Consecutive Achievements of Stellar Business Results Assessing the Intrinsic Value of China Biotech Services Holdings (08037) by Addressing on Two Market Discrepancies
发布时间:2021-08-24 19:12:49

China Biotech Services Holdings’ (08037.HK, the “Group”) business results continued to grow substantially.


The Group’s interim report (the “Report”) for the first half of 2021 (the “2021 Interim Period”) was announced on 12 August 2021. According to the Report, the Group recorded a turnover of approximately HK$374 million during the 2021 Interim Period, an increase of approximately 10.95 times over the same period last year. Recorded net profits came in at approximately HK$109 million, marking a remarkable turnaround from a net loss (approximately HK$45.78 million during the 2020 Interim Period) to net profit.


Following to the announcement of the Report, The Group’s stock price remained relatively modest, not adequately reflecting the Group’s robust performance results. This is directly related to certain market discrepancies of the  Group’s intrinsic value.


Zhitong Caijing App believes that there are two discrepancies happened on the assessment of the intrinsic value of the Group versus general market cognition. Firstly, revenues from COVID-19 nucleic acid testing services will soon come up to a stable stage and this will continue to generate a sustainable cash flow to the Group while the diversified testing operations are widely expected to create new dimensions of growth opportunities. Secondly, LY007 Cellular Injection, being developed by Shanghai Longyao, has proceeded to phase I clinical trials. Despite these key developments, The Group’s intrinsic value has yet to be fully reflected on its stock price.


In fact, the Group’s intrinsic value can be easily deduced with a more in-depth understanding of the two discrepancies noted above. Among all companies involved in CAR-T product development across Mainland China, the Group could be the highest odds one to draw favourable returns to investors. Once the catalytic factors behind its corporate value become in effect, the stock of China Biotech Services Holdings is poised for stellar performance. 


Outstanding business results and substantial increase of earnings power


Backed by its core precision diagnosis operations whilst spearheading gene and cell-based medicines in the market, The Group is nurturing double biotechnology platforms for both precision testing and cell medicine development in the Guangdong-Hong Kong-Macao Greater Bay Area. Therefore, precision diagnosis and cell-based therapy are the core businesses of China Biotech Services Holdings, and based on these two businesses, the Group has built up a two-wheel drive development model.


Since the Group’s cell-based therapy business operations have yet reach full commercialisation, precision testing has been the key revenue driver for the company in the 2021 Interim Period. The revenue generated from medical laboratory testing and health check services accounted for 96.96% of total  revenues in the first half of 2021. This substantial, more than 10-fold revenue increase in the 2021 Interim Period was mainly driven by a significant increase in both medical laboratory testing and health check services.


As a leading third-party testing service provider in Hong Kong, China Biotech Services Holdings responded quickly and decisively in the early stages of the Covid pandemic outbreak, partnering with BGI Health (HK) Company Limited and Mr. Anthony Wu Ting-yuk, former chairman of the Hospital Authority of Hong Kong as well as a standing committee member of the Chinese People's Political Consultative Conference National Committee of the People's Republic of China. Together they jointly established the Sunrise Diagnostic Centre. With the introduction of BGI’s ‘Huo Yan Laboratory’ module, Sunrise Diagnostic Centre has been providing sampling and testing services for persons from high-risk groups, including elderly home residents, taxi drivers and others. Sunrise has also participated in the Universal Community Testing Programme since September 2020, providing Hong Kong residents with COVID-19 nucleic acid testing services. Reaching a maximum of 230,000 tests per day, the Sunrise Diagnostic Centre is the largest service provider in Hong Kong for the COVID-19 nucleic acid tests.


Since Hong Kong’s fourth wave COVID-19 outbreak in November 2020, the Sunrise Diagnostic Centre has provided nucleic acid testing services directly to individuals as well as clinics, companies and government offices. Since December 2020, the Sunrise Diagnostic Centre has also set up a mobile laboratory in the Hong Kong International Airport to provide arriving travellers to the Territory with 24/7, one-stop services, including nasopharyngeal sampling and two-hour rapid RT-PCR nucleic acid testing.


Due to the especially high demand for nucleic acid testing services, the revenues generated by the Group’s medical laboratory testing and health check services recorded a robust 10-fold increase. In addition, the gross profit margin for the 2021 Interim Period rose to approximately 57.88%, (an improvement of nearly 27.73%) compared with the gross profit margin of around 30.15% for the 2020 Interim Period.


During the 2021 Interim Period, sales and distribution expenses were maintained at steady levels while administrative expenses increased by a reasonably low amount.  For these reasons, the Group was able to achieve a turnaround from a net loss for the 2020 Interim Period to net profit for the 2021 Interim Period of approximately HK$109 million and a 29% net profit margin, reflecting a significant growth in overall earning power.


Discrepancy over stable growth prospects of the Group’s precision testing business


Despite these impressive results, the market has shown signs of concern about prospects for the Group’s precision testing business. Some market pundits predict that the demand for testing services will go down once the pandemic is under control, which is an overly pessimistic sentiment.


Ideally, successful research and development as well as acceptance of vaccines will help relieve the burdens of the pandemic both in Hong Kong and over the world. However, the subsequent emergence of COVID-19 variants and the actual slower than anticipated uptake of vaccinations locally have meant that eliminating the coronavirus is and will continue to be an extended and tortuous process. Demands for testing services in the community and at the airport area are still robust. In particular, the Hong Kong International Airport, as an important aviation hub in Asia, performs the critical function of prohibiting the influx of coronavirus strains from overseas. Therefore, the demand for testing services there will certainly be maintained. 


In addition to COVID-19 nucleic acid testing services, The Group also offers a diverse range of testing products. According to its financial statement, the Group runs three different types of medical laboratories, plus three health check centres located in various districts of Hong Kong. With its key focus on providing COVID-19 nucleic acid testing services, Sunrise Diagnostic Centre also offers HPV screening and COVID-19 Neutralising Antibody testing services.


The PHC Medical Diagnostic Centre was amongst the first third-party medical testing centre established in Hong Kong since 1968. Its comprehensive testing scope covers pathology, haematology, biochemistry, immunology, radiology and almost all medical testing areas.


Moreover, Asia Molecular Diagnostic Laboratory (AMDL) has been exclusively licensed

by its shareholder Pillar Biosciences to distribute Pillar's FDA-approved lung and colon cancer assay in several Asian countries and regions.


The assay is the first FDA-approved, NGS tissue-based companion diagnostic test (not the so-called single site IVD) as well as Pillar’s first NGS IVD product approved by FDA’s Class III, highest standard Premarket Approval (PMA). Taking full advantage of the exclusive distribution rights of these tests, China Biotech Services Holdings is expected to enjoy a new growth curve in its precision testing business. This will help drive sustainable growth in the Group’s overall business results.

In addition, Precision Health Care Services Ltd., a subsidiary of the Group, runs three V-Care health centres located in Causeway Bay, Jordan and Tsuen Wan, providing HPV vaccinations, health checks, COVID-19 antibody testing as well as health management and other customised services for Hong Kong and Mainland customers.


Essentially the Group is capable of providing a diverse array of testing products and services through its three functional laboratories and three health centres. Taking full advantage of its respected reputation as a result of the Group’s initiation of the Universal Community Testing Programme, the Group can now target business growth for other testing services and strengthen the growth of its overall precision testing operations.

Moreover, AMDL’s exclusive distribution rights for Pillar’s assay is expected to generate a new business growth stream while China Biotech Services Holdings will continue to expand its diversified testing services. In view of these positive factors, the Group’s precision testing business is well poised to move into a next growth stage. The high probability of achieving a sizable, steady expansion is at stark odds with certain market participants’ pessimistic outlook.
CAR-T business value not yet reflected in the future stock price

More critically is that while LY007 Cellular Injection, developed by Shanghai Longyao, has proceeded to phase I clinical trial, this positive factor has yet been fully reflected in the stock price. Zhitong Caijing App noted that the Group acquired Shanghai Longyao in July 2018 to complete its strategic goal of cellular research and development of CAR-T. On 21 January 2021, Shanghai Longyao received the approval letter from the National Medical Products Administration to begin clinical trials for LY007 Cellular Injection and will be registered as a new Class I drug.


Approval for clinical trials of LY007 Cellular Injection implies that the Group’s strategic aims for CAR-T are now at the forefront of its operations. As a new Class I drug it is the highest standard in the national medical product classification, and represents a breakthrough treatment not yet for sale either in China or overseas. More importantly LY007 Cellular Injection is being independently developed by Shanghai Longyao with the incorporation of the patented OX40 co-stimulatory signal design. It is the first and only CD-20-targeted CAR-T product in China whose application for registered clinical trial has been approved.


Five days after the approval for clinical trial for LY007 Cellular Injection, Science Translational Medicine published a research article about CD20-CART-OX40-related research findings by Shanghai Longyao’s Chief Scientist Professor Xuanming Yang. The article recognised the promising potential of LY007 Cellular Injection for application in solid tumour treatment as being highly regarded in the international medical field.


Other than CD20-CART-OX40, Shanghai Longyao’s product pipeline includes seven therapies that treat B-cell lymphoma, leukaemia and various kinds of solid tumours. In addition, Shanghai Longyao has proactively gone ahead with research applications for solid tumour CAR-T, Universal CAR-T and MAX.


Why do we cite the fact that the value of LY007 Cellular Injection moving onto phase I clinical trial has not been reflected in the current stock price of China Biotech Services Holdings? According to a research report by China Merchants Securities (HK), the market value range of comparable CAR-T clinical trial companies listed on the Main Board of the Hong Kong Stock Exchange are between US$1,200 million and US$2,200 million, and up to US$5,600 million on the NASDAQ. However, the market value of China Biotech Services Holdings was recorded only at US$192million as of the close of market on 17 August 2021.


Worth noting as well is the fact that the US$192million valuation included the Group’s precision testing business which achieved revenues of HK$374 million and net profits at HK$109 million in the 2021 Interim Period. This implies that the current stock price has not even factored in the value of the CAR-T business.


The factors that are depressing market value assessment may no longer exist


Investors may rightly question the low stock price of the Group, which owns a quality precision testing business and heavily weighted CAR-T products with a highly under-estimated value. The core reason for this is that the Group is listed on the GEM board and many institutional investors are not mandated to allocate fund for investment in this class of shares. That is why the value of China Biotech Services Holdings has been so deeply under-estimated.


This outlook may eventually be reversed in view of the accelerating development of the CAR-T industry in China. The approval of Yescarta was a landmark case for the CAR-T industry and a breakthrough milestone in China. From zero to one, China has set up examination and approval standards for CAR-T immunotherapy. It’s in effect like pressing the fast forward button to launch innovative anti-cancer drugs in China, which will be beneficial for the overall development of the entire CAR-T industry.


Based on the estimates by Market Research Future, the future global CAR-T market is expected to expand rapidly with a compound growth rate of 59% and will reach the scale of US$8,710 million in 2025. Coherent Market Insights anticipates that the scale of the CAR-T market in China will also grow at an annual compound rate at 46.1%.


In view of the huge CAR-T market potential and accelerated development of the CAR-T industry in China, various capital sources will indeed be increasing their research efforts toward CAR-T-related enterprises, more accurately exploring the intrinsic value of the CAR-T sector.


Compared with other well-established enterprises involved in CAR-T product development, the Group is perhaps one of the most promising firms destined to attain the highest returns.  This means that the Group will inevitably become a must-have option in terms of capital allocation among investors. As a result, we will not be amazed to see a positive correction of the Group’s stock price in near future.