Medtecs International

[weijian]

Hard times have fallen on this Covid-19 beneficiary and "1 hit wonder" company. 1H22's PATMI is -3.7mil, while 2H21's PATMI is ~-1.7mil. This means that losses are continuing to widen.

Medtecs is currently trading at ~18-20cents for the last 1 month. With a NAV (end Jun2022) of 32.76USD cents (or 0.45sgd), it means the Market puts a 50% discount to NAV. This translates to Mr Market assigning zero value to its "brand, existing sales channels and trusted OEM" or its overseas manufacturing facilities, while believing that its losses will continue together with more inventory write-downs.

A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting period and
the next 12 months.

As part of our growth strategy, we have substantially completed a fully integrated manufacturing facility for nitrile gloves in Cambodia and expect to start commercial operations in the 3rd quarter of 2022. We also have completed vertical integration
of the facemask production facility in the Philippines. This ensures product quality and minimizes supply chain disruption. as we work on becoming a one-stop total solution provider for healthcare needs.

The Group will capitalize on our expanded production capacity of key products such as facemasks, isolation gowns, and other protective apparels to maintain our competitiveness in terms of quality and cost. The Group will continue to accelerate
automation of production facilities while at the same time, outsource non-critical production processes.

The Group will make full use of e-commerce platforms through the business model of “Source and Sell Globally”, which will drive customer engagement and help the Group source for better-quality raw materials and suppliers of PPE. The Group
has continued to grow the Medtecs and CoverU branded protective equipment and disease prevention products as we strengthen our business to consumer (B2C) services both through e-commerce platform and through retail distribution hubs
like drug store, convenience stores and supermarkets.

The Group has capitalized its manufacturing presence in the Philippines as it has several stockpiling contracts for PPEs and military uniform with the government. We have successfully partnered up with a local distributor and key developer of highend medical devices such as handheld ultrasound devices, and expect to launch these products in the Philippines in the next few months.

The COVID-19 pandemic has increased awareness and demand for the Group’s healthcare products and PPE. With the above-mentioned sales and operational strategies, the Group will continue to build awareness for its own brand, develop and expand sales channels, while at the same time, focus on maintaining our competitiveness as a trusted original equipment manufacturer for medical institutes and healthcare providers. The Group remains and will continue to strive to be in the forefront of safety and disease control and management with our high-quality PPE and healthcare related products.

Medtecs 1H22: https://links.sgx.com/FileOpen/Medtecs_S...eID=728580

[BlueKelah]

Hard times have fallen on this Covid-19 beneficiary and "1 hit wonder" company. 1H22's PATMI is -3.7mil, while 2H21's PATMI is ~-1.7mil. This means that losses are continuing to widen.

Medtecs is currently trading at ~18-20cents for the last 1 month. With a NAV (end Jun2022) of 32.76USD cents (or 0.45sgd), it means the Market puts a 50% discount to NAV. This translates to Mr Market assigning zero value to its "brand, existing sales channels and trusted OEM" or its overseas manufacturing facilities, while believing that its losses will continue together with more inventory write-downs.

A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting period and
the next 12 months.

As part of our growth strategy, we have substantially completed a fully integrated manufacturing facility for nitrile gloves in Cambodia and expect to start commercial operations in the 3rd quarter of 2022. We also have completed vertical integration
of the facemask production facility in the Philippines. This ensures product quality and minimizes supply chain disruption. as we work on becoming a one-stop total solution provider for healthcare needs.

The Group will capitalize on our expanded production capacity of key products such as facemasks, isolation gowns, and other protective apparels to maintain our competitiveness in terms of quality and cost. The Group will continue to accelerate
automation of production facilities while at the same time, outsource non-critical production processes.

The Group will make full use of e-commerce platforms through the business model of “Source and Sell Globally”, which will drive customer engagement and help the Group source for better-quality raw materials and suppliers of PPE. The Group
has continued to grow the Medtecs and CoverU branded protective equipment and disease prevention products as we strengthen our business to consumer (B2C) services both through e-commerce platform and through retail distribution hubs
like drug store, convenience stores and supermarkets.

The Group has capitalized its manufacturing presence in the Philippines as it has several stockpiling contracts for PPEs and military uniform with the government. We have successfully partnered up with a local distributor and key developer of highend medical devices such as handheld ultrasound devices, and expect to launch these products in the Philippines in the next few months.

The COVID-19 pandemic has increased awareness and demand for the Group’s healthcare products and PPE. With the above-mentioned sales and operational strategies, the Group will continue to build awareness for its own brand, develop and expand sales channels, while at the same time, focus on maintaining our competitiveness as a trusted original equipment manufacturer for medical institutes and healthcare providers. The Group remains and will continue to strive to be in the forefront of safety and disease control and management with our high-quality PPE and healthcare related products.

Medtecs 1H22: https://links.sgx.com/FileOpen/Medtecs_S...eID=728580

If you follow the history it has often been a poorly performing company with only spikes in share price during pandemics like the previous SARs period and Covid.

[ghchua]

Hi BlueKelah,

I have to disagree with you if you are just looking at its share price performance. Yes, Medtecs's net profit margin had been low before Covid, but it had been a consistently profitable company.

We have to understand that Covid is a unique situation. Companies that benefited from it are now looking at the after effects of those ramp-ups. This is not only unique to healthcare products and PPE producers like Medtecs. Other companies which provides Covid testing services are also looking at lower revenue.

What is the steady state then? We still don't know. Have to wait for those excesses to be weeded out from the system before we can see the after effects. In the meantime, do not be too fast to write off companies like Medtecs.

[BlueKelah]

Hi BlueKelah,

I have to disagree with you if you are just looking at its share price performance. Yes, Medtecs's net profit margin had been low before Covid, but it had been a consistently profitable company.

We have to understand that Covid is a unique situation. Companies that benefited from it are now looking at the after effects of those ramp-ups. This is not only unique to healthcare products and PPE producers like Medtecs. Other companies which provides Covid testing services are also looking at lower revenue.

What is the steady state then? We still don't know. Have to wait for those excesses to be weeded out from the system before we can see the after effects. In the meantime, do not be too fast to write off companies like Medtecs.

I remember looking at this company many many eons ago and already written it off already.  If you know the insider story about the boss you would write it off as well   Something about crosslisting in taiwan which was bad for local shareholders, heard it from my broker when i discussed this stock with them. I think it happened long time back, maybe even before GFC.

Historically they have had very bad EPS, i think was loss making in 2014 and before, then very very borderline break even earnings for many years. 

Even in 2019 , out of revenue on 94m+ they only made a net profit of 1.4+m translating to EPS of 0.29c lol...

Precovid their revenue was 90m+, 2020 was 550m+ and in 2021 has come back down to 193m and 1H2022 I just saw was only ~43.5SGD which if you project same revenue next 2H2022, should be back to baseline of precovid 90m+ They are also back to making losses. 

Back then 2019 share price was 3-4c which i think it should fall back to that range again and would make a good short at current prices.

They were just lucky to be in the right sector during covid 2020, but now without capable management its gonna be a gone case.

[ghchua]

Hi BlueKelah,

Why do you think that Medtecs will fall back to 3-4c range again?

I mean, back then in 2019, their NAV was around US11c+ share. Currently it is at around US32c per share. Even if you apply the same NAV discount on its share price, it couldn't be that low. Unless you are assuming that the company will continue to be loss making every year from now on until NAV will be eroded from US32c back to US11c per share.

The company is certainly in a stronger position now as compared to 2019, as can be seen from its higher cash balance and fixed deposits.

[Elty]

Hi BlueKelah,

Why do you think that Medtecs will fall back to 3-4c range again?

I mean, back then in 2019, their NAV was around US11c+ share. Currently it is at around US32c per share. Even if you apply the same NAV discount on its share price, it couldn't be that low. Unless you are assuming that the company will continue to be loss making every year from now on until NAV will be eroded from US32c back to US11c per share.

The company is certainly in a stronger position now as compared to 2019, as can be seen from its higher cash balance and fixed deposits.

There are plenty of opportunities in the market. 
An investor has to sieve out great businesses from mediocre ones.

[Semper Incertus]

Medtecs, in my opinion, unfortunately appears to be a company with appalling management & governance. Since 2019, sales effectiveness in terms of sales generated per dollar spent on marketing has fallen by 50%. Their Hospital Services Division appears to have very poor economics (average gross margins are around 2.8%) & this division's profitability has not grown since 2014. Their Distribution Division sales have also been falling at a compounded annual rate of almost 6% per year since 2014 and yet assets at this division have grown at a CAGR of 53% per year. This appears to be a misallocation of capital to me. Inventory growth seems to regularly (once every 3 years since 2014) exceed sales growth indicating poor inventory control. Management has also indicated that it wants to venture into renewables, a crowded space which the Company does not appear to any edge in. When I asked management to shed some light on the above issues prior to the AGM, my questions were just ignored. The current share price also appears to be at or close to Liquidation value. Yet major shareholders/management is NOT pursuing buy-backs. This appears to suggest that even management is not confident of their prospects moving forward. Medtecs appears to be a struggling company in a mediocre business with a very small moat.

Major shareholders appear to only hold 11% of the Company so if this is correct, the shareholding structure is pretty fragmented. A strategic acquirer may be able to unlock value but I wouldn't hold my breath.

[BlueKelah]

Hi BlueKelah,

Why do you think that Medtecs will fall back to 3-4c range again?

I mean, back then in 2019, their NAV was around US11c+ share. Currently it is at around US32c per share. Even if you apply the same NAV discount on its share price, it couldn't be that low. Unless you are assuming that the company will continue to be loss making every year from now on until NAV will be eroded from US32c back to US11c per share.

The company is certainly in a stronger position now as compared to 2019, as can be seen from its higher cash balance and fixed deposits.

Yes they have had a big windfall from covid, what you would call being in the right industry at the right time. Balance sheet looks strong. 

However as the ASP of HC gloves has collapsed back to precovid levels, and so has their revenue. They have also started clocking in losses. There is a double whammy of low glove prices/oversupply and rising raw material costs from inflation.Do you think their losses will lessen going forward as we go into a global recession or to you think it will just be 3million/q?

This company has a long history from SESDAQ listing in 1999. Performance past 20 years just been subpar and OPMI unfriendly as per my previous post about the taiwan listing. 

AND yes i am projecting they will continue to make more losses going forward and slowly erode the NAV, wont go to 3-4c right away, You might see more big inventory write downs+increased admin costs in the future further eroding "NAV" at a much quicker pace, etc.. 

Unless we suddenly get another monkeypox pandemic or something, i think next 5 years likely to be back below 10c even if not at my 3-4c precovid level call.