Under the microscope

BGI: sky-high valuation

“If you are really stupid, I’d call that a disease.” So said the biologist James Watson, during a British television series in 2003. Watson was one of the Cambridge University team of scientists that won the Nobel Prize after they famously unlocked the chemical structure of DNA in the 1950s.

No stranger to controversy, he also suggested that genes could be manipulated to make people more intelligent. A team at Imperial College in London came a step closer to realising his dream a few years later after isolating two gene networks, dubbed M1 and M3, which govern cognitive functions within the brain.

But perhaps the scientists should be focusing on the brain circuitry of the retail investors who have bought into China’s leading genetics firm, BGI Genomics.

The company, which is listed on Shenzhen’s ChiNext board, asked for a suspension last week so it could investigate why its share price has soared almost nineteen fold since its flotation in mid-July.

When it was listed at Rmb13.64 per share, BGI had a valuation of Rmb54.57 billion ($8.29 billion). By the time the stock was suspended, it had risen to Rmb103 billion.

The massive increase has catapulted one of its founders, Wang Jian, into the upper echelons of China’s rich lists, theoretically placing him at number 44 on Forbes rankings with a paper wealth of just over $5 billion.

However, BGI’s profits have not kept pace with its share price surge and analysts do not expect them to justify the sky-high valuation any time soon. Third quarter results, for example, revealed net profit of Rmb318.43 million, up about 24% year-on-year.

BGI has long been held up as one of China’s pioneering scientific firms (we first wrote about it in WiC195), at the forefront of genetics research and testing. The health sector is a hot-spot for professional investors at the moment too, especially within the artificial intelligence (AI) sphere. So in many ways, retail investors are simply following the lead of the institutional investors. But the problem is there are simply too many retail punters and the country’s ubiquitous social media networks mean they have a habit of herding in the same direction all at once.

As a result, BGI is now trading at 280 times its 2016 earnings, compared to about 61 times for its main rival, US-listed Illumina Corp.

Some netizens already believe the run-up in share price is a recipe for disaster. “Genes are supposed to be tested, not fried,” said one, referring to the stir-fry mentality common to retail investors (rapidly buying and selling shares).

“If there’s no shorting mechanism to act as a counter-balance, then this illusion of wealth could become the knife that kills a perfectly good company,” noted another.

Caixin Weekly also ran a bearish article concluding that BGI lags some of its overseas competitors such as Illumina and that domestic rivals such as Berry Genomics and iCarbonX are closing the gap.

As we reported in WiC361, former BGI CEO, Wang Jun, has rapidly achieved unicorn status for iCarbonX, another bioinformatics company he founded in 2016.

Big Data and AI allows genetics scientists to mine a much wider range of information, not just the DNA but also medical records and information from wearable devices that record tiny changes in our bodies.

The hope is that the findings will deliver long-term upside for companies like BGI and iCarbonX as they develop the algorithms that map humanity’s gene pool and test for its worst diseases.

In the meantime, the leading firms in the sector have been getting backing from the all-powerful tech troika. Tencent led the Series A fundraising for iCarbonX. Alibaba has been working with BGI on a bioinformatics platform (and more recently for ET Medical Brain, its virtual assistant for doctors). And Baidu has launched its own AI-powered doctor chatbot called Melody.

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