Universal Medical Financial & Technical Advisory Services Company Limited (HKG:2666) continues to post impressive revenue growth and its prospects have never been brighter. However, my main concerns are around how the company is managing its balance sheet, and whether their current financial status is sustainable. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.
Firstly, a quick intro on the company – Universal Medical Financial & Technical Advisory Services Company Limited provides integrated healthcare services with integration of capital, technology, equipment, specialists, management, and training resources to hospital customers in Mainland China. Founded in 1984, it currently operates in China at a market cap of CN¥10.69b.
2666 is exceeding expectations, with top-line rocketing up by 26.21% from last financial year , and a bottom line growth of 31.68%. Over the past five years, sales has risen 24.08%, boosted by previous years of higher capital expenditure, which most recently reached CN¥18.89m. With continual reinvestment into business operations, a return on investment of 18.35% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to CN¥1.39b in the upcoming year, and over the next five years, earnings are predicted to grow at an annual rate of 17.43% on average, compared to the industry average growth of 14.03%. These numbers tell me that 2666 has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.
2666’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. Two major red flags for 2666 are its debt level exceeds equity on its balance sheet, and its high cash expenses leading to negative cash profit from operations. Although debt levels have been declining over time, and its interest income is able to cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of 2666’s financial health lowers my conviction around the sustainability of the business going forward. 2666 has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. One reason I do like 2666 as a business is its low level of fixed assets on its balance sheet (0.29% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. 2666 has virtually no fixed assets, which minimizes its downside risk.
2666 currently trades at CN¥6.29 per share. With 1.72 billion shares, that’s a CN¥10.69b market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 1.23x vs. the industry average of 1.98x.
If you’re thinking about buying 2666, you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.