.82 6.02 11.42 14.46 13.01
operating margin 11.61% 13.3% 10.16% 8.28% 7.04% 11.61% 12.33% 8.68%
net income 4.39 7.89 5.83 5.62 5.07 9.13 13.09 11.54
net margin 9.91% 13.52% 9.13% 8% 5.93% 9.28% 11.38% 7.7%

Table 8, income statement data (unit: one million U.S. dollars)

From fiscal year 2004 to 2011, Winner Medical achieved a compound average growth rate of 17.25% despite a global economic crisis during the period. Its CARG of gross profit, operating profit and net income are 17.7%, 14.19%, and 14.81% respectively. If we process the data from fiscal year 2007 to 2011, its CARG of gross profit, operating profit and net income for 5 consecutive years would be 20.85%, 23.77%, 22.28%, and 19.71% respectively. This enhancement is partly due to the company's strategy of allocating more resources to larger customers.

Winner Medical is an export-oriented enterprise which means its costs are calculated in Renminbi while its revenues are in U.S. dollars. Over the past few years, the exchange rate of these two currencies changed enormously from 8.3 to 6.3 applying many pressures on the company's profit margin. Considering the circumstances, the CARG of both operating profit and net income are quite impressive.

Net income margin of the company declined from 11.38% in 2010 to 7.7% in 2011. However, with the consumer products contributing more and more revenues in the future, we believe it is just a matter of time before the company hits a mew profit margin high.

  2004 2005 2006 2007 2008 2009 2010
year-on-year growth in revenue 31.8% 9.44% 10.04% 21.67% 15.06% 16.91% 30.31%
year-on-year growth in gross profit 42.11% -16.37% -0.74% 16.66% 37.57% 23.69% 18.2%
year-on-year growth in net income 79.73% -26.11% -3.6% -9.79% 80.08% 43.37% -11.84%

Table 9, trend analysis of income statement dada

Data of fiscal year 2009 was amazing for the year-over-year growth rate of net income doubled than that of gross profit and the year-over-year growth rate of gross profit doubled than that of revenue. Factors include cost control, equipment upgrades, lean production, lower logistics expenses, and export tax rebates.

  2006 2007 2008 2009 2010
group employees 5,400 5120 4645 4459 4491
revenue per capita $11,827.78 $13,726.56 $18,409.04 $22,065.49 $25,613.45
net income per capita $1,079.63 $1,097.66 $1,091.5 $2,047.54 $2,914.72

Table 10, per capita data

The number of group employees continued to decrease between fiscal year 2006 and 2009. As for the number increased in 2010, it is because its PurCotton business recruited some new staffs. In fiscal year 2010, revenue per capita was $25,613.45, 116.55% percent higher than four years ago. Net income per capita in 2010 was $2,914.72, 169.97% higher than that in 2006.

There is a huge gap, however, when comparing Winner Medical's per capita data to international and local big players. Kimberly-Clark had 57,000 employees in 2010, and revenue and net income were $19.75 billion and 1.843 billion respectively. Its revenue per capita was $346,500, 13.53 times than Winner, and net income per capita was $32,333, 11.09 times than Winner.

According to HengAn, its number of employees was approximately 10,000 in 2010, and revenue and net income were $1.728 billion and $314 million respectively. Its revenue per capita was $172,800, 6.75 times than Winner, and net income per capita was $32,300, 11.08 times than Winner.

With the company's shifting from direct sales model to a dealer based model aimed at penetrating domestic medical dressings market, as well as improving the degree of automation, we expect both revenue and net income per capita will to climb very fast.

  2005 2006 2007 2008 2009 2010 2011
ROA 14.55% 8.68% 6.6% 4.97% 9.04% 11% 7.7%
ROE 18.13% 11.12% 9.21% 6.95% 11.1% 12.36% 9.18
Table 11, profitability data

The company's return on assets (ROA) and return on equity (ROE) in 2005 were 14.55% and 18.13%, respectively. But the two indicators declined to 4.97% and 6.95% during the following three years. There are three reasons: 1, after raising capital in the stock market it spent more than 30 million RMB on ERP system by SAP; 2, it accumulatively invested 200 million RMB in Huanggang factory; 3, non-woven spunlace fabric products were initially not accepted by some customers successfully.

However, ROA and ROE have reversed ever since 2009 albeit with global economy crisis, in 2010 two they were 11% and 12.36%, respectively. Along with expected revenue and net income increase, and taking the enhancement of productivity and profitability at Huanggang factory into consideration, we expect the indicators to rise above 20%.

  2005 2006 2007 2008 2009 2010 2011
cash and equivalents 2.65 4.32 6.38 6.59 9.62 16.6 21.95
inventory 10.48 11.33 11.48 15.84 14.93 15.95 25.41
inventory turnover 4.38 4.25 4.64 4.69 4.52 5.06 4.72
accounts receivable 8.37 7.99 11.68 13.86 13.15 15.67 20.98
account receivable age 42.59 44.44 48.12 49.47 44.97 44.23 44.1
retain earnings 14.1 19.18 24.12 28.79 36.8 48.73 58.98
shareholders equity 43.51 2.41 61.01 72.91 82.22 105.9 125.68
Table 12, asset data (unit: U.S. dollars 1 million/day)

The CARG of cash and equivalents over the past six years was 42.24%, much higher than that of sales revenues during the same period. According to the inventory structure, raw materials, semi-finished goods, and finished goods accounted for 42.71%, 27.89%, and 29.4% in 2010. In 2011, three numbers were 42.71%, 27.89%, and 29.4% in 2011, respectively.

The CARG of account receivable was 16.55% during the time period, up from $8.37 million in 2005 to 20.98 million in 2011. Although slightly lower than that of sales revenue, it still shows that the company's credit risk is under control. Age of account receivable was stable around 44 days over the past six years. According to the financial reports, Winner Medical signs a $2 million insurance contract with China Export & Credit Insurance Corporation every year.

  2005 2006 2007 2008 2009 2010 2011
liability 18.7 14.74 24.11 29.01 18.72 13.08 24.24
liability/equity ratio 0.43 0.28 0.39 0.4 0.23 0.12 0.19
liability/asset ratio 0.34 0.22 0.28 0.28 0.19 0.11 0.16
long-term liability 0 0 0 0 0 0 0
Table 13, liability data (unit: U.S. dollars 1 million)

During the past six years, the liability to asset ratio continued to fall from 0.34 to 0.16. And it is easy to see that the company's long-term liability has been zero for the last 6 consecutively years. Data shows that Winner is far from in a stressed situation.

4.2 Cross Sectional Analysis

I have discussed Winner Medical with several institutional investors as well as personal investors and it is quite hard to find a consensus. Some of them consider Winner a traditional textile company and strongly suggest avoiding buying shares, others think it has evolved from medical dressings to high-end consumables so it is reasonable to give the company a much higher valuation, and the rest get starry-eyed notions for they see it as a new material or e-commerce company.

Putting aside the varying views, I find investors can be grouped into 3 major categories based on how they define Winner Medical as an OEM (Original Equipment Manufacturing), ODM (Original Design Manufacture), or OBM (Original Brand Manufacture).

Numbers talk. As a percentage of total revenue, revenue generated in overseas market from fiscal year 2005 to 2011 was 88.11%, 87.82%, 87.86%, 89.04%, 83.13%, 80.16%, and 79.6%, respectively, which implies that revenue from Chinese market has been growing much faster than the former in the past 7 years. But from this perspective, Winner will continue to be an OEM or ODM until its revenue from self-branded products that sold in China and other developing countries reaches 50%.

According to those inclined to define the company as an OBM, their reason is that both medical dressings and PurCotton products sold in China have increased dramatically since 2008 and the management team declared at the end of 2010 its revenue from export will decrease to 50% in 5 years. If this strategy could be implemented successfully, the reason for attaching an OBM label on Winner in advance is understandable.

I don't think such debate touches the true core of company analysis. Why investors are very reluctant to give OEMs a price/earnings ratio of more than 5 while at the same time vying with each other in pushing OBMs' valuation to 30 and even higher? In short, the crucial point is whether the high positive profit margin and PEG (the ratio of market price to expected growth in earnings per share) could be optimized or maintained in ugly economic conditions.

It showed in financial reports that the gross margin of Winner Medical's OEM products was approximately 27%, while that of self-branded medical dressings was approximately 30%, and that of PurCotton branded consumer goods was higher than 60%. With the consumer goods contributing higher percentage of the annual sales which is also a high profit margin product, I am optimistic about witnessing the company's profitability take off in the future.

Let us compare Winner Medical with Weiqiao Textile ( and find out if the former is also a textile company.

Weiqiao is a Hong Kong-listed company and the largest cotton textile manufacturer in the world, engaged in the production, sales and distribution of cotton yarn, grey fabric and denim. It is one of the top 500 enterprises in China and one of the top 26 super-large enterprises in Shandong Province. Total revenue was 18 billion RMB in 2010, gross margin ranged from 8% to 17% over the past 5 years, operating margin ranged from 4% to 13%, and ROE ranged from 4%-14%.

  2006 2007 2008 2009 2010
gross margin 16.8% 14.3% 8.7% 8.7% 16.1%
operating margin 11.64% 12.23% 4.38% 8.37% 12.62%
ROE 14.01% 13.97% 4.46% 6.34% 10.55%
Table 14, profitability data of Weiqiao Textile (source: annual reports)

Some investors may argue that if the capital market is not willing to give a blue chip stock like Weiqiao a P/E ratio of higher than 5 then it must be insane to value Winner aggressively. However, my thoughts regarding this issue are as follows, cotton textile is only the first steps in Winner's workflow which can be outsourced in the future. Besides this, non-woven spunlace fabric made from 100% cotton and PurCotton branded consumables will continue to upgrade the company's profitability ratio.

I would compare Winner Medical with Luolai Home Textile (002293.SZ) rather than Weiqiao Textile. Take a look at the latter's profitability data.

  2006 2007 2008 2009 2010
gross margin 25.63% 34.81% 37.06% 39.1% 37.8%
operating margin 12.76% 22.64% 24.22% 27.17% 24.08%
ROE 38.56% 37% 36.93% 10.88% 14.51%
Table 15, profitability data of Luolai Home Textile (source: annual reports)

Luolai is a well-known home textile supplier in China, providing a series of bed linen collections to middle and high ended consumers. Its sales network for the period included over 1,000 stores and total revenue in 2010 was 2 billion RMB. During the past 5 years, the gross margin ranged from 25% to 39%, operating margin ranged from 12% to 28%, and ROE from 10% to 39%. Investors' confidence in this company reflected in both its price/earnings ratio and market capitalization/total revenue ratio, 60 and 6, respectively. Capital market defines it as a growth stock although the company's business roots in the textile industry are deep.

Winner Medical's total revenue in 2010 is approximately the same as that of Luolai in 2007. I personally expect Winner to grow rapidly in the few years and when the market understands the company's fundamentals have been experiencing profound and positive change, shares will definitely roar one day.

Let us see how capital markets value those typical home and personal care companies.

  revenue gross margin operating margin net margin ROA ROE
2010 Kimberly-Clark 19750 33.27% 13.86% 9.33% 9.43% 32.55%
2010 Unicharm 3837 45.91% 12.63% 6.86% 8% 13.9%
2010 HengAn 1728 44.26% 22.33% 18.51% 13.13% 23.22%

Table 16, income data (unit: U.S. dollars one million)

Kimberly-Clark is a company listed in New York Stock Exchange, its P/E and P/S as of September 30, 2010 was 16 and 1.3, respectively. Unicharm is a Tokyo-listed company, its P/E and P/S were 20 and 2, respectively. HengAn is a China-based company listed in Hong Kong, its P/E and P/S was 20 and 2 respectively. According to Winner Medical, the two numbers were 5.66 and 0.66, respectively.

4.3 Instrinsic Value

The above is a summarized version of the research report on Winner Medical . If you can read Chinese and are interested in the completed version, don't hesitate to write an email. The address is

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.