Xinmai Medical (688016. SH), which experienced the slowest year of growth since its listing.

The company's total operating income last year was 1.206 billion yuan, a slight increase of 1.61% year-on-year; The net profit attributable to the parent company was 502 million yuan, a slight increase of 1.96% year-on-year. This is in stark contrast to the company's rapid growth over the past few years, with Wind data showing that the company's revenue and net profit growth rate exceeded 30% most of the time between 2020 and 2023, and even in 2022, it maintained double-digit growth.

The

turning point appeared in the third and fourth quarters of 2024, when the company's revenue in these two quarters was 182 million yuan and 237 million yuan respectively, and the net profit attributable to the parent company was 150 million yuan and -51 million yuan, compared with the revenue of 267 million yuan and 299 million yuan and the net profit attributable to the parent of 109 million yuan and 104 million yuan in the same period of 2023, there was a significant decline. At the same time, the net cash flow from operating activities also deteriorated sharply, from 212 million yuan and 130 million yuan in the first half of the year, to 33 million yuan in the third quarter and -1.84 million yuan in the fourth quarter, and the net inflow for the whole year was 374 million yuan, a significant decrease of 33.08% year-on-year.

What's wrong with Cardio Medicine?

High pricing disputes

Xinmai Medical's performance is closely related to the price adjustment of its core product Castor® Branched Aortic Stent Graft and Delivery System (Castor stent for short), which was previously experiencing a "price reduction" storm.

On August 19, 2024, the National Health Insurance Administration (NHSA) questioned the pricing of the Castor stent for the first time in the form of a public inquiry. This has also become an unprecedented regulatory event in the field of medical devices in China. The National Health Insurance Bureau pointed out that the ex-factory price of the Castor stent (200mm) is about 50,000 yuan, but the terminal purchase price of the hospital is as high as more than 120,000 yuan, and the price markup is more than 100%, which is significantly beyond the reasonable range. Previously, a large number of people have complained about the inflated price of the product, and the Health Insurance Bureau said that "the price gap is too large" and "significantly beyond the necessary range".

On August 26, under the dual pressure of public opinion and supervision, Xinmai Medical announced a price reduction, adjusting the maximum sales price of the Castor stent to no more than 71,500 yuan, a decrease of 40.42%. The company explained that the previous price difference was mainly due to the cost of inventory management, intraoperative support, marketing, and training services borne by dealers in the multi-level distribution system. This price reduction not only demonstrates the country's determination to supervise the price of high-value medical consumables, but also marks a turning point for the medical insurance bureau to extend its regulatory tentacles from drugs to high-value medical devices.

According to the previous data of Xinmai Medical, in 2023, the number of Castor stent implants will be about 6,500-7,000, and the sales will be about 450 million to 490 million yuan, accounting for 38%-41% of the total revenue (1.187 billion yuan) that year. Although the 2024 annual report does not disclose the specific sales data of the product, it clearly mentions that the changes in the market environment in the second half of the year and the adjustment of some product prices and promotion strategies have had a certain impact on the annual sales growth rate and profit, confirming the impact of the price reduction on the company's performance.

In 2024, the National Health Insurance Administration will conduct price interviews with 12 thoracic aortic stent companies, and finally all of them will reduce their prices, showing the regulator's systematic measures to promote price transparency and reduce circulation costs. This incident clearly sends a signal: the regulatory authorities will intervene more frequently in the circulation of medical devices in the future, and carry out pricing supervision from the source, circulation to the whole chain of terminals.

At present, the domestic aortic stent market is facing the dual challenges of slowing growth and intensifying competition. The localization rate of this market has exceeded 60%, and the competition between local companies is becoming more and more fierce. Although Cardio Medical is leading the thoracic aorta market, it still lags behind Medtronic, a foreign leader, in the abdominal aorta field. With the advancement of centralized procurement, foreign brands have taken the initiative to reduce prices and the market structure has continued to reshape. Although the company has deployed a number of innovative products (such as Cratos stent, Aegis II, etc.), it has a long R&D cycle, large investment, complex clinical and registration requirements, and increasingly strict price control by medical insurance policies.

With the acceleration of supervision and the expansion of centralized procurement, the price system of high-value consumables has been comprehensively reconstructed. In December 2024, the fifth batch of national high-value consumables centralized procurement has been opened in Tianjin, and peripheral vascular stents and cochlear implants are officially included in the scope of centralized procurement, marking the formation of the "drug-style" price reduction model of high-value consumables. The previous model of the price system relying on multi-level agents and intraoperative support is facing reshaping, and the profit structure of the industry will be tilted towards "price for volume". Analysts generally believe that in the next one to two years, high-value consumables such as aortic stents and peripheral stents may continue to face the "double pressure" of centralized procurement and supervision, and the price will further move closer to the cost line.

In the face of high regulatory pressure and rapid price reduction in China, Xinmai Medical is accelerating its global layout as a breakthrough in performance. In 2024, the company's overseas revenue will increase by 75% year-on-year, and the proportion of revenue will exceed 10% for the first time, and its core products have entered Europe, Japan, Colombia, South Korea and other markets. In order to strengthen international channels, the company spent 463 million yuan to acquire 72.37% of the shares of Optimum Medical (OMD), a European medical device company, to promote the localized registration and sales of products in the European and American markets.

There are drawbacks in the business

"High-tech enterprise" is not just a name. On December 2, 2024, Xinmai Medical announced that the company received the "Notice of Tax Matters" from the Second Tax Office of the Shanghai Pudong New Area Taxation Bureau of the State Administration of Taxation. The notice pointed out that due to the cancellation of the qualification of Xinmai Medical as a high-tech enterprise, the tax authorities will recover the tax incentives that the company has enjoyed since 2023 and require the payment of late fees. According to the Company's preliminary estimates, the total amount of taxes and late fees to be paid is approximately RMB60 million to RMB70 million, and the impact on net profit is expected to account for more than 10% of the Company's audited net profit in the most recent fiscal year.

The

main reason for the disqualification of high-tech enterprises is that Xinmai Medical has not filled in the annual development report of the enterprise for two consecutive years in 2021 and 2022. According to the relevant provisions of the Administrative Measures for the Recognition of High-tech Enterprises, enterprises are required to submit annual development reports every year to maintain their status as high-tech enterprises. This negligence of Xinmai Medical led to the cancellation of its qualification as a high-tech enterprise, which in turn led to the issue of tax back-payment. The annual report disclosed that the company paid 62.23 million yuan of corporate income tax for 2023 in December 2024 and paid 6.9 million yuan in late fees, totaling about 69.13 million yuan, which further affected the current profit.

However, Xinmai Medical has re-obtained the high-tech enterprise certificate in December 2024, which is valid for three years and can continue to enjoy a preferential tax rate of 15% in 2024. The company's management said that it will strengthen internal management, organize training of relevant departments and personnel, and strengthen the sense of responsibility to avoid the recurrence of similar incidents. The incident exposed obvious shortcomings in the company's internal compliance management and information disclosure system, especially at a time when the capital market is highly concerned about ESG and governance structure, and such "low-level mistakes" can easily cause investors to question the executive's execution and risk control capabilities.

On the other hand, while facing performance pressure, Xinmai Medical will significantly reduce its R&D investment in 2024. Compared with 261 million yuan in the same period of the previous year, it decreased by 90.92 million yuan, a year-on-year decrease of 34.91%. The proportion of R&D investment in operating income also decreased from 21.94% in the previous year to 14.05%, a decrease of 7.89 percentage points. Reducing R&D investment can directly increase performance, but it may damage long-term interests and the subsequent market competitiveness of products. Under the superposition of several factors, the company's net profit attributable to the parent company in 2024 will only increase slightly by 1.1% year-on-year, and the non-net profit will decline sharply by 15.3%, and the quality of earnings will decline significantly.

In addition, Xinmai Medical's operation of "favoring one over the other" has also hit the confidence of the market. On December 4, Xinmai Medical announced the launch of the 2024 employee stock ownership plan, which plans to grant about 1.1 million shares, accounting for 0.89% of the company's total share capital; The share price of the plan is set at 58 yuan per share, which is significantly lower than the market price. The plan has a performance appraisal target, the stock unlocking period is three years, and the net profit attributable to the parent company from 2025 to 2027 needs to reach 600 million yuan, 720 million yuan and 864 million yuan respectively. If the net profit target of 600 million yuan can be completed, the company's net profit growth rate in 2025 will be 19.52%.