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Venus Medtech (Hangzhou) Inc. (OTC:VMTHF) (2500.HK) is desperately trying to cure its corporate ailments, after first uncovering governance issues nearly a year ago. But the Hong Kong Stock Exchange isn’t satisfied that the transcatheter device maker is healthy enough just yet to resume trading.
Last week, Venus Medtech disclosed that the stock exchange has laid out five conditions the company must meet before its shares can trade again, following its disclosure last May that it failed to properly disclose loans made by the company to its chairman and general manager.
Not only did Venus Medtech fail to disclose the loans to investors, it also failed to tell its own board. Its excuse was that the loans had been repaid – 360.5 million yuan ($40 million) to general manager Zi Zhenjun in 2021-2022, and 268.6 million yuan to Chairman Zeng Min in 2022. The company’s May 8 stock exchange filing when it first disclosed the issue described Zi and Zeng, co-founders of the company, as key people needed for its continuing operation.
Such lending by companies to their founders isn’t unheard of in China, since much of their wealth is often tied up in their company shares that they don’t want to sell for legal reasons or because it might send the wrong signal to investors. But such loans need to be disclosed to both the company’s board and also to minority shareholders.
Following its disclosure of its governance problems, the company fired CFO Ma Haiyue last June, and set up an independent team to investigate the matter. That team’s report, published in August, found the company had no internal controls covering loans to directors, and that it wasn’t reporting such loans to shareholders. It noted the company’s audit team prepared monthly reports that included the loans, but didn’t share those reports with its board.
Following the CFOs firing in June, both Zeng and Zi resigned from the company in November. Venus Medtech announced a suspension of trading in its shares on Nov. 23.
But the problems didn’t end there. It was also discovered that Ting Yuk Anthony Wu, one of the company’s independent directors who replaced Zeng, was found guilty of professional misconduct by the Hong Kong Institute of Certified Public Accountants in 2014, two years before his appointment as a Venus Medtech director in 2016.
The company’s latest update shows it has met most of the conditions the stock exchange set forth for trading to resume, though Wu’s position leading Venus Medtech may be a sticking point, given his past record. That means trading could resume in the next few months after all the issues are finalized and executed.
So, what does the company’s future look like once it resumes trading? Venus Medtech has been losing money since its relatively large IPO in December 2019 when it raised HK$2.41 billion ($308 million) by selling shares for HK$33 apiece. The stock jumped 20% on its debut, and the company raised another HK$2.59 billion in February 2021 by selling additional shares.
Market leader
The company attracted attention as the first Chinese medical device maker to list in Hong Kong, with 79.3% of the market for its transcatheter aortic valve replacements (TAVR), according to independent research, in a market with strong growth potential and still at an early stage of development in China. It was the first company to introduce TAVRs on the Chinese Mainland, and at the time of the IPO was the seller of two of only five TAVR devices approved in China.
When Venus Medtech’s shares were suspended last November, they were about 95% below their peak, dropping its market cap to just HK$2.5 billion. That steep decline probably reflected investor impatience with the company, as its losses ballooned from 181.9 million yuan in 2020 to 1.2 billion yuan in 2022.
Despite those losses, the company still had a relatively large cash cushion, though the figure fell from 2.95 billion yuan in 2021 to 1.9 billion yuan at the end of 2022, and dropped further to 1.45 billion yuan by the middle of last year. At the end of 2022, it had 222.6 million yuan in bank loans maturing in 2022 or 2023, with another 795.9 million yuan in loans coming due between 2024 and 2037.
The company’s revenue is trending up, rising 21.7% to 255.6 million yuan year-on-year in the first half of last year from 209.9 million yuan the year before. Its loss also widened 52.8% to 366 million yuan in the first six months of last year from 240 million yuan a year earlier, as it spent more on both R&D and product distribution.
Its high operating costs were based in part on a 33.8% increase in its R&D spending, which totaled 294.7 million yuan for the six-month period. Sales and distribution expenses were the other big item, rising 28% to 157.9 million yuan over the period.
The bottom line for Venus Medtech is that it is spending heavily on R&D and relying on success of its future products now in development to reach eventual profitability. Its flagship VenusP-Valve has been commercialized in 30 countries, according to the 2023 interim report. And in July 2023, it became the first Chinese-made heart valve product approved by the U.S. Food and Drug Administration for clinical trials in the U.S.
Its debut product, the VenusA-Valve, continues to provide solid income in China, as the VenusP Valve and other new products go through development. The VenusA-Valve was the first in its category to be approved by China’s National Medical Products Association (NMPA), and accounted for 93.7% of the company’s sales in the first half of last year.
Within the TAVR camp, Venus Medtech traded at a price-to-sales (P/S) ratio of 4.97 before its suspension, which is more than double local rival MicroPort Scientific’s (OTCPK:MCRPF, 0853.HK) 1.96 and global peer Medtronic’s (MDT) 3.54. Seven analysts surveyed by Yahoo Finance are still relatively upbeat on the company, forecasting its revenue will grow 45% and its loss will narrow by about half this year.
Disclosure: None.
