Medtecs

COVID-19 changed the world. Increased demand for medical consumables and gloves have powered the healthcare sector worldwide and presented an interesting investment opportunity that I will be sharing today.

Medtecs International is a healthcare products and services provider and manufacturer of medical consumables, ranging from masks to hospital gowns. Manufacturing plants are located in Philippines, China and Cambodia. They boast a strong presence in Europe, United States and Asia Pacific.

Purchased shares of Medtecs in Jun 2020 @ $0.28.

Stock prices of healthcare companies (e.g. Top Glove, UG healthcare and Medtecs) are not only pushed higher from the substantial increase in earnings, but also the expectation of investors that earnings will be even higher in the coming quarters.

Reasons for my purchase:

Firstly, rising earnings. Medtecs Q1 Net Profit jumped almost 17 times, from US $227,000 to US $3,700,000. Additionally, mentioned in their AGM, earnings for following quarters are expected to be on par or even higher. This reflects the management’s high level of confidence in subsequent earnings.

The World Health Organisation released an article titled “Shortage of personal protective equipment endangering health workers worldwide” on 3rd March 2020 asking for the industry and governments to increase manufacturing to meet rising global demand. Also, mentioned in the article would be the surge in prices of masks and gowns, sixfold and twofold respectively.

An article by CNN highlighted the skyrocketing cost of personal protective equipment (PPE) – more than 1000% in some cases – amid the surge in demand (Diaz, Sands and Alesci, 2020). “The federal government’s Strategic National Stockpile has nearly emptied and states have been left to find PPE supplies on their own”, showcasing the desperate need for PPE in the United States. Considering these articles were published in March and April, I am expecting a stronger demand and increased Average Selling Price (ASP) for Medtecs products in Q2.

Some may question that production capacity would have been running at 100% or at least close to their max capacity, thus it is unlikely that Medtecs would be able to increase their unit sales. However, it was mentioned in their AGM they have implemented methods to ramp up production. E.g. converted idle plants into additional production bases.

(Those that are interested to find out more about the implemented methods are invited to look at Question 3 of their AGM response to substantial and relevant questions, link below)

http://www.medtecs.com/attachments/category/139/2020%20AGM%20Q%20and%20A_ENG.pdf

With that said, my estimation for earnings in Q2 would be at least a twofold increase.

Secondly, there is an influx of investors into the healthcare sector. Increased popularity of healthcare stocks as seen in forums brought about massive money inflow. With more people hopping onto this bandwagon, stock prices of healthcare companies will be pushed even higher. However, it is also to note that this bandwagon has cooled significantly after the crash in share price on 13th Jul, as mentioned below.

Risks:

Firstly, Q2 earnings may not be up to expectations. Medtecs share price have already accounted for Q2 earnings to outperform Q1 substantially as seen in the recent spike. Should Q2 earnings be not up to par, Medtecs share price would surely take a beating.

This is unlikely to occur in Q2. However, it may happen in future quarters to come as suppliers ramp up productions levels significantly to a level where supply becomes more readily available, causing a decrease in ASP. This ultimately leads to lower earnings affecting share price.

Secondly, and most importantly in my opinion, would be the exit of big investors. As seen below, on 13th Jul, Medtecs share price crashed from a high of $0.965 to $0.56 (-41.9%) in a matter of hours. The share price recovered some loss to close at $0.68.

The exit of a big investor might have caused the crash in share price. Seeing a drop of a 5% at 11 am and subsequently 23% at 1 pm, new investors might have panicked and followed to sell off all of their holdings resulting in the steep decrease in share price, bottoming at $0.56 for the day.

Others say that this crash was caused by a drop in the share price of Medtecs Taiwan Depository Receipts (TWD$25.70 to TWD$21.10).

Reasons for big investors’ exit may range from share price hitting their target price to feeling a lack of confidence in the future prospects of Medtecs.

Judging from forums and also word on the street, a large number of investors in Medtecs are new to investing and are riding on this trend without any proper investment plan or analysis. They are easily swayed by hearsay and movement in share price. Thus, are easily flushed out when the share price decreases. This brings about a huge risk of Medtecs share price crashing to rock bottom if any unfavourable catalyst surfaces (e.g. COVID-19 Vaccine).

All in all, I believe the current share price has reflected the current fair value of Medtecs and thus, I may be looking to offload half of my holdings. The other half will be held till Q2 reporting in August. I am still optimistic that Medtecs will be able to report a surprisingly strong Q2 result which will send their share price to higher highs. From there, I will have to evaluate on the correct course of action for my remaining holdings.

References

Diaz, D., Sands, G., & Alesci, C. (2020, April 17). Cost of protective equipment rises amid competition and surge in demand. Retrieved July 24, 2020, from https://edition.cnn.com/2020/04/16/politics/ppe-price-costs-rising-economy-personal-protective-equipment/index.html

Shortage of personal protective equipment endangering health workers worldwide. (2020, March 3). Retrieved July 24, 2020, from https://www.who.int/news-room/detail/03-03-2020-shortage-of-personal-protective-equipment-endangering-health-workers-worldwide