All about its image

United Imaging is STAR’s biggest IPO of 2022


Diagnostic imaging technology

On Monday United Imaging Healthcare went public on Shanghai’s STAR market. The stock surged as much as 60%, reaching a market capitalisation of Rmb150 billion at one point, after an IPO that was the second-largest A-share offering in China this year and the biggest on the STAR market. The diagnostic imaging device manufacturer raised nearly Rmb11 billion, ($1.62 billion), much of which will be used to fund research and development, production and marketing, it said in the IPO prospectus.

The strong start shouldn’t come as a surprise as the IPO was oversubscribed more than 3,500 times among retail investors. Most analysts have been positive about United Imaging’s prospects, reckoning that the homegrown leader in diagnostic imaging is benefiting from favourable policies and can be considered a relatively safe investment.

United Imaging’s prospectus revealed the enormous support it has received from the state. The company, which has Shanghai’s Sasac as its second-largest shareholder with a 18.6% stake, received Rmb1.1 billion in subsidies between 2019 and 2021, equivalent to 48% of the net profit made over the same period.

“United Imaging’s focus on its own research and development is completely correct as it has resolved a chokehold on China in that area,” one industry insider claimed. “But now that United Imaging has listed, it must also prove to the market and shareholders that its profits are sustainable, not supported by the government. As long as it brings out high-end products while maintaining its production capacity, the market will pay the bill.”

Other analysts expressed a more sceptical view. Even at the issuance price, the shares traded on a price-to-earnings ratio of more than 77 times, more than double the global average for the sector.

The bullish outlook is that United Imaging is on the verge of loosening the grip of the ‘GPS’ – GE, Philips and Siemens – on sales of high-end diagnostic imaging equipment. That might be optimistic. Although the Chinese firm ranked first in sales of magnetic resonance imaging (MRI) scanners in 2020, they were mostly lower-end models. In the premium segment – that is, the 3-Tesla MRI, which is the gold standard in the technology – business is still dominated by the ‘GPS’, with United Imaging in a distant fourth place. The same scenario also played out in the CT scanner market.

“Although it has been dubbed ‘the first domestic high-end medical imaging equipment maker’, the reality is that the main battlefield of United Imaging is still in the low-end market,” warned Baima, a local commentator on the sector. Needless to say, gross profit margins tend to be a lot lower in the low-end market. Margins at United Imaging hovered between 48.6% and 49.4% in 2020 and 2021, below the average across the industry. For comparison, Chinese competitor Mindray Medical’s gross profit margin is well above 60%.

Moreover, United Imaging doesn’t have a solid record of profitability. The company started making money in 2020, when the pandemic sparked a surge in sales of CT scanners, which were widely used to diagnose cases of the coronavirus. Its bottom line has also benefited from the generous government subsidies. Even in 2020 and 2021, when United Imaging was starting to enjoy profitable operations, public subsidies still accounted for 30% and 26% of profits in those two years.

The risk is that government support isn’t guaranteed, however. One danger is that its future business could be vulnerable to efforts to drive down costs at state hospitals as part of President Xi Jinping’s push for ‘Common Prosperity’.

“If more cities or the central government introduces centralised procurement policy for large healthcare equipment, the company might face more pressure to lower prices,” acknowledges Industrial Securities in a research note.

China is also the only market where United Imaging makes meaningful revenues. Between 2019 and 2021, its overseas income was Rmb99 million, Rmb240 million and Rmb511 million respectively, accounting for a single-digit percentage of its total business. These minor contributions could be seen as a signal of the opportunity to grow its business, of course, although building market share outside China is going to take time and investment.

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