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Healthway Medical: Second quarter results.

Sunday, August 15, 2010

Healthway Medical announced that it has entered into agreements with twelve (12) medical and dental centres in Shanghai and Hangzhou.  To operate and manage these facilities, an investment of RMB38m (or S$7.6m) is required over a period of three months. They hope to increase the number of facilities under management to more than twenty by end of this year.

At the same time, Healthway Medical also released their second quarter results and the numbers look bad.

1. Revenue compared to the same period last year has tumbled 12.3% from S$24.45m to S$21.44m.  This is worse than the first quarter when the revenue declined 6.3% compared to the same period a year ago.

2. Staff cost increased 22.9% which suggests that Healthway Medical is paying a lot more now to retain or to recruit staff.  In terms of absolute dollars, the increase from S$10.75m to S$13.2m is no small change.

3. Profit before income tax is an insignificant S$165k compared to S$5.23m in the same period last year.  This is much worse than the first quarter profit of S$1.4m.

4. Cash flow from operations is a negative S$2.3m compared to a positive S$4.05m in the same period last year.  However, it is an improvement over a negative S$4.94m in the last quarter.

5. Cash flow from financing activities is still a positive S$18.79m and the company has S$32.6m in bank deposits.

6. EPS for the quarter is 0.01c, down from 0.32c in the same quarter last year and down from 0.09c in the last quarter.

Fundamentally, Healthway Medical's numbers in the first quarter were relatively bad but they are now worse.  See second quarter statements here.

On 16 May, I blogged about Healthway Medical's first quarter results.  I said: "As an investor, to be prudent, I would continue to wait for greater clarity on whether higher earnings would follow, maintaining that the share price at current level does not offer good value."  This opinion has not changed.

Although Healthway Medical has taken another important step in its expansion plans in China, risks still exist and it remains to be seen if the management is able to execute its plans successfully and deliver value to shareholders.  With weakening revenue and rising costs at home and possible teething problems in China, investing in Healthway Medical at the current price is not for the faint hearted.

On 11 Aug, I blogged about how Healthway Medical's support at 18.5c has been compromised and that price could go lower. It is likely that 17c could be tested as a support sooner than later.

Related post:
Healthway Medical: A weak first quarter.
Healthway Medical: Support compromised.


Drizzt said...

thanks for the review, how do u find the model of these clinics, because i would expect them to be revenue generating off the bat but probably they are not doing well there.

AK71 said...

Hi Drizzt,

It seems that Healthway Medical is fighting to keep doctors from leaving here at home. Revenue is dropping while staff cost is rising. This suggests that there are less doctors generating revenue and the fewer doctors left are being paid a lot more to keep them from leaving.

As for the business model adopted for expansion in China, it seems like a good one. Healthway is just operating and managing the clinics. They don't own the clinics. The idea is an appealing one but I am unsure of the exact mechanics. Having said this, the risks listed by the company regarding its expansion in China are still quite real.

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