Losses in performance for over three consecutive years

Recently, the Ministry of Finance has stated that it will increase its support for local governments in resolving government debt risks. Against this backdrop, whether pharmaceutical distribution companies, primarily serving public hospital clients, can benefit from this remains to be seen.

This year, the stock price of Sile Medical (603716.SH) has fallen by more than 30% in the secondary market. The pressure on the stock price may be related to the company's high accounts receivable and continuous losses.

Affected by factors such as slower-than-expected recovery of accounts receivable from hospitals, as of the mid-year report this year, the company's accounts receivable still stood at 1.526 billion yuan.

In recent years, the slow recovery of accounts receivable has put significant financial pressure on the company. In 2021, the company's performance recorded its first loss since going public, and as of the mid-year report this year, it has been losing money for more than three years.

High Accounts Receivable

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In August this year, Sile Medical's announcement about the temporary inability to repay the raised funds used to supplement working capital "sounded the alarm" for the company's tight funds. At that time, the company had not yet returned the remaining 374 million yuan of raised funds, which were temporarily used to supplement working capital, to the special account for raised funds.

As for the reason, Sile Medical explained that, given that all the company's clients are public hospitals, and due to industry policies and other factors, the recovery of accounts receivable has improved but still falls short of expectations.

In the first half of this year, Sile Medical's accounts receivable reached 1.526 billion yuan, while the company's operating income was 976 million yuan, and the net profit attributable to the shareholders of the parent company was a loss of 4.7725 million yuan. The net cash flow generated by the company's operating activities was negative, at -48.8779 million yuan.

The crisis of high accounts receivable at Sile Medical emerged as early as the 2021 financial report. That year, the company's accounts receivable rose to 1.752 billion yuan, and the net profit attributable to the shareholders of the listed company was a loss of 49.506 million yuan, marking the first loss since its listing.

In 2022 and 2023, the company's accounts receivable continued to rise, reaching 1.752 billion yuan and 1.767 billion yuan, respectively, with net losses attributable to the shareholders of the parent company of 154 million yuan and 159 million yuan, respectively.Serica Medical has stated in the reply to the regulatory work letter regarding information disclosure in its annual report for the year 2023 that, in recent years, influenced by the policy environment, the payment cycle of hospitals has been extended, leading to a continuous high level of accounts receivable balance and age levels for the company. In the absence of significant improvement in the accounts receivable balance and age levels, the company's credit impairment losses have remained at a high level in the past three years. Additionally, the extended accounts receivable collection cycle has led to high financing pressure for the company, resulting in financial expenses that account for a higher proportion of revenue compared to the industry average.

In 2021, 2022, and 2023, Serica Medical's credit impairment losses amounted to 76.5792 million yuan, 91.9207 million yuan, and 80.0681 million yuan, respectively; financial expenses also reached 76.6036 million yuan, 88.347 million yuan, and 72.8812 million yuan, respectively.

From the top ten accounts receivable customers disclosed by Serica Medical for the years 2021, 2022, and 2023, the vast majority of customers are hospitals. Specifically, the Affiliated Hospital of Inner Mongolia Medical University, Beijing You'an Hospital affiliated with Capital Medical University, Rongchang District People's Hospital of Chongqing, and the People's Hospital affiliated with Inner Mongolia Medical University have been listed in these three years.

Among them, in 2023, the accounts receivable balance of the Affiliated Hospital of Inner Mongolia Medical University was 184 million yuan, and the bad debt provision balance was 11.1246 million yuan. As of May 31, 2024, the hospital has repaid 56.614 million yuan.

Serica Medical has taken legal action against some customers to urge repayment, which has also affected the company's business situation in some areas in the short term.

For example, in 2022, Serica Medical filed a lawsuit with the Qingdao Intermediate People's Court, applying for the repayment of accounts receivable and other corresponding amounts by Qingdao Women and Children's Hospital. In 2022, the operating income from Qingdao Women and Children's Hospital was 5.5067 million yuan, but in 2023, the income has become zero.

Business Model Dilemma

The industry in which Serica Medical operates is the commercial circulation field of the medical industry. The company was originally a distributor of in vitro diagnostic products. With intense market competition, after going public in 2016, the company increased its efforts to transform into medical testing centralized marketing and service business (IVD business), which is referred to as "integrated sales" or "linked sales" in the industry.

This model refers to the company signing medium and long-term business contracts with medical institutions and other customers, agreeing that during the contract period, the company provides in vitro diagnostic equipment for customers to use and sells in vitro diagnostic reagents and consumables to them, with profits coming from the purchase and sales price difference of in vitro diagnostic reagents and consumables or the sale of self-produced products.

Subsequently, the company's business further extended, upgrading the original centralized operation service of medical institution testing products to centralized operation service of hospital medical consumables (SPD business), expanding from the original medical testing centralized business to the overall supply of medical consumables. In addition to providing medical testing-related equipment, reagents, and related professional services, it also provides centralized services for in-hospital high and low value consumables and other medical products.By expanding intensive services, Selix Medical hopes to assist medical institutions in reducing costs and improving efficiency, thereby gaining control over the entry points of terminal medical institutions.

However, under this model, the company faces financial pressure challenges, needing to bear more pre-collecting investments from upstream suppliers and payment period pressures from downstream medical institutions.

Although Selix Medical's customers are mainly public hospitals with a relatively high overall credit rating, they are subject to complex approval processes for contract payments and longer repayment cycles due to budgetary fund arrangements.

Since entering 2023, influenced by macroeconomic factors and the state of fiscal funds, the repayment cycle for customers has been further extended.

In the reply announcement to the regulatory work letter regarding the disclosure of the 2023 annual report, Selix Medical stated that the contract payment periods for SPD business customers and IVD business customers in cooperation are generally agreed to be within 12 months.

However, in reality, some customers' repayment times exceed the agreed period. Among the top ten IVD customers of Selix Medical in 2023, the contract payment period for Huangshi Central Hospital was 3 months, but the actual payment period reached 18 months; for Hebi People's Hospital, the contract payment period was 4 months, but the actual payment period reached 18 months.

Among the top ten SPD business customers of Selix Medical in 2023, the contract payment periods for the Affiliated Hospital of Inner Mongolia Medical University and Alxa League Central Hospital were not clearly stipulated, but the actual payment period reached 14 months; the actual payment periods for Chongqing Rongchang District People's Hospital, Tieli City Medical Service Community Center Hospital, and Chongqing Rongchang District Traditional Chinese Medicine Hospital exceeded 20 months.

Recently, Selix Medical announced in a public statement that the company is increasing the collection efforts of receivables to enhance the company's cash flow.