The second biotech firm on the Star Market closed the first day of trading at 91 times earnings.
September 30 can be considered as another big day for China’s public equity ecosystem. Three companies – recently undefeatable champion of the African mobile market Transsion (688036:SH), thirteen-year-old network security company Hillstone Networks (688030:SH) and in vitro diagnostic firm Hotgen Biotech (热景生物, 688068:SH) – kicked off trading on the Shanghai sci-tech board. Hotgen is of particular interest as the second biotech company in the new venue.
Investors welcomed the life science equipment producer, pushing the stock up 140.63% to close at CNY 70.89 (USD 9.92) per share. This boosted the company’s market capitalization to CNY 4.41 billion (USD 616.93 million).
Headquartered in Beijing, Hotgen develops, manufactures and markets innovative in vitro diagnostic (IVD), point-of-care-testing (POCT) and biodefense products. Last year, it generated CNY 187.12 million (USD 26.19 million) in operating income, which resulted in a net profit of CNY 48.19 million (USD 6.74 million). The firm’s net profit margin has been hovering above 20% over the past three years. It amounted to 23.57%, 21.16% and 25.75% in 2016, 2017 and 2018 respectively.
Though the company has been recently doing pretty well, it is now exposed to a handful of fundamental risks. For instance, the wave of generous subsidies provided by the Chinese government might be over soon. As mentioned in the prospectus (in Chinese), Hotgen obtained a three-year 15% concession from the local tax authority in 2016. Now, three years have passed.
Another peril comes from technological upgrades, which are always costly and time-consuming in the biotech industry. A quite long (usually, ten to fifteen years) research and development cycle in IVD business is often a hindrance that doesn’t allow small startups to keep up with mighty multinational corporations.
According to the United Kingdom-based market research and advisory company Allied Market Research, the global IVD market will be steadily growing over the next six years, reaching USD 90 billion by 2025. While developed economies will continue holding the largest share, immense emerging markets such as China and India are likely to dramatically improve their positions.