I have blogged extensively about Healthway Medical since I started this blog in December last year. I like the business and I like their strategy. The management is growing a defensive business. Sounds good, doesn't it? Their announcement to expand in China is a shot in the arm for the company. That Singapore's domestic market is small and could only provide so many growth opportunities is quite obvious. As Healthway Medical already has a business platform in Shanghai, continuing expansion in China is only natural and, if successfully executed, in time, it should be a more important contributor to Healthway Medical's overall performance.
Healthway Medical: Growing a defensive business.
Healthway Medical's growing in china.
Healthway Medical: A seven months journey.
In order to expand in China, Healthway Medical issued rights (1 for 5) at 7.5c to existing shareholders. This, I like. It allowed all shareholders to participate in the enlarged capital base of the company. Coverage by DMG with a target price of 28c sent the share price soaring soon after. Although I believed that Healthway Medical's valuation was inexpensive at 13c then when compared to peers such as Raffles Medical Group (RMG) and Parkway (and if we compared it to Q&M Dental, it was dirt cheap), seeing the price moving rapidly from 13c to hit 19.5c in a very short period was just unbelievable.
Fundamentally, at the CR price of 19.5c, it had similar valuations as RMG at that point in time. Technically, 19.5c was an eventual target provided by the chart pattern then. I divested as its price hit various levels of resistance on the way up and was 80% divested by the time it retreated a cent from 19.5c.
Healthway Medical - Rising too quickly?
Healthway Medical: A beautiful symmetry.
Rationale for partial divestment.
The CR target price of 19.5c translates to a XR target price of 17.5c. A CR target price beyond 19.5c was 24c and the XR target price beyond 17.5c is 21.5c. DMG later lowered their target price from 28c to 21c to take into consideration the dilution resulting from the rights issue as well as a share placement that would be taking place. The proposed share placement is good and bad and I have blogged about it before.
Healthway Medical: XR.
Healthway Medical: Share placement.
Today, I received a circular from Healthway Medical for an EGM on 9 March 2010. The following resolutions are being put up for a vote by shareholders:
1. The Proposed China Expansion Plans.
2. The Proposed IFC Placement.
3. The Proposed Placement.
Healthway Medical's management is being very forthright with all the risks which it might face in its proposed plans to expand in China. In total, there are 11 risks listed. Not great bedtime reading, for sure. This is why I have mentioned before that the plan is good and all we have to worry about is its execution. We can only hope that the management is up to the tasks at hand and that they have a measure of good luck on their side as well since, realistically, we cannot expect the entire process to be without hiccups. However, the management's strong track record in Singapore is re-assuring and we hope for the best.
That a member of the World Bank Group, International Finance Corporation (IFC), is going to take up 108,000,000 placement shares at 13c per share is a positive. IFC is going to be a long term partner and its track record of more than 50 years in creating opportunities and improving lives in emerging markets will raise the corporate profile of Healthway Medical. IFC will also extend a term loan of US$15m for a period of 10 years as a substantial shareholder of Healthway Medical.
A share placement at 13c per share is also being offered to two controlling shareholders and three substantial shareholders of Healthway Medical. This is to ensure that their aggregate interest in the company remains substantially unchanged at 44.6% and it also demonstrates the five shareholders' confidence in the growth prospects and plans of the company.
Healthway Medical's star is shining bright but the risks which are inherent in their ambitious plans to expand aggressively in China cannot be ignored. The journey will be a long one and fraught with obstacles. Shareholders will have to believe in the management and their vision. Having said this, shareholders will also have to keep an eye on the progress that is being made and adjust their expectations accordingly.
Investing in a company with confidence and holding with conviction is not the same as blind faith. Periodic reviews are still necessary. This brings me to the most important part of this post:
Number of shares:
As at 30 Sep 2009: 1,384,752,983
Upon completion of Rights Issue: 1,647,665,980
Upon completion of Proposed IFC Placement: 1,755,665,980
Upon completion of the Proposed Placement: 1,841,539,384
The much enlarged share capital of Healthway Medical is something shareholders and would be investors should bear in mind. Buying Healthway Medical's shares today at 13c is different from buying it at 13c in December last year which was the last time I bought some before it issued rights. Buying it at 13c now is closer to buying at 14.5c in December. So? It means that Healthway Medical's shares are not as cheap as before.
EPS would be about 20% lower and PE is less attractive. Fundamentally, at 16c, its PE would be 20x once all the proposed share placements are approved and effected. This valuation is similar to RMG and I would, therefore, consider 16c per share as a fair value for Healthway Medical from a fundamental perspective. Buying at any higher price would be a bet on the future earnings of Healthway Medical which cannot be determined with any great amount of certainty at this point in time.
I still have 20% of my original investment in Healthway Medical which were purchased at prices ranging from 10c to 13c. I still have shares which were given to me as scrip dividends which are about 11c per share in cost. I have also left a small position of those I bought at 16.5c XR as a hedge which is now losing money (which is what hedging does sometimes), having divested most of it at 16c and incurring a small loss when support became resistance. Finally, I have some entitled rights and excess rights which I got at 7.5c recently.
Fundamentally, I do not see a compelling reason rooted in the present to increase my investment in Healthway Medical. Technically, the counter might provide trading opportunities and I have identified 17.5c and 21.5 as the resistance levels to watch. 13c should be a strong support level. Good luck to all fellow shareholders.