The stock price skyrocketed 600% in 10 days, which all started with the resumption of trading of new ray medic (06108).

"As the saying goes, 'bear markets often have violent rallies, while bull markets often have violent declines,' during a bear market phase, the so-called 'demon stocks' are often the ones that experience violent rallies."

In today's Hong Kong stock market, it has already entered a bear market situation, with many stocks experiencing halving of prices and breaking through key support levels. Despite the overall poor market conditions, there are still a few individual stocks that have shown impressive performance,$NEW RAY MEDIC (06108.HK)$and this is one of those few stocks.

According to the Wisdom Financial APP, new ray medic was suspended in October 2017 and resumed trading on March 22, 2022. Since resumption, the company's stock price has formed a perfect U-shape, rising by over 600% from the bottom. As of the closing on April 19th, new ray medic surged 152.78% on that day, closing at 0.91 Hong Kong dollars with a turnover of 0.473 billion Hong Kong dollars.

(Market source: Zhongtong Finance)

From a fundamental perspective, the significant surge in new ray medic is mainly due to a substantial growth in the company's performance. In 2021, the revenue reached 0.335 billion Hong Kong dollars, an increase of 1.52 times year-on-year. The loss decreased from 69.73 million yuan in the previous year to 2.82 million yuan, a reduction of about 96% year-on-year. The company stated that the growth in sales of second-generation cephalosporin products was the main reason for the revenue surge, and the significant decrease in impairment losses also became a key factor in reducing losses and increasing profits.

Performance greatly increased, growth limited by medical insurance control costs.

According to Zhongtong Finance and Economics APP, New Ray Medic is a pharmaceutical distributor headquartered in Hangzhou, Zhejiang Province, China, and listed on the Hong Kong Stock Exchange in 2013.

Looking at the company's past performance, New Ray Medic's performance has not been very ideal, with annual revenue ranging from over 0.1 billion Hong Kong dollars to 0.3 billion Hong Kong dollars, 2021 being the second best year in the company's history in terms of revenue.

In terms of business segments, New Ray Medic's income mainly comes from pharmaceutical product distribution and trade, as well as providing marketing and promotion services. Pharmaceutical product distribution and trade are the company's main source of income, accounting for 98.3% to 0.329 billion Hong Kong dollars of total revenue, a 157% increase from the same period in 2020; gross margin is 7%, an increase of 1.8 percentage points from 2020.

The significant increase in pharmaceutical product distribution is mainly due to the control of the domestic COVID-19 epidemic in 2021, with cities in China relaxing population movement restrictions, leading to an increase in the number of people seeking medical and hospital services. At the same time, New Ray Medic actively organized and participated in various academic promotion activities in China, resulting in a significant increase in sales of the company's main second-generation cephalosporin product (1.0g).

It is worth mentioning that New Ray Medic's major customer income in 2021 reached 83.285 million Hong Kong dollars, accounting for 25.28% of total revenue. If the major customers detach from the company, it will have a significant impact on the company's performance.

In recent years, under the backdrop of medical insurance cost control has become the core of the pharmaceutical industry policy. The medical insurance cost control policy mainly focuses on three aspects: targeting the circulation sector, mainly dual-invoice system, value-added tax reform, pharmaceutical-medicine separation; targeting pharmaceutical equipment manufacturers, mainly centralized procurement of drugs, consumables, medical insurance negotiations, dynamic adjustment of the national medical insurance drug list; targeting medical institutions, mainly multi-component medical insurance payment reforms such as DRG, DIP, single-disease, day-based payment reform.

Against the backdrop of medical insurance cost control, pricing pressure on pharmaceuticals will persist. For distributors, it undoubtedly poses significant challenges. Facing market challenges, New Ray Medic actively strengthens cooperation with suppliers and end customers (such as hospitals) to improve the company's sales and marketing capabilities, and strives to expand its distribution network in China to reduce the impact of adverse external factors on the company.

One of the main reasons for the significant reduction in new ray med's losses in 2021 is that Saiko International had no impairment losses and no losses, while as of December 31, 2020, the company recorded impairment losses of approximately 37.3 million Hong Kong dollars in Saiko International for the year.

The investment in Saiko International can be traced back to 2015.

A long suspension triggered by an acquisition case

In January 2015, new ray med first announced the acquisition of Saiko BVI. The announcement stated that on March 20, after the trading hours, the buyer, new ray med's wholly-owned subsidiary Major Bright Holdings Limited (hereinafter referred to as 'new ray BVI'), entered into a purchase agreement with the seller Zhao Lei. Zhao Lei conditionally agreed to sell 50% of the target company's issued share capital for a total consideration of 95 million yuan.

According to the disclosure, the target company of this transaction is Saiko BVI. Saiko BVI wholly owns Saiko Hong Kong and Hangzhou Saiko Medical Instruments Co., Ltd. (hereinafter referred to as 'Hangzhou Saiko').

In this transaction, Zhao Lei made performance commitments, with a net income of 19 million yuan in 2015, 22 million yuan in 2016, and 25 million yuan in 2017.

It is worth noting that during the acquisition, the announcement also disclosed the operating conditions of Hangzhou Saiko in 2013 and 2014. According to the disclosure, the revenue in 2013 and 2014 was 21.588 million yuan and 75.284 million yuan, with pre-tax losses of 0.468 million yuan and profits of 2.669 million yuan respectively.

It is not difficult to find that Hangzhou Saiko's performance is hard to meet the performance promised by Zhao Lei.

On October 6, 2017, Hong Kong's Securities and Futures Commission required new ray medic to suspend trading of its stocks, as the Hong Kong Stock Exchange believed that the company's announcements regarding the acquisition of 50% equity interest in Sico BVI in 2015 and the acquisition of 15% equity interest in Heng Ya International Co., Ltd. (now known as Win Health International Company Limited) in 2016 may contain materially false, incomplete, or misleading information.

It is worth noting that shortly before the suspension announcement, the former chairman of New Ray Medic, Zhou Ling, also reduced his shareholding accordingly. Major shareholders Zhou Ling / Yang Fang sold 5 million shares of the company on September 26, 2017, realizing 2.15 million Hong Kong dollars, with an average transaction price of 0.43 Hong Kong dollars.

Furthermore, on the same day as the announcement, New Ray Medic also announced another plan to sell assets, intending to sell 25% equity of the target to Wing Yin Holdings Limited for a price of 44 million yuan, and the target being sold is Sico BVI.

From buying to selling, New Ray Medic's transaction with Sico BVI can be described as a typical case of 'buying high and selling low,' which is why the Hong Kong Securities and Futures Commission demanded the suspension.

On November 30, 2020, the Hong Kong Securities and Futures Commission initiated legal proceedings in the original court, seeking a court order to disqualify former Chairman and Executive Director Zhou Ling and former CEO and Executive Director Dai Haidong of New Ray Medic, as the two were suspected of corporate misconduct and breaching their responsibilities to New Ray. The Hong Kong Securities and Futures Commission also sought a court order in the same legal proceedings for Zhou Ling to compensate New Ray.

By the end of March 2022, the company announced that the current directors and senior management are not under the control or influence of former directors Zhou Ling, Yang Fang, and Dai Haidong, and the stocks resumed trading.

At this point, New Ray Medic has managed to overcome the negative impact of the acquisition case, which is one of the reasons for the recent significant increase in the company's stock price.

However, fundamentally, the future prospects of the medical distribution industry under centralized procurement are not optimistic, with limited room for growth.

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