BIOHLDG, one of the pureplay integrated health supplement company listed in Malaysia had inked another Joint Venture (JV) agreement with a healthcare giant listed in Shanghai – Suzhou MedicalSystem Technology Co Ltd (Suzhou MedicalSystem) to further commercialize BIOHLDG’s health formulations in the China market.

Suzhou MedicalSystem had a market capitalization of RMB3.5 billion.

To recap, this is BIOHLDG second major venture into the China market. In July 2020, the company bagged a 5-year contract to supply health food products, with a total contract value of RMB3.5 billion, or equivalent to RM2.1 billion.

So, what is the JV agreement all about?

Under the JV agreement, BIOHLDG and Suzhou MedicalSystem will setup a new company, namely Suzhou BioMedical Biotechnology Co. Ltd. (Suzhou BioMedic) to carry R&D activities, and most importantly, to register products with China’s National Medical Products Administration and for BIOHLDG to commercialise their herbal formulations in China.

Suzhou MedicalSystem had connections with approximately 80% of China’s triple-A Grade hospitals.

For the investment savvies, the JV will require a total initial capex of RMB5.0 million, which RMB4.05 million will be coming from BIOHLDG and the rest to be paid by Suzhou MedicalSystem. This would translate to an 81% stake in the Suzhou BioMedic. Apart from that, the company would also inject Intellectual Properties (IPs) into the Suzhou Biomedic including formulations that aid Type 2 Diabetes and for those who are undergoing Hormone Replacement Therapy (HRT) as well.

Suzhou BioMedic would station in Suzhou Industrial Park and due to its position as one of the China’s Special Economic Zones, the JV would also enjoy a lower corporate tax rate of 15%.

But wait, how can we make sure that Suzhou BioMedic is not another rah-rah game plan just for the hype? Well, lucky for us, we could always backtrack the company’s performance.

Bioalpha Hainan, a company that could be associated to the previous mega project that BIOHLDG inked had brought in RM16.4 million in sales for the company’s 2^nd Quarter in financial year 2021, which is equivalent to 55% of revenue contribution. Bear in mind that the management of BIOHLDG could not travel to China during the MCO, else the revenue contribution could be on an even higher spectrum.

Back to Suzhou BioMedic, all the IPs that BIOHLDG that will be injecting into consists of immunity-boosting, obesity-care, anti-ageing, longevity as well as β-nicotinamide mononucleotide or NMN supplement. A study by Frost and Sullivan indicates that the market size for antidiabetic treatment in China is expected to grow with 12.2% CAGR from 2018 to 2027, where the HRT market in China is expected to grow with 4.6% CAGR from 2020 to 2027.

We do not know any guidance on the future earnings yet, but assuming the JV could contribute 50% of what Bioalpha Hainan is doing on a minimum case scenario, that would mean an additional revenue contribution of RM8.2 million per quarter and RM32.8 million per financial year. A conservative net profit margin of 12% would result in an increase of RM3.9 million in net profit and when translated to market capitalization with the 5-year average PER of 22.8 times, it is expected to add RM86.6 million to the market capitalization or 7.3 cents per share.

Unfortunately, due to the bad market condition, BIOHLDG’s price could not reflect its true value. Personally, I think BIOHLDG is worth at least 27 ~ 28 cents in value. We shall wait for the market to rebound and determine market’s assumption on the company valuation.