Venus Medtech-B (02500) after trading suspension: Facing internal control risks, solidifying long-term intrinsic value growth foundation.

On February 25th, after a 62-day trading suspension, VENUS MEDTECH-B (02500) issued three announcements in a row, disclosing the results of its handling of the former management's unauthorized loans and company disclosure issues, as well as specific measures to improve the company's internal control system. It was learned that on November 23 of last year, Qiming Medical was suspended due to unauthorized borrowing of funds by the management and related disclosure issues. In the following three months, in response to internal control issues, Qiming Medical promptly established a special committee, conducted a special review, initiated forensic investigations, strengthened internal compliance, and actively cooperated with the Hong Kong Stock Exchange to promote the resumption of trading of the company. The three consecutive announcements issued by Qiming Medical this time aimed to provide detailed disclosure to the market about the details of the events, announce the latest internal control measures, eliminate information asymmetry with investors, and enhance market confidence. However, this move recently put the company in the spotlight of public opinion. Internal control issues: existing, not evading, actively resolving Internal control, regulation, risk assessment, are topics that listed companies cannot avoid. Stock price declines and trading suspensions due to corporate governance issues are not uncommon in the pharmaceutical and medical device industry. However, in the current unclear market environment, overall market sentiment seems to emphasize the internal control risks of companies. Through the content of the three consecutive announcements, it is not difficult to see Qiming Medical's attitude towards addressing internal control risks: acknowledging the problems, not evading them, and actively resolving them. The reason why Qiming Medical has come under public scrutiny is due to the latest forensic investigation results disclosed in the announcement issued on February 25th, which revealed undisclosed fund transfers between Mr. Zi or Mr. Zeng's related entities in addition to previously disclosed fund flows. The total net inflow of funds transferred to Mr. Zi, Mr. Zeng, or their related entities were 52,841,848 yuan during the period from April 2020 to May 2023. The announcement stated that the forensic advisor found that in January 2021 and January 2023, Qiming Medical's wholly-owned subsidiary Hangzhou Qijin unauthorized loaned 230 million yuan to JiangSu WuZhong Pharmaceutical Development. As of the announcement date, there were still 80 million yuan unpaid. In addition, from March to June of last year, Qiming Medical's wholly-owned subsidiary Hangzhou Qiyi unauthorizedly pledged approximately 400 million yuan in company deposits to multiple banks as guarantees for loans totaling 396 million yuan granted by these banks to a company controlled by Zi Zhenjun. As of the announcement date, while approximately 198 million yuan in pledged deposits have been released, the remaining 200 million yuan in pledged deposits have not yet matured. In short, the former senior executive Zi Zhenjun still needs to repay 280 million yuan to the company. According to the announcement, Zi Zhenjun has provided a repayment commitment letter and an asset pledge agreement to the company. After evaluating Zi Zhenjun's assets, his assets include, but are not limited to, shares of two listed companies and equity pledges of a leading domestic company in the aortic valve field, with the asset valuation sufficient to cover the current loan amount. It is easy to see that the subject assets pledged by Zi Zhenjun to Qiming Medical have great potential for integration with the existing business of Qiming. If there is a need to liquidate the equity for debt repayment, the entry of the subject assets is expected to further optimize and enrich Qiming's business lines. In addition, the announcement disclosed the corresponding progress of the 5 resumption guidance provided by the Stock Exchange after the trading suspension last year. In response to the internal control risk issues that have appeared, Qiming Medical has taken a proactive attitude and provided practical solutions. In fact, before the trading suspension in November, the company had already completed a series of external remedial measures such as changing third-party auditors and hiring new internal control and compliance consultants. According to the announcement on February 25th, the company has appointed Deloitte as its internal control consultant, and the relevant process is expected to be completed by the end of March this year. Internally, all the involved management in the company have been replaced. After the former chairman, Zeng Min, the former executive director, Zi Zhenjun, and the former CFO, Ma Haiyue resigned, Qiming Medical announced updates to the management team, appointing Lin Haosheng and Ma Liqiao as executive directors of the board, with Lin Haosheng taking over as the general manager from Zi Zhenjun. In January of this year, the new CFO, Wang Fei, officially joined Qiming Medical. The reason why Qiming Medical made significant and decisive changes in its management team was not only to address internal control risks but also perhaps to follow the international industry practice and move towards a more professionally led governance model by the board of directors. It is worth mentioning that among the updated management team, Lin Haosheng joined Qiming Medical as the Technical Director in December 2016, mainly responsible for the company's business operations, regulatory approvals, quality control, and the commercial viability and sustainability of products; Ma Liqiao has been the Vice President of Clinical Medicine at Qiming Medical since 2019. With over 15 years of experience in the medical industry, he focuses on medical affairs, clinical research and development in the cardiovascular medical device field, successfully leading the formulation and implementation of clinical strategies for innovative products in multiple countries and regions. Furthermore, Qiming conducted a systematic review of its internal control and compliance issues and provided additional disclosures. On February 25th, Qiming Medical disclosed a land and construction contract involving approximately 1.182 billion yuan. As for the last requirement to fill the vacancy of an independent non-executive director and related board committee vacancies, Qiming Medical also stated that they are currently "looking for suitable candidates." From the above, it is evident that Qiming Medical has always maintained a positive attitude towards addressing internal control issues, cooperating with the Stock Exchange's resumption guidance, resolving internal control mechanisms and compliance issues in the company's operation and governance processes, striving to prevent loss before it happens. If the subsequent audits and rectification progress smoothly, it is expected that Qiming Medical will resume trading soon. The outbreak in the heart valve track is imminent, and the medium to long-term value is promising. It is worth mentioning that on November 22nd last year, Qiming Medical also collaborated with DeJin Medical on DragonFly and the Catheter Mitral Valve Clip System (DF) have reached an exclusive strategic marketing cooperation intention. Both parties will conduct in-depth commercial cooperation after DF is approved for market entry. Recently, the commercialization progress of DF has been rapid.The above is sufficient to show that during the suspension period in the past few months, although there have been changes in the company's management team, the core management team remains stable, and the overall product development and commercial cooperation operations of the company are stable. In fact, establishing a sound internal control mechanism as soon as possible and pragmatically solving internal issues will not harm Qiming Medical. It is understood that benefiting from the continuous growth of national innovative support policies and patient demand, the medical high-value consumables industry has experienced rapid recovery in the post-pandemic era. Since 2023, the volume of TAVR surgeries in China has recovered rapidly. Data from the Chinese Structural Heart Disease Annual Report shows that as of the end of November 2023, China had carried out 13,572 TAVR surgeries (a total of 37,552 cases) in 23, with an estimated total of about 15,000 for the year. The report predicts that China's TAVR surgeries will continue to grow rapidly in 2024, with an estimated annual volume of 20,000 cases. Qiming Medical's half-year report for 23 revealed that in the first half of last year, Qiming Medical achieved sales revenue of 256 million yuan, a year-on-year increase of 21.74%, achieving the expected growth target. It is reported that in January 24, the implantation volume reached a new high, with a year-on-year increase of over 200%. While achieving market breakthroughs domestically, Qiming Medical is gradually shifting its strategic focus to the broader global market. Its international "flagship" product, the VenusP-Valve transcatheter pulmonary valve replacement system, is the first self-expanding TPVR product approved for marketing in China and Europe, opening the way for Chinese valve products to enter the European market. Even in the international market, Qiming's VenusP is comparable to the "beautiful and rich duo". Currently, VenusP-Valve has been included in medical insurance in Germany, France, and other countries, and has been registered for marketing in more than fifty mainstream countries such as China, Germany, France, the UK, Italy, and Spain, continuing to carry out implant surgeries in newly covered medical institutions. According to last year's interim report data, Qiming Medical's overseas sales in the first half of 2023 totaled 22.49 million yuan, a year-on-year increase of 60.37%. As the first domestically produced TPVR system to enter the European market, VenusP-Valve's implantation volume has significantly increased overseas, with an 80% increase month-on-month, with European countries represented by Germany and France accounting for approximately 77%, reflecting the high recognition of the international mainstream market. Last year, the US FDA approved Qiming Medical's investigational device exemption (IDE) application for VenusP-Valve and obtained the first central ethical approval in the US, with the start of critical clinical trials in the US imminent. If successful, Qiming Medical may become the first Chinese heart valve company to enter the US medical device market, with promising prospects for the future. On the research and development front, Qiming Medical is almost on par with global multinational companies in the field of mitral and tricuspid valve interventions. Recently, Edwards Lifesciences announced FDA approval for its tricuspid valve product EVOQUE, the first transcatheter tricuspid valve replacement product approved by the FDA. Since the transcatheter tricuspid valve replacement market is much larger than the TAVR market, estimated to be 2-3 times the size, the market expects this product to provide strong growth momentum in the next ten years. In fact, Qiming Medical is at the forefront in this field globally. Its flagship product, the transcatheter valve introducer valve replac...