Business Strategy and Outlook
Masimo has been a leading provider in pulse oximetry since developing signal extraction oximetry in the late 1990s, a technology that offered better accuracy and reliability. The firm’s business strategy depends on maintaining product advantages in core pulse oximetry, expanding its installed base of monitors, and developing innovative technologies to grow its footprint in the hospital setting, such as remote monitoring and hospital automation.
Further revenue and market share growth for Masimo will primarily come from one of two sources: winning business from Nellcor customers seeking a technology upgrade and expanding the use of oximetry beyond the critical-care environment with greater penetration in the general ward. In critical care, where pulse oximetry is often necessary for good patient outcomes, Masimo has a saturated position. However, on the general floor, Masimo is continuing to make the case that pulse oximetry can improve patient care and reduce hospital costs.
Apart from its core pulse oximetry business, Masimo has also prioritized the expansion of its hospital automation program, which involves integrating central monitoring with bedside vital-sign aggregation systems. This program is being established as a software-as-a-service business, with a per-bed cost for hospitals of $1,000 to $5,000, depending on services offered. We like the potential here, and we think Masimo is poised to significantly expand revenue from the program, despite having less than 100 hospitals currently under contract.
Masimo’s Opioid SafetyNet is another pipeline product that could have a material impact on the business over the coming decade. This product, a modified version of the company’s remote monitoring Patient SafetyNet system, is designed to monitor for Opioid overdose risk and alert emergency contacts if needed. Masimo was selected as one of eight companies to receive expedited development and regulatory approval support from the U.S. Food and Drug Administration to help with the ongoing opioid crisis, and Masimo expects to receive product approval in 2021. We see potential for Masimo to rapidly scale up this business.
Financial Strength
Masimo has excellent financial strength. The company operates without leverage and has consistently been able to generate strong free cash flow. In December 2018, Masimo established a credit facility for $150 million, with an option to increase borrowing to $555 million based on meeting certain lending conditions. Considering the strong free cash flow of the business, which we estimate will exceed $200 million in 2021, it’s clear Masimo has significant financial flexibility. While we don’t anticipate large-scale litigations like the ones Masimo fought against Nellcor and Phillips, the firm’s strong financial position would be advantageous in a lawsuit or settlement requiring significant legal fees or settlement funds. Given the many lawsuits in the pulse oximetry space over the past two decades, another major court action within the next 10 years is certainly possible, but we don’t think Masimo faces any major litigation risk.We expect Masimo to pursue several smaller acquisitions, and while the firm can make a larger acquisition if one is found that makes sense, we don’t expect material acquisition activity in the near term. Over the 2014-2015 time period, Masimo borrowed over $150 million, primarily using the funds to repurchase shares. This debt was fully paid down by year-end 2016. If Masimo draws from its credit facility at some point to acquire a business, we would likely expect quick repayment based on management’s accelerated debt paydown last time the firm used leverage
Bulls Say’s
- The potential in Masimo’s product pipeline is underappreciated. An estimated $10 billion opportunity for products in development would provide diversification to a strong pulse oximetry business,
- As Masimo continues to take share, the firm’s superior oximeters could become a de facto necessity for clinicians. Masimo could leverage this position to push pricing, generating a tailwind for revenue.
- Masimo’s strong balance sheet and cash flow generation give the company resources to maintain high levels of investment and to explore accretive acquisition opportunities
Company Profile
Masimo is an Irvine, California-based medical device business that focuses on non-invasive patient monitoring. It began by developing superior signal processing algorithms to measure blood oxygenation levels through pulse oximetry and has expanded this expertise into a wide range of measurements and applications. The company generates revenue globally, with the United States the largest market (67% of 2020 sales), followed by Europe, the Middle East, and Africa (21%), Asia and Australia (9%), and North and South America excluding the U.S. (3%).
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020 on approx. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model.
JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. Gross margin improved yearly from 5.5% in 2011 to 15.2% in 2016, and following the consolidation of JD Finance in second-quarter 2017, gross margin improved year over year from 13.7% in 2016 to 14.6% in 2020.
In the medium term, it is foreseen the investment into community group purchase, JD logistics and the supermarket category will hold back some of the margin gains. JD is unlikely to have non-GAAP net margin increase in 2021. Starting in April 2017, the logistics business became an independent business unit that will open its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, it is foreseen for, gross profit margin improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.
Financial Strength
JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. It is contemplated management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so it is alleged think JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial headcounts. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.
Bulls Say’s
- JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate.
- The partnership with Tencent could allow JD.com to gain significant user traffic from Tencent’s dominant social-networking products in China.
- JD is now the largest supermarket in China, the high frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.
Company Profile
Trip.com is the largest online travel agent in China and is positioned to benefit from the country’s rising demand for higher-margin outbound travel as passport penetration is only 12% in China. The company generated about 78% of sales from accommodation reservations and transportation ticketing in 2020. The rest of revenue comes from package tours and corporate travel. Prior to the pandemic in 2019, the company generated 25% of revenue from international business, which is important to its margin expansion. Most of sales come from websites and mobile platforms, while the rest come from call centers. The competes in a crowded OTA industry in China, including Meituan, Alibaba-backed Fliggy, Toncheng, and Qunar. The company was founded in 1999 and listed on the Nasdaq in December 2003.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook:
New Oriental Education, or EDU, is a large-scale leading provider of private tutoring in China. EDU offers a diversified portfolio of educational programs, services, and products to students in different areas. Not only does EDU offer K-12 after-school tutoring, but EDU also offers other test preparations for both overseas and domestic examinations. In non-academic fields, EDU offers adult English and other languages, and it also provides services in vocational training, such as corporate training, marketing, accounting, human resources, IT and PRC Bar. EDU has been able to raise its fees via new students or new programs to cover rising costs, driving an improving margin as utilization and operational efficiency continues to improve.
A key tenant of EDU’s strategy is to improve operational efficiency in the near term. EDU is guiding 20%-25% year-over-year growth per year for its learning center capacity for the next three years and we believe that offline classes should gradually open as the impact of the coronavirus gradually fades. Also, EDU will continue to close down underperforming centers, which also implies improving operating efficiency. EDU is aiming to raise its student retention rate to 65% from 63% in fiscal 2021.
Financial Strength:
The company’s financial status has been healthy over the past years, with a clean balance sheet and steady cash inflows. EDU has been generating net cash since 2011 with steady cash flow. However, uncertainty is expected to be ahead before the end of 2021, when businesses are required to restructure–with the estimation of 62% of their business being required to be spun off.
Bulls Say:
- Well-established reputation and dominant position in China.
- Successful expansion with strong student enrolment in China should drive growth.
- Likely to benefits in the longer term as one of the first movers in online education known as Koolearn.com.
Company Profile:
EDU, founded in 1993, is the largest well-established one-stop shopping private educational services provider in China. EDU has had over 52.8 million student enrollments, including about 8.4 million enrollments in fiscal 2019. As of third-quarter fiscal 2020, EDU had a network of 1,416 learning centers, including 99 schools, 12 bookstores and access to a national network of online and offline bookstores through 160 third-party distributors and over 38,400 highly qualified teachers in 86 cities. EDU offers a diversified portfolio of educational programs, services and products to students in different age groups, including K-12 after-school tutoring for major academic subjects, overseas and domestic test preparations, nonacademic languages and services in vocational training, and so on.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.