The seller of medical imaging film products is making solid profits for now, but it is looking for IPO financing to future-proof its business

Key Takeaways:

  • Guanze Medical has been turning a profit for three straight years but the market for its medical imaging film products is gradually shrinking
  • Policy risks and the decline of its mainstay medical film market have put the company under mounting pressure to transform into a cloud-based imaging services firm

By Molly Wen

Anyone who has ever had a medical scan has benefited from the diagnostics industry, which aims to provide a clear picture of potential health problems. But for the makers of medical scanning products, seeing into the future of imaging technology is not always easy.

Take for instance IPO-candidate Guanze Medical Information Industry (Holding) Co. Ltd., a supplier of traditional medical imaging film that is keen to expand further into digital and cloud services for radiologists performing tests such as Magnetic Resonance Imaging (MRI) or Computed Tomography (CT).

Behind the black-and-white images from these techniques is an expanding medical imaging market that has successfully incubated listed companies including Lucky Film (600135.SH) and Yestar Healthcare (2393.HK). Even leading medical equipment maker Shenzhen Mindray Bio-Medical Electronics (300760.SZ) wants to get into the picture.

Looking to join them as a listed company is Guanze Medical, based in the coastal province of Shandong in eastern China. The company first filed to list its shares on the Hong Kong Stock Market in 2021 but was unsuccessful. A second attempt at the beginning of this year also failed without proceeding to a listing hearing. Last Monday, the company filed an updated preliminary prospectus in its third shot at an IPO.

The company started out in 2016 as a distributer of medical imaging film. It grew to be Shandong’s biggest second-tier distributor of the film, with this business accounting for 60% of its operating revenue. Since 2018, the company has also marketed medical imaging film under its own label, expanding the own-brand business from 9% of total medical film sales in 2019 to 32% in the first half of 2022.

The company also provides cloud services including digital platforms for radiologists to store and assess images, but this business has only contributed 6% of its operating revenue in recent years.

Demand for the core medical film products faces a long-term decline as imaging technology turns increasingly digital. But for now, Guanze Medical’s finances are in healthy shape. Its revenue grew steadily from 140 million yuan ($19.2 million) in 2019 to 210 million yuan last year, while its gross margin rose from 33% to nearly 36% during the same period.  Moreover, it turned a net profit of more than 22 million yuan in each of the past three years. In the first half of this year its profit jumped almost 39% to 15.32 million yuan from the year-earlier period.

Policy risks enter the picture

The sale of medical imaging film products still dominates the company’s business, accounting for more than 90% of revenue. These products include various types of medical imaging printing equipment, discs and other items, in addition to imaging film. The company also offers free equipment for printing medical images, and self-service printing machines.

Most of its more than 90 clients are hospitals and medical institutions. Of these, nearly 90% are public hospitals, including 43 so-called “grade 3” larger hospitals in the province that provide comprehensive medical services. The company serves just over a fifth of the region’s top-grade hospitals but less than 5% of the smaller grade 1 or 2 hospitals.

Guanze Medical has cultivated close relationships over several years with its top five clients, which together contribute 40% of total revenue.  However, the dependence on those partnerships leaves the company exposed if its clients want to switch suppliers or are required to do so.

The policy risk is real. The company could be hit hard if new regulations aimed at shortening medical supply chains are expanded to cover sales of medical equipment. In 2019, local government departments including Shandong Province’s health committee published a directive requiring public medical institutions to implement a  “Two Invoices System” for procuring drugs. The reform limits the number of invoices between manufacturers and hospitals to two, forcing companies to sell to hospitals via first-tier distributors.

The policy does not yet cover medical equipment, but a widened scope would hit Guanze Medical hard as a second-tier distributor, and the company’s operating revenue could be slashed by more than 60%.

The growth of digital technology and cloud services has eroded the traditional market for medical imaging film, according to research cited in the prospectus.  The market was valued at 6.6 billion yuan in 2021 and its compound annual growth rate in the past five years was 2.9%. Despite a steady increase in the volume of medical scans performed, the use of digital technology is projected to shrink the film market to 4.8 billion yuan by 2030.

Jumping onto the cloud

Looking to secure its long-term future, Guanze Medical started to expand into cloud platforms for medical imaging from 2017.

Those cloud services include a storage platform for digital images and a regional imaging diagnosis platform, according to the prospectus. The company ranked as Shandong’s third-biggest provider of medical imaging cloud services by sales in 2021, with 4.7% of the market.

Medical institutions, academic organizations and hospitals can use the cloud services for storing, sharing or even processing images. Users accessing imaging data through the platforms can collaborate more effectively and share patients’ test results.

The convenience of digital platforms has boosted the market for medical imaging cloud services from 700 million yuan in 2016 to 3.5 billion yuan in 2021, at a compound annual growth rate of nearly 37%. The company expects the market to grow further to 18.9 billion yuan in 2030, at a compound annual growth rate of almost 21%.

The company attracted an outside investor in April 2021 who paid HK$16.50 million ($2.1 million) for 5% of its shares, after which the company was valued at below 310 million yuan. Extrapolating its net profit in the first half of 2022 to the whole year, the company’s projected price-to-earnings (P/E) ratio would be 10 times.

That is far less than the P/E ratio of 105 times for medical imaging company Lucky Film or the 44 times for Shenzhen Mindray Bio-Medical Electronics, probably reflecting Guanze Medical’s smaller scale and its transitional risks.

As the future of the industry rests on cloud services, investors are closely watching whether Guanze Medical, with imaging film as its dominant business, will be able to realize its vision of a digital transformation and deliver stable growth.

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