Investors Give, Then Take Away, in Meihua's New York Trading Debut

Key takeaways:

• Shares of disposable medical products maker Meihua rose 30% on their first trading day in New York, but fell by a similar amount the next day and now trade below their IPO price
• The listing is only the second by a Chinese company in the U.S. since a regulatory-related pause last summer, indicating such listings may slowly start to resume

By Doug Young

Underwhelming.

That single word may best describe the market reception for the second New York IPO in more than half a year by a Chinese company, as the China-U.S. listing pipeline slowly returns to life. The muted market reception isn’t too surprising, since the listing has come from a relatively low tech disposable medical device maker called Meihua International Medical Technologies Co. Ltd MHUA.

Nearly everything about this particular listing says “ho-hum,” and the reality is that few people would have noticed it at this time last year. But it’s drawing unusual attention now as only the second Chinese company to make it to market since last summer, when such IPOs ground to a halt after both Beijing and Washington expressed different sets of concerns. The other IPO came from a drug startup called LianBio LIAN, which raised $325 million from its listing last November.

Much of the concerns that led to the listings pause have been addressed by now, meaning we could well start to see the China-U.S. IPO pipeline return to more normal activity soon, especially for less controversial names like Meihua.

The company first filed its IPO prospectus last August, not long after the freeze began when the Uber-like DiDi Global DIDI raised Beijing’s wrath by making a New York listing before China’s internet regulator conducted a required data security review. DiDi has since announced it will privatize from New York and is expected to relist its shares closer to home in Hong Kong.

Meihua is far less controversial, as its main business is selling simple disposable medical products like eye drop bottles, surgical masks and identification tape to hospitals and other medical establishments. What’s more, the company works mostly with distributors, who handle 90% of its sales, meaning it probably has very little sensitive customer data.

That heavy reliance on third-party distributors is probably one reason investors weren’t exactly fighting with each other for a chance to buy the company’s shares, since such middlemen typically demand big discounts and thus margins for such sales are low.

That might explain why Meihua ultimately raised just $36 million from the listing, or just over half of its original target of up to $69 million. It priced its IPO shares at $10, in the middle of its range of $9 to $11. That’s actually not too bad in the current climate, since U.S.-traded Chinese stocks have become pariahs among local investors these last few months due to all the controversy.

As if to provide a strong “welcome back” message, investors bid up the stock as much as 48% when trading began on Wednesday, and the shares ultimately finished their first trading day up 30%. But the story wasn’t over, and the stock gave back all those gains and more the next day, closing down 30% at $9, or 10% below their IPO price.

Its current market cap stands at $180 million, not huge but also relatively large when compared with companies from sectors like education whose values shriveled last year from hundreds of millions of dollars to just tens of millions following all the regulatory actions at home.

Day traders

That kind of volatility isn’t that uncommon for Chinese stocks these days, especially smaller ones, and almost certainly indicates that most of the trading in the first two days came from short-term speculators who know little or nothing about the company. Accordingly, we’ll need to wait a while longer for the stock to settle down to see how the market really feels about this company.

Truth be told, Meihua looks solid enough and certainly has plenty of room to improve. For starters, it’s one of the few profitable companies in China’s booming medical products market. The main reason for that is that its products are very basic and thus easy to design and manufacture. What’s more, the company can quickly generate big sales by using distributors rather than cultivating its own direct sales to hospitals and other end users, even though the latter type carry much higher margins.

The company pointed out in its prospectus that demand for face masks, protective clothing and gloves has exploded during the pandemic, citing third-party research that says the China market grew more than tenfold in 2020 from 2019. It added that the broader market for disposable medical devices in China grew at a slower but more sustainable 26% to $14.9 billion in 2020.

As to Meihua itself, the company’s own revenue grew just 11% in 2020 to $88.2 million, though its profits grew at a faster 23% to $19 million. Revenue growth continued at 11% year-on-year in the first half of last year to $48.3 million. But its profit actually contracted 11% to $9.1 million during that time, with the company blaming increased sales of third-party products that typically carry lower margins.

That leads into our earlier point, namely that Meihua has lots of room for improvement. For starters it could manufacture more of its own products, which now account for about half of all its sales. It indicated it intends to do just that by using some of its IPO proceeds on new manufacturing facilities and to acquire another local disposable device maker. The company could also try to build up its direct sales network, and could also try to boost its international sales that currently account for just 20% of its total.

In valuation terms, the company trades at a price-to-earnings (P/E) ratio of 9 based on its 2020 profit. That pales compared with global giants of higher-end medical devices like Medtronic MDT and Thermo Fisher ScientificTMO, which both have multiples of about 28. But such comparisons probably aren’t that fair, and a better comparison might be domestic peer PW Medtech (1358.HK), which trades at a roughly comparable P/E of 8.

At the end of the day, Meihua isn’t likely to dazzle Wall Street with the kinds of explosive growth that China tech investors have been used to in the past. But those days could well be in the past, or at least on hold for now, meaning a company like Meihua might make an interesting and more stable China-oriented investment in the current climate.