1. Targeted by a short seller, China Medical System fought back with a strong response and large-scale buyback


In recent years it has been common for short sellers who are active in the Hong Kong stock market to target "high-performing stocks". However, most of these actions have been in vain, the targeted companies with solid fundamentals have withstood these tests and their stock prices performed well again in the secondary market, fighting back against the short sellers.


Recently, the short-seller Blue Orca issued a short selling report of China Medical System, a domestic high-quality pharmaceutical company. In this report releasing in early February, Blue Orca accused China Medical System of inflating profits and its chairman's misusing of the listed company's profits for his personal gain.



China Medical System quickly issued a strong response responding to each of the key points in Blue Orca's allegations. The response also stressed that these allegations were groundless, seriously misleading with untruthful conclusions. Then Blue Orca released a second report which is similar to the first one on February 10. In response, China Medical System further denied all the allegations made in both reports, and claimed that all the allegations were false due to the ignorance of the company's business structure, applicable tax policies and regulations, and audit process and these allegations are based on incomplete information that was inconsistent with the facts.


Despite the round of confrontation, the share price of China Medical System has not been frustrated, presenting a stable trend and rebounding in the following days. It is worth mentioning that after the short sale, China Medical System bought back 9.648 million of its shares at the cost of HK$ 98.1641 million on February 11. This action not only shows the strong confidence that China Medical System has in its future development but also showcased the company's sincerity to its minority shareholders and determination of defending against short selling. The company's shares continue to be in popular demand since the short sale on February 6, with a cumulative increase of 9.8% as of February 14. The response in the capital market clearly demonstrates the failure of Blue Orca's long planned short sale.


2. China Medical System gives strong response to the allegations. Why the company is so confident?





As a Chinese idiom goes, "If you stand straight, do not fear a crooked shadow," when facing Blue Orca's attack, China Medical System not only strongly responded to various allegations in announcement, but also asserted its confidence through a large-scale buyback. The following is a discussion of key views of the confrontation and an analysis of why the Blue Orca's short selling is untenable.


First, Blue Orca questioned the performance of China Medical System, claiming that the net profit margin of the company's Chinese branches was significantly lower than the group, and further claiming that the profits from its Malaysian subsidiary were fictitious. In response, China Medical System pointed out that its Malaysian subsidiary, with independent rented offices and employees, undertakes the main international business functions of the company, including new product investment and introduction, manufacturer selection and evaluation, quality control and supply chain management, promotion strategy formulation, etc., and by the end of 2018, its accumulated intangible asset expenditure had reached RMB 2.85 billion.





In fact, given that only a few listed pharmaceutical companies are involved in large-scale international trade, it is not fair to simply compare the business data of China Medical System with other pharmaceutical companies and thoughtlessly conclude that China Medical System exhibited business performance of fraud. Furthermore, from the perspective of China Medical System's business system, the involved transnational businesses and corresponding structures, established with the assistance of professional tax consultants, are designed to undertake different functions and risks domestically and abroad, then generated corresponding profits, which is a normal business activity and common practice in multinational enterprises. Therefore, the profits of its Malaysian subsidiary really exist, and the profits of the Chinese branches do not represent the overall profit level of China Medical System as a whole.


In fact, the past financial performance and dividend payout further authenticate China Medical System's operation. Since listed in Hong Kong, China Medical System has maintained 40% of net operating profit as its dividend payout for nine consecutive years, totaling RMB 3.95 billion. Publicly disclosed total projects investment is about RMB 4.7 billion. Before 2016, the year-end bank loan balance of China Medical System totaled about RMB 300-400 million; from 2016 to 2018, the year-end bank loan balance of the company was about RMB 1.6 billion, RMB 2.1 billion and RMB 1.4 billion and with a gearing ratio of 16.5%, 20.7% and 13.9% respectively. The gearing ratio of the company has remained at a relatively low level for a long time. Since listed in Hong Kong, the direct equity financing of China Medical System totaled only about HK$ 1.7 billion. If, according to Blue Orca, 49% of the company's profit was fictitious, then the cash flow would have made it difficult to maintain its normal investments, operations and dividend payout. The company would have been stuck in the mud of cash flow fracture. In light of this, the seemingly exaggerated data argument of Blue Orca is obviously not reliable. At the same time, the long-term performance of China Medical System has obviously registered a soaring growth. Ten years period from 2009 to 2018, the CAGR of its revenue, excluding the effects of the two-invoice system, reached 28.1% and the CAGR of its profits reached 32.9%. Since its listing, the company has been audited by Deloitte, an internationally renowned accounting firm, and its market value has more than tripled.





Second, the other allegation made by Blue Orca mainly claimed that China Medical System, as a listed company, secretly funded the R&D of its chairman's private company as well as transferred benefits for its chairman's investment activities.


The root cause of Blue Orca's allegation lay in its lack of in-depth understanding of the company. In 2015, due to the uncertainty of the policy environment and the expectation of new product launching, Mr. Lam Kong, Chairman of China Medical System, made equity investments. After the successful commercialization of the product in which Mr. Lam Kong invested, China Medical System would then intervene and give Mr. Lam Kong a reasonable return. These were reasonable business decisions and protected the interests of shareholders. After the policy became clear and the team accumulated investment experience, China Medical System gradually explored the model of joint investment by both the listed company and the chairman, and, in some cases, independent investment by the listed company alone. It is in fact a meticulous design made by the company's founder. On the one hand, as a former medical practitioner, Mr. Lam Kong strives to bring an increasing number of highly innovative, affordable pharmaceutical products which can meet unmet clinical needs of the Chinese market to patients.


Continues on www.acnnewswire.com/press-release/english/57392/

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