New stock interpretation | Taimi Medical: Accumulated losses of 1.26 billion in 3 years, does the high valuation hide a "bubble"?

On September 16th, with the official disclosure of the news through the Hong Kong Stock Exchange hearing, Taimei Medical undoubtedly moved one step closer to listing on the Hong Kong stock market. In fact, as the largest domestic digital solution provider in the life sciences field, Taimei Medical's path to listing was not smooth from the start. The company submitted its prospectus to the STAR Market in December 2021, but its IPO did not pass the review in March 2023. It then chose to switch to the Hong Kong stock market, submitting applications to the Hong Kong Stock Exchange in January and July 2024, until now passing the Hong Kong Stock Exchange hearing. However, it is worth noting that behind the "not smooth" listing process of Taimei Medical, there are some hidden operational risks. Zhejiang Taimei Medical Technology Co., Ltd. (referred to as "Taimei Medical") was founded in 2013 and is a digital solution provider focusing on the medical science industry. The company designs and provides industry-specific software and digital services to accelerate the research and development and marketing of medical science products such as innovative drugs and medical devices. Since its establishment, due to filling the gap in digitalization of clinical trials in China, and riding on the wave of precision medicine regulatory reform, Taimei Medical has undergone 8 rounds of financing with a total amount exceeding 2 billion RMB. According to the prospectus, in September 2020, Taimei Medical completed its last round of financing led by Tencent, Hillhouse Capital, Yunfeng Fund, followed by investment from Morning Ventures, and China Growth Capital, among others. After this round of financing, Taimei Medical was valued at 8.1 billion RMB. However, even though it is favored in the capital market, Taimei Medical has been struggling at the edge of losses - from 2021 to 2023, the company accumulated losses exceeding 1.26 billion RMB. So, under years of losses, can Taimei Medical support its 8 billion RMB valuation? What do investment institutions see in it? 3 years of cumulative losses of 1.26 billion RMB, the industry leader also "bleeding" Observing the medical science industry chain, Taimei Medical plays the role of a well-known "hub". Specifically, Taimei Medical Technology's cloud software and digital services are mainly provided through its two digital collaboration platforms (TrialOS and PharmaOS). The company's digital collaboration platforms act as a hub connecting various parties in the medical science industry chain, including pharmaceutical and medical device companies, hospitals, third-party service suppliers, patients, and regulatory agencies. According to Zhishi Consulting data, Taimei Medical Technology is the only supplier in China that can provide a one-stop digital solution from research and development to marketing for the Chinese medical science industry. Due to the wide coverage of the "hub" role, covering a broad industry chain from pharmaceutical companies, hospitals, third-party service providers, patients to regulatory agencies, Taimei Medical Technology is the most widely used digital solution provider in the field of medical science research and marketing in China. As of March 31, 2024, the company has provided services to more than 1,400 pharmaceutical companies and entrusted research institutions, covering 21 of the top 25 pharmaceutical companies globally and 90 of the top 100 innovative enterprises in China Meheco Group. In terms of revenue performance, along with the continuous expansion of the customer base, Taimei Medical's revenue has been steadily increasing in recent years. According to the prospectus data, for the three months ending March 31 of 2021, 2022, 2023, and 2024, the company realized revenues of approximately 466 million RMB, 549 million RMB, 573 million RMB, and 132 million RMB, respectively, with annual compound growth rates of 10.88%. During the reporting period, the company's software and digital services attracted 908, 1,033, 1,107, and 867 customers, of which 679, 789, 851, and 682 were SaaS product customers. However, despite the steady revenue growth, the company has been struggling on the edge of losses - from 2021 to 2023, Taimei Medical's net losses were approximately 480 million RMB, 423 million RMB, and 356 million RMB, accumulating losses of approximately 1.26 billion RMB in just three years. As of March 31, 2024, the company continued its trend of losses, with a net loss of 118 million RMB. Looking at the revenue cost of Taimei Medical, it is easy to see that the main reason for the company's perennial losses lies in high "triple expenses". During the reporting period, Taimei Medical incurred sales expenses of 179 million RMB, 185 million RMB, 150 million RMB, and 24.35 million RMB, accounting for 38.5%, 33.6%, 26.3%, and 18.4% of total revenue, respectively, while employee costs accounted for 68.3%, 76.1%, 67.1%, and 72.7% of these sales expenses, respectively. Meanwhile, research and development expenses accounted for 40.9%, 37.9%, 29.5%, and 20.6% of revenue, respectively. The company also admitted the reasons for the losses in the prospectus, stating that the losses mainly came from the rapid development of its various businesses, leading to a significant increase in staff expansion-related salary and stock payment amounts, coupled with increased costs related to business development, and that the operating income could not cover the increased main business costs and expenses, ultimately resulting in a significant net loss for the company during the reporting period. Under continued losses, Taimei Medical's cash flow performance has also been poor. For the three months ending March 31 of 2021, 2022, 2023, and 2024, the company's cash flow used in operating activities was approximately -212 million RMB, -329 million RMB, -351 million RMB, and -113 million RMB, consistently negative. During the same period, the company's cash and cash equivalents were approximately 1.324 billion RMB, 679 million RMB, 668 million RMB, and 578 million RMB, shrinking significantly. Thus, under the significantly reduced cash flow and constant losses in operations, Taimei Medical, favored by capital, had to turn to the secondary market for "blood transfusion". The gap between the top three in the industry is not significant, and could there be a "bubble" hidden under the high valuation? Certainly, in the secondary market, evaluating the investment value of a company, fundamental factors are just one aspect, and the industry's growth space and potential are also important evaluation factors. This also applies to Taimei Medical. In terms of growth space, with the emergence of SaaS products reducing entry barriersThe demand for digitalization in the pharmaceutical and medical device industry has surged, indicating significant growth potential for the entire industry.According to the Zhaoshi Consulting report, the combination of cloud software and digital services creates business value for China Meheco Group and the medical device industry. It is estimated that by 2028, the market size of China Meheco Group's digital solutions for medical device research and marketing will reach 24.3 billion yuan, with an annual compound growth rate of 20.2% from 2023 to 2028. At the same time, coupled with Taimei Medical's leading advantages, the company still has great potential in this field. According to Zhaoshi Consulting data, in terms of revenue, Taimei Medical is the industry leader in the domestic market for digital solutions for pharmaceutical and medical device research and marketing, with a market share of 5.9%. At the same time, the company is also China's largest supplier of digital solutions for pharmaceutical and medical device research, occupying 8.2% of the market share in 2023. The strength of the industry leaders will undoubtedly put the company in a favorable position relative to its competitors in the rapidly changing market. However, it is worth noting that the market share gap between the top three players in this field is not very large. It is reported that the domestic market for digital solutions for pharmaceutical and medical device research and marketing is highly fragmented. In terms of revenue generated in 2023, the market share of the top five market participants accounts for 23.1%, with the second and third places holding market shares of 5.7% and 4.1% respectively, which is not significantly different from Taimei Medical's 5.9%. This also means that the competition pressure faced by Taimei Medical is considerable, and if not careful, its leading position in the industry may change hands. In conclusion, from the perspective of market share and industry potential, there are reasons why Taimei Medical is favored by capital. However, from core financial indicators such as net losses and cash flow, its high valuation seems to be mixed with some "bubble elements". Now, as Taimei Medical's path to listing gets closer and closer, whether it is a "mule" or a "horse", we may as well wait patiently for time to test.