GAUSH MEDITECH (02407): The stock price has dropped by 80% from its peak, and funds from the Hong Kong Stock Connect have chosen to exit before the "outbound connect" is implemented.

Recently, the rapid increase in trading volume of Southbound Hong Kong Stock Connect has attracted widespread market attention. On February 18, the net buying amount of Hong Kong stock connect reached 22.423 billion Hong Kong dollars, setting a new record for the highest daily net buying amount in nearly 4 years. Looking ahead to 2024, the cumulative turnover of Hong Kong stock connect channel has reached about 11.2 trillion Hong Kong dollars, reaching a new high. So far this year, the total net buying amount of Southbound Hong Kong stock connect funds has reached nearly 200 billion Hong Kong dollars in less than 2 months. These data clearly show the enthusiasm of Southbound funds for investment. In this context, if a stock is kicked out of the Hong Kong stock connect in the upcoming new round of Hang Seng Index and Hong Kong stock connect regular adjustments, it may face double pressure on liquidity and market value. Perhaps for this reason, some Southbound Hong Kong stock connect funds have chosen to "exit early" in GAUSH MEDITECH (02407). Exiting before the stock is delisted from the Hong Kong stock connect On February 21, during trading hours, GAUSH MEDITECH's stock price hit a low of 8.20 Hong Kong dollars, reaching a new low since its listing, and has fallen by 84.12% from its highest point in March 2023 of 51.63 Hong Kong dollars. It can be observed that from 2024 to now, GAUSH MEDITECH's stock price has been mostly in a downward trend, with only increases in April, July, and October 2024. From the end of September to the beginning of October last year, driven by the overall market and the medical equipment sector of Hong Kong stocks, GAUSH MEDITECH saw trading volumes of 2.7504 million shares and 8.863 million shares on September 27 and 30, respectively, setting new daily trading volume highs since listing. On September 30, GAUSH MEDITECH's stock turnover rate reached 5.99%, with a turnover of 95.2356 million Hong Kong dollars. The high volume on that day was mainly attributed to the active participation of Southbound Hong Kong stock connect funds. Data shows that on September 30, China Investment Corporation bought a large amount of GAUSH MEDITECH shares, holding a stake of 4.5%, an increase of 2.73 percentage points from the previous trading day. However, compared to many companies in the Hong Kong medical equipment sector that experienced continuous significant price increases from the end of September to the beginning of October last year, GAUSH MEDITECH only had a strong increase on October 7 by 30.60%. However, due to the low trading volume of 881,300 shares on that day, it was a small upward trend. The next day, the stock price experienced a significant drop of 9.95%, followed by a "six consecutive decline" trend. Since then, GAUSH MEDITECH's stock price has been in a fluctuating downward trend, with declines in November and December of 2.54% and 8.47% respectively. However, before the end of last year, Southbound Hong Kong stock connect funds' investment strategy for GAUSH MEDITECH was mainly "buying more as it falls". Taking China Investment Corporation as an example, when GAUSH MEDITECH experienced a significant drop on October 8 last year, the company continued to increase their stake. By October 15, their holding percentage had risen to 5.36%. After October 15, GAUSH MEDITECH ended a week-long deep pullback and entered a period of fluctuation for about a month and a half. The chart shows that during this period of fluctuating upward movement in GAUSH MEDITECH's stock price, Southbound Hong Kong stock connect funds sold off some of their holdings, until GAUSH MEDITECH started a new round of decline on November 28, and Southbound Hong Kong stock connect funds only resumed increasing their stake several trading days later. It can be observed that this round of Southbound Hong Kong stock connect fund ownership increase lasted from November 29 to December 19, with the ownership percentage increasing from 6.60% to a peak of 7.22%. In fact, after December 19, GAUSH MEDITECH's stock price continued to decline, and this downward trend lasted until January 13 this year. However, Southbound Hong Kong stock connect funds did not continue to increase their stake according to the previous "buying more as it falls" strategy, instead they began reducing their holdings, even when GAUSH MEDITECH's stock price experienced a rebound, the trend of reducing holdings continued. As of February 20, the Southbound Hong Kong stock connect stake in GAUSH MEDITECH had decreased to 6.33%. This may be related to GAUSH MEDITECH's impending delisting from the Hong Kong stock connect. It is understood that the next round of scheduled adjustments for the Hang Seng Index and Hong Kong stock connect will take place in March this year. The results of the review will be announced on February 21, with the review period spanning from January 1, 2024 to December 31, 2024. During this review period, GAUSH MEDITECH's average market value per day was 2.464 billion Hong Kong dollars, which is 15.36 billion Hong Kong dollars lower than the 4.0 billion Hong Kong dollar market value threshold, and is likely to be delisted from the Hong Kong stock connect. Referring to the market performance of the stocks delisted from the Hong Kong stock connect in September 2024, at that time, a total of 33 stocks were delisted from the Hong Kong stock connect. Their average stock price dropped by 10.47% on the first trading day after the adjustments took effect, with an average decrease in trading volume of 51%. It can be seen that after being delisted from the Hong Kong stock connect, the stocks may experience a "double hit" in terms of stock price and liquidity, which may be an important factor in accelerating the outflow of funds in the short term. When will the transformation support the valuation? Although in the hot field of ophthalmology, GAUSH MEDITECH's stock price has not improved since listing on the Hong Kong Stock Exchange, and its price-to-earnings ratio is lower than that of leading companies in the same industry. In the current environment where innovation and research and development are valued in the Hong Kong stock medical equipment industry, GAUSH MEDITECH, which started as a distributor of ophthalmic medical equipment, is facing a significant transformation challenge. Looking back, investors can see that GAUSH MEDITECH's long-term downward trend in stock price can be traced back to March 2023, and until now, the stock has only increased in price for 5 out of the 23 months, even during times when its performance was strong. In the example of the mid-year report of 2023, GAUSH MEDITECH reported revenue of 701 million yuan, a year-on-year increase of 21.2%; net profit amounted to 110 million yuan, turning a loss into profit compared to the same period the previous year. However, just a month after the report was released, the company's stock price fell from 43 Hong Kong dollars to a low of 32.5 Hong Kong dollars, setting a new low since listing at the time. The market performance behind this may reflect investors' attitude towards its business model. So far, GAUSH MEDITECH has mainly relied on sales of distribution products as its main source of revenue. This issue first appeared during its IPO stage. According to the information in the prospectus at that time: During the reporting period, GAUSH MEDITECH's sales of distribution products generated revenues of 986 million yuan, 793 million yuan, and 811 million yuan, accounting for 98.9%, 97%, and 72% of total revenue respectively; while sales of its own products generated revenues of 11.329 million yuan, 24.72 million yuan, and 3.16 billion yuan, accounting for 1.1%, 3%, and 28% of total revenue respectively.It is not difficult to see that GAUSH MEDITECH has actually been consciously adjusting its business structure: reducing distributed products and increasing the proportion of proprietary products. However, by 2023, the proportion of revenue from its proprietary products had not yet reached 40%. As the main product is distributed, the coverage of products and distribution channels, as well as the integration of commercial networks, to a certain extent, have become the main selling points for GAUSH MEDITECH in the short term. Data shows that the company now has a wide range of ophthalmic instruments covering ophthalmic diagnostic equipment, ophthalmic surgical equipment, ophthalmic surgical instruments, and ophthalmic consumables across ophthalmic diseases, cataracts, glaucoma, refractive errors, optometry, ocular surface, and pediatric ophthalmology, for examination, treatment, and correction. By the end of 2023, the company had established cooperation with nearly 20 global top ophthalmic medical device companies, including Heidelberg, Schwind, Geuder, Optos, and Quantel, of which 17 were exclusive partners. It is worth mentioning that the interim report for 2024 shows that even with a decrease of 4.3 percentage points compared to the previous year, the company's gross profit margin in the first half of 2024 was still 46.5%. This indicates that, with its competitive advantage in equipment, consumables, and services, the company's profitability in the field of ophthalmology is among the industry leaders. However, in recent years, although GAUSH MEDITECH has emphasized strengthening independent research and development, the proportion of research and development expenses to revenue has remained at a relatively low level. The company's IPO prospectus revealed that during the reporting period, its research and development expenses were 2.7 million yuan, 3.1 million yuan, and 23.5 million yuan, accounting for 0.2%, 0.3%, and 1.8% of total revenue, respectively. The latest interim report for 2024 shows that the company's current research and development expenses are 35.1 million yuan, accounting for 5.47% of revenue. Due to the imbalance between self-developed and distributed product revenue, the market has not valued GAUSH MEDITECH at the average level of ophthalmic instruments. Based on the price-to-sales ratio valuation, GAUSH MEDITECH's price-to-sales ratio is currently only 0.93 times, much lower than the industry average of 2.54 times.