Medical Device Maker Highlights China Risk as Chinese U.S. IPOs Resume

Key Takeaways:

• Meihua International files updated prospectus highlighting China oversight risk in latest filing for its modest $57 million U.S. IPO
• Hotel operator Atour makes similar updated filing for U.S. IPO plan to raise $350 million, valuing the company at more than $2 billion

By Doug Young

It’s a new week, with yet more signs that the China-U.S. IPO pipeline is slowly creaking back to life. This time it’s a relatively small IPO by a medical device maker named Meihua International Medical Technologies Co. Ltd. that’s making headlines with the company’s latest filing for a plan to raise a modest $57 million.

At the same time, two new listings we wrote about last week have also moved forward. The first saw drug maker LianBio’s LIAN shares fizzle in their trading debut, falling 14% on their first trading day, as it became the first major New York listing by a Chinese company since a halt in July. The second saw hotel operator Atour Lifestyle Holdings Ltd. (ATAT.US) file an updated prospectus for its plan to raise about $350 million.

We’ll start with Meihua, as that’s the freshest news and also includes language in its updated prospectus that signals what U.S. Chinese IPOs will look like as things resume. Then we’ll spend the rest of this space looking at the financials for Meihua and Atour and how those listings might be received.

In quick review, the big back story is that both Washington and Beijing have expressed concerns about Chinese companies listing in the U.S., for different reasons. Washington’s main concern is tied to a complex corporate structure called variable interest entity (VIE), which is used by most Chinese companies listing in the New York. Meantime, Beijing’s concerns mostly involve data security.

All three of these new listings are significant in that none of the companies is using a VIE structure. What’s more, none of them are internet companies that have big troves of potentially sensitive data on millions of Chinese.

In our review last week, we speculated that the VIE structure could become an endangered species among U.S.-bound Chinese IPOs in the future due to Washington’s concerns. It’s a bit less-clear if internet IPOs will be able to resume anytime soon, as those will all require data security reviews by China’s internet regulator.

In that regard, the clearest signal that such internet IPOs are resuming will come when China’s internet regulator starts clearing Chinese companies to resume listings after conducting required data security reviews. Three companies that made U.S. IPOs without completing such reviews – DiDi Global DIDI, Full Truck Alliance YMM and Kanzhun BZ – are now all awaiting those results, though none has announced anything yet.

All that said, we’ll return to the latest news of Meihua International’s listing plan, which was actually first filed in August and includes an update filed last Friday. The updated prospectus is notable for a lengthy section at the beginning – well before the usual “risks” section in all prospectuses – on the risks associated with Chinese IPOs. That section wasn’t present in the original August filing.

“Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers,” the section begins, before including more detail how such oversight could affect its future listing.

Disposable Devices

We’d strongly recommend that readers take a closer look at the LianBio and Meihua prospectuses to better understand the unique risks of Chinese IPOs that are now spelled out far more clearly than in past similar listings. But in the meantime, we’ll quickly review Meihua’s and Atour’s latest financials to see what kind of market reception they’re likely to get.

Meihua sells low-value-added disposable medical devices, both self-made and purchased from third parties, with a current portfolio of 920 products. The company points out in its prospectus that demand for such products has exploded during the pandemic, citing third-party research that says the China market grew more than tenfold in 2020 from 2019. It also includes somewhat contradictory data that says the China market for such devices grew 26% to $14.9 billion last year.

No matter which of those numbers is right, the company’s own results look quite disappointing in comparison. Its revenue grew just 11% last year to $88.2 million, though its profits grew at a faster 23% to $19 million. Revenue growth continued at 11% year-on-year in the first half of this year to $48.3 million. But its profit actually contracted 11% to $9.1 million in the first six months of 2021, with the company blaming increased sales of third-party products that typically carry lower margins.

None of that is particularly impressive, meaning this listing is likely to meet with a lukewarm reception.

Atour’s IPO is a bit more interesting, due to the company’s status as one of China’s top hotel operators. Based on its latest filing, which includes a price range of $13.50 to $15.50 for its American depositary shares (ADSs), the company should get a market value of more than $2 billion, making it China’s fourth-largest homegrown operator.

Atour’s business model looks noteworthy for its growing focus on “manchised” hotels, a model used by most big western operators that sees them manage hotels under their own brands for third-party property owners. That model is more profitable and requires far less capital than the traditional model where a hotel company manages a property that it directly owns or leases.

Atour’s portfolio of such “manchised” properties grew to 654 at the end of June from 420 at the end of 2019. By comparison, its directly leased and managed properties grew to just 33 from 29 over that period. That model, combined with a recovery from the pandemic, helped Atour to post 83% revenue growth in the first half this year to 990 million yuan ($155 million), and also to pull the company back into the profit column after posting a loss in the first half of 2020.

In valuation terms, a pricing at the midpoint of its range would give Atour a lofty PE of 95, based on profit projections for this year. That figure is actually below two of its larger domestic rivals, with Huazhu HTHT now trading at 129 and Jin Jiang (600754.SH) just a bit lower but still high at 115. Those compare with 67 for global giant Hilton HLT, which also looks quite high, reflecting broader high hopes for a global sector recovery as the pandemic eases.