Introduction and Sisram Medical (HK. 1696)

After various years of debating whether to start part-time investing in the stock market, in early 2020 I finally decided that the time was right. The last few months have been a great introduction to the world of financial markets with various lessons already learned (some learned the hard way!). The end game was/is to create a portfolio of around 15 stocks across the global markets, with a balance of value stocks and growth stocks (at reasonable price, sorry Tesla). 

I will use this blog to summarise some of the positions I've taken and providing updates/views on how they evolve over time. Given this is part-time hobby, I'm in no way providing any kind of financial advice to anyone reading any entries of this blog. Please analyse investments thesis yourselves, its the best part of the journey anyway, nothing more rewarding than finding undiscovered gems!

The first stock I would like to cover is Sisram Medical (HK.1696), listed on the Hong Kong Stock Exchange. 

Summary

• Sisram Medical (1696.HK) operates in the medical aesthetics market, through its subsidiary Alma Lasers, with a focus on minimally invasive procedures (Market >10% CAGR globally in next years)

• 75% Owned by Fosun Pharma (Strategic Investor, Market Cap >$10bn), having acquired ~100% of Alma Lasers in 2013 and filing for IPO in 2017.

• Sisram Medical currently trades at LTM 0.3x Revenue (4x at IPO), 2.4x EBITDA (21x at IPO), 11x PE (22x at IPO) and vastly cheaper than listed competitors as well as past transactions in sector.

Background

Sisram Medical (1696.HK) operates in the medical aesthetics market, through its subsidiary Alma Lasers, with a focus on minimally invasive procedures (Market >10% CAGR globally in next years). 

Alma Lasers, founded in Israel, develops laser based treatment systems which help doctors provide treatments such as hair removal, skin rejuvenation, cellulite reduction, tattoo removal, acne treatment, body contouring and skin tightening. Currently Alma Lasers has around 25 products on the market and tends to release 2 or 3 new products every year or upgrade existing products with new features. 

Revenue

The company derives revenues globally (sales in over 90 countries) with  geography split illustrated below.

As at IPO, a 2017 Medical Insight Report, forecasted Alma Laser's market share in China to be 16% (#1), followed by Wuhan Miracle Laser (13%), Lumenis (11%), Cynosure (7%) and Syneron (6%). Equally, it forecasted that Alma Lasers market share globally to be 4% (#5), behind Cynosure (16%), Zeltiq (13%), Syneron (11%) and Lumenis (6%). 

Since IPO, Sisram Medical has achieved solid growth across all geographies albeit slower growth in APAC (which Management is addressing by increasing focus in new territories such as South Korea and Australia in recent months). Detailed figures in the chart below.  

Whilst, we have had no access or visibility of updated Market Insight Reports, we understand the market leading position in China remains, whilst Alma Lasers is still amongst the top companies in the sector globally (with growth in revenue outperforming the general industry CAGR every year since IPO). 

The revenue and sales model is based on two sources:

1) Direct - Alma Lasers sales representatives selling directly to Clinics/Doctors etc. This is the case for U.S, Canada, Germany, Austria and India. This accounted for ~54% of Revenue in 2019. 

2) Distributors - Distribution agreements across all other jurisdictions. This accounted for ~46% of Revenue in 2016.  In particular for China, the company has an exclusive distribution agreement with one company. 

The key revenue sources are based on three core products:

- Soprano Titanium / Soprano ICE Platinum (Hair Removal) – Main competitors appear to be Candela GentleMax, Lumenis SplendorX, Cynosure Elite MPX. 

-Accent-Prime (Body Contouring) – Main competitors appear to be InMode (BodyTite, Contoura, Evolve), Cynosure Smartlipo.

- Harmony XL Pro (Skin Treatment and Hair Removal) – Main competitors appear to be Candela (Frax and Nordlys), Cynosure Picosure, Lumenis Stellar M22

Comparisons across products are difficult to make as performance depends on skin colour/type, maintenance of machine, provider experience etc but reviews across the web appear to be positive (i.e. check in RealSelf) for Alma Lasers’ products across the board. 

Costs and EBITDA

Gross Profit Margin (after Cost of Goods Sold) is ~50% and has been slightly improving over time (51% in 2014 to 55% in 2019). The other two main costs relate to SG&A and R&D Expenses. The former has grown at a fast pace from ~$27m in 2014 to $59m in 2019 at a CAGR of 17%, mainly driven by associated costs from expanding direct sales operations in key markets such as United States and Israel. 

R&D has increased from $7m in 2014 to $10m in 2019, a CAGR of 9%. R&D represents approximately 6% of Revenue and is a focus of the business (i.e. Alma Lasers seems themselves as the innovator in the sector, not a trend follower). 

As a result, EBITDA has grown at ~6% CAGR since 2014 with margins declining from ~22% in 2014 to ~18% in 2019. 

The business Working Capital position of the business could do with improvements with the business having a net working capital outflow every year (albeit it has plenty of liquidity to fund this). Hence the gap between EBITDA and Cash From Ops as highlighted above. Since the business has limited Capex (~$1m p.a.) Cash From Ops is essentially Free Cash Flow to the Firm Pre Tax. 

Working Capital Details

Receivables Days (2014-2019 Avg): 95 Days

Payables Days (2014-2019 Avg): 46 Days

Inventory Turnover (2014-2019 Avg): 140 Days

Capital Structure and Shareholding

The IPO raised $100m in Sep 2017 with all debt repaid around the same time. As a result, since IPO in 2017, the business operates with a Net Cash position of ~$100m. The Cash Position is used to fund the negative working capital as outlined above but is also being retained for potential M&A targets as outlined as part of IPO Prospectus as well as past announcements made by both Sisram Medical as well as its major shareholder Fosun Pharma. 

In addition, for FY 2019, Sisram Medical paid a dividend of $6m, equivalent to a 30% Payout based on Net Income. The dividend yield based on share price at the time (~4 HKD) was ~2%. Based on current share price of (~2.3 HKD) this would double dividend yield with plenty of coverage. 

The major shareholder of Alma Lasers is Fosun Pharma, owns ~75% of the company. Fosun Pharma is a large conglomerate across the Medical Space with a market cap of >$10bn and listed in Hong Kong. Fosun is one of the most respected investor groups in Asia, with operations across other sectors as well. This significantly de-risks any issue with potential overstatement of revenue/fraud which is commonly feared by investors of stocks listed in Asia. 

In addition, Fosun provides a great platform for Sisram/Alma to sell their products through, given connections in the sector. 

Valuation and Competitors

Fosun Pharma acquired Alma Lasers in 2013 for a consideration of ~$250m (100%). This implied an EV/Rev of 2.5x, EV/EBITDA of 12.5x and P/E of 47 based on our calculations and disclosures at the time. 

Sisram Medical Market Cap is currently ~1bn HKD or $130m (based on share price of 2.3 HKD). Hence, since the original acquisition of Fosun Pharma, the value of Alma Lasers has halved, whilst the business has delivered Revenue CAGR of >11% since and EBITDA CAGR of >6%. 

Sisram Medical currently trades at LTM 0.3x Revenue, 2x EBITDA, 10x PE (and vastly cheaper than listed competitors as well as past transactions in sector). Past transactions in the sector (excluding Cynosure in 2019) have been at implied EV/Rev of 3.0x (range 1.1x-6.8x), EV/EBITDA of 25.0x (range 10.3x-69x) and P/E data is not meaningful given disparity and majority of companies being loss making. Apart from InMode, which I will comment further on, Sisram actually has the best EBITDA margins in the sector.

Cynosure acquired in 2017 for $1.5bn was sold two years later at $0.2bn as the business went from being high growth with solid EBITDA margins, to negative growth and negative EBITDA. It highlights competitive nature of the business (no denying that). Recent transactions in the sector since 2013:

InMode, also founded in Israel, IPOed in August 2019 with a share price of ~$20 around that time implying a market cap of ~$700m. Since September 2019, the share price has doubled (granted driven by impressive revenue growth despite COVID). InMode's revenues are primarily focused in the United States (80%) with the business aiming to expand to other geographies in upcoming years. Worth noting, InMode is not a new player in the market (it was founded in 2008 whilst Alma Lasers was founded in 2005). 

Based on my high level research, the reason behind the strong EBITDA margins for InMode are driven by jurisdiction it operates in (North America) and the fact that sales are all direct. As the business expands into other geographies, I would expect the margin to decline. Having said that, my focus is not so much on InMode but on Sisram. The listed comparable companies data is shown below (in addition to InMode, Cutera is also listed). I've used LTM data (H1 2020 + H2 2019) for the comparison to include impact of COVID for Sisram (H1 2020 commentary below as well).

 

Looking at this in addition to everything outlined above, I would estimate that Sisram's Fair Value would be considerably higher than the share price as of today. Based on my calculations, I would conservatively estimate upside of over 200% from the current levels.

The H1 2020 results for Sisram were not amazing but far from bad with Revenue decreasing by ~15% albeit a further reduction in EBITDA margins due to higher costs associated with COVID impact and hence net income reduction of 50%. This is expected to pick up in H2 2020 so we will be focused on upcoming announcements by the company in the next few months.