► YuYue Medical has anchored a lot on inorganic growth, facilitated by e-commerce platforms.

► Now this company has accelerated the R&D process and business model transformation.

The still-spreading epidemic has dramatically changed people's lifestyles and their awareness of health issues. One aspect of this is that a soaring number of people are buying small home-use healthcare devices and making other small-scale health investments.

Undoubtedly YuYue Medical has been capturing this wind using e-commerce. With an increment total of CNY 33, the last six months represent an up to 50% rise, from CNY 20 at the beginning of January to CNY 35. The stock price grew over 20 times, from the IPO price at CNY 1.83 to over CNY 35 as of today, at a 12-year CAGR of 28.39%.

Founded in 1998, this Jiangsu medical device provider has grown to a public giant with a market value in the multiple billions. It extended the business from home-use healthcare gadgets, clinic medical equipment, respirators and oxygen generators to foreign trade products.

The last three years saw an apparent increase in home-use healthcare medical devices, such as glucose meters, blood pressure monitors, oxygen generators and other home appliances. The pull from this business segment has been taking an increasing share of the total revenue, as much as 38.42% in 2019.

It also tells another exciting story – that the C-end customer group of this medical device company is expanding.

Sales boosted by e-commerce

When manufacturing has a more direct or efficient way to access end-users, it benefits consumers by shortening the value chain and cutting off the conductive losses. From a value proposition perspective, the C2M (customers to manufacturers) model is more advanced than the traditional B2C (businesses to customers) models.

It seems that this is what YuYue Medial has been doing recently.

More than a home medical device manufacturer, YuYue Medical (002223:SZ) is also an online vendor on Alibaba's Tmall shop. In the 618 online shopping festival, this company hit an online sales record of CNY 230 million, including over CNY 100 million in two e-shops, JD and Tmall. The hot products there are sphygmomanometers, oxygen generators and thermometers, helped by a booming demand for home medical devices due to COVID-19.

Like its ambitious medical device peers, YuYue Medical has adopted a mixed sales strategy of distribution and a direct selling model. The company's 2008 prospectus disclosed that YuYue primarily was using distribution sales to connect with hospitals and pharmacies and directly sell to enterprise clients and significant government procurement projects. In the overseas market, the company adopts an OEM (original equipment manufacturer) strategy in the US and ODM (original design manufacturer) in the EU market, with private brands selling in other markets.

The cooperation with large e-commerce platforms in the C2M business framework is not only dropping the role of distributors but also triggering the reverse impact from consumers' big data to the product level, such as product development.

In the future, YuYue expects a higher efficiency in selling and marketing by leveraging e-commerce in an 'Internet +' strategy. As the consumers for e-healthcare are expanding, it is essential to realize that the medial e-commerce platform is not only a trading media agent but an ecology providing diverse products, services and distribution channels.

Acquisitions, new markets and goodwill impairment risks

If a company has a lot of free cash on the books, or more precisely, 'working capital,' it shows the company has high liquidity at low default risk. The other perspective also indicates that the C-level managers are 'lazy' – they may utilize the spare money to invest in some projects for higher returns.

In a look at YuYue’s history, it is not hard to find its managers looking pretty diligent from 2009 onwards. During the last decade, YuWell frequently initiated many acquisitions to expand its business. To cement the business moat, this low-value home healthcare appliance provider has entered a broad spectrum of medical segments, from acupuncture needles and cupping vessels (for traditional Chinese therapies) to oxygen generators.

In 2012, it acquired Hwato Medical, an acupuncture needles and cupping medical devices provider.

 In 2014, it bought in 51% shares of Beijing Wandong Medical (600055:SH) to become the significant board (at the cost of CNY 1.2 billion) and wholly acquired Wikiwand (at the cost of CNY 700 million)

In 2017, it acquired CBL – China Better Life (CNY 863 million) and bought 38.66% of Amsino Medica (for USD 26.54 million).

Mergers and acquisitions are an efficient method to seek inorganic growth, to engage in a new business, enter a new geographic market, and enjoy the synergies of the complementary businesses. All of the full acquisition targets mentioned above, including Hwato Medical, Wikiwand and CBL, are focused on home healthcare, including specialty healthcare segments such as diabetes, high blood pressure, high blood sugar, heart disease and breathing disorders.

The synergies can be exploited from the highly overlapping end consumer groups with slightly different demand but in sync, from the integration of distribution channels and reduced expenses in marketing, labor and R&D.

One thing that cannot be neglected is the goodwill impairments risk brought by the acquisitions. Since the IPO in 2008, YuYue has expanded its business into clinic medical devices and home healthcare. As of the end of 2019, the total goodwill registered on the books to an amount of CNY 73.63 million, representing 9.24% of total assets.

Hurry up R&D-based growth

External expansion and selling optimization are efficient strategies to build competitive advantages in the short term. But an improved R&D capability is more appreciated by the market in a more extended period. Spending money in R&D is adding up a higher return in the future.

YuYue Medical is now taking a different path, from a selling-driven mode to high-value device development. According to the 2019 financial report, in 2020 it plans to promote the production capacity expansion project and develop products integrated with high synergies

For a big-size company like YuYue Medical, it is not easy to make an immediate improvement in core technologies. For quite a long time, it leveraged external expansion to grow. However, the outlook may be different later, as it can fully exploit the selling efficiency by cooperating with e-commerce platforms. An accelerated operation can anchor more resources on building R&D to win a large pie in the spacy Chinese market.