Recently, BGI (300676.SZ) revealed its semi-annual report for 2023.

In the first half of 2023, BGI's operating income and net profit were 2,071 billion yuan and 52 million yuan respectively, a year-on-year decline of 34.49% and 91.46%, respectively.

In response, BGI explained, “This is mainly due to a year-on-year decline in the company's unconventional business revenue.”

Among them, “unconventional business” mainly involves “basic infection prevention and control research and clinical application services” and “comprehensive precision medical testing plan” businesses related to epidemic prevention. In the first half of 2023, the revenue of these two businesses was 142 million yuan and 799 million yuan respectively, down 75.22% and 48.18% from the previous year, respectively.

However, wealth management products have supported BGI's profit level. Investment income for the first half of 2023 reached 30 million yuan, accounting for 57.69% of the net profit of returning to the mother.

Excluding investment income, BGI's profit for the first half of 2023 was only 22 million yuan.

After demand for epidemic prevention has ebbed, BGI is facing the “where is the road” torture.

TradeWind01 (ID: TradeWind01) sought proof from BGI about the specific investment issues of wealth management products, but there was no response until press time.

The main business falls short of financial management

Without a hint of preparedness, BGI's profits have shrunk drastically.

In the first half of 2023, BGI's revenue and net profit were 2,071 billion yuan and 52 million yuan respectively, down 34.49% and 91.46% from the previous year, respectively.

Excluding the performance data for the first quarter of 2023, BGI's revenue for the second quarter was 1,171 million yuan, an increase of 22.75% over the previous year; however, net profit for the same period was only 111 million yuan, a year-on-year decline of 73.17%.

In response, BGI explained that “it was mainly due to a year-on-year decline in the company's unconventional business revenue.”

What BGI calls “unconventional business” points to “basic infection prevention and control research and clinical application services” and “comprehensive precision medical testing solutions” businesses related to epidemic prevention.

In the first half of 2023, revenue from basic research on infection prevention and control, clinical application services, and comprehensive precision medical testing programs was 142 million yuan and 799 million yuan respectively, a year-on-year decline of 75.22% and 48.18%, respectively.

The decline in demand for epidemic prevention has brought not only a decline in performance, but also a sharp decline in net interest rates. In the first half of 2023, BGI's net interest rate was only 2.51%, down 16.64 percentage points from the previous year; this is also far from the pre-epidemic level. BGI's net interest rate could reach 15.32% in the first half of 2019, which is more than 10 percentage points higher than in the first half of this year.

It is worth noting that behind this net interest rate is still inseparable from the help of investment income.

In the first half of 2023, BGI's investment income reached 30 million yuan, accounting for 57.69% of the net profit of Huida Gene.

“It is mainly the investment income of transactional financial assets during the holding period.” BGI explained.

In the first half of 2023, earnings from transactional financial assets reached 24 million yuan.

TradeWind01 (ID: TradeWind01) notes that the main capital of BGI's “transactional financial assets” came from a fixed increase in 2021.

In February 2021, Huada Gene raised an additional 2,003 billion yuan to invest in “Qingdao Huada Genetic Testing Reagent Production and Genetic Testing Service”, “Medical Testing Solution Platform Construction”, “Cloud Data Processing System Upgrade”, “Biological Sample Bank Construction”, and supplementary liquidity.

By the end of 2022, the amount of unexpired wealth management products of BGI was 1,208 million yuan, accounting for 68.71% of the amount raised; as of the end of the first half of this year, the unexpired amount of wealth management products was still 788 million yuan, and the share of capital raised also reached 73.60%.

According to a rough estimate by TradeWind01 (ID: TradeWind01) using 1,208 billion yuan of wealth management products as principal, BGI's yield for the first half of this year was 1.99%.

Excluding the impact of transactional financial assets and depreciation, BGI's ROE for the first half of this year was only 1.26%.

In other words, the return on BGI's main business is no longer as good as investment and financial management.

At the same time as “lying back and making money,” BGI's related fund-raising projects still had to be postponed due to various reasons.

According to the semi-annual report, the “Qingdao Huada Genetic Testing Reagent Production and Genetic Testing Service Project”, which has raised 668 million yuan to build, was originally scheduled to be used on December 31, 2022, but now “the plot involves adjusting relevant planning and construction indicators” and “macroeconomic and environmental impact” and has been postponed until the end of December 2024. As of the first half of this year, the investment progress was only 4.90%.

In fact, if the investment income contributed by purchasing wealth management products is excluded, BGI's profit for the first half of 2023 was only 102 million yuan, and the net interest rate for the same period was even only 1.06%.

After demand for epidemic prevention declined, it was clearly difficult to maintain profits that had soared.

Weak main business

Limited growth in other main businesses is also one of the reasons for this decline in performance.

In the first half of 2023, BGI's “Basic Research and Clinical Application Services for Reproductive Health” business revenue was 566 million yuan, an increase of only 0.03% over the previous year.

The business is still facing a certain ceiling.

Despite the help of various policies, the increase in the prevalence rate of pre-pregnancy screening is bringing potential room for growth in BGI's performance. For example, the “Implementation Plan for Issuing and Implementing the 2021-2030 Outline for the Development of Chinese Women and Children” issued by the Health and Health Commission on April 2, 2022 suggests that the target population coverage rate for pre-pregnancy eugenics health examinations remains above 80%, and the prenatal screening rate has reached 90%.

However, the decline in the domestic fertility rate is also hedging market demand for pre-pregnancy screening, and it is still unknown how much room BGI's “basic reproductive health research and clinical application services” business actually has for growth.

In fact, BGI's peers are also suffering from a shrinking market in the reproductive health industry.

According to the recent performance forecast for the first half of 2023 released by Berry Gene (000710.SZ), net profit for the first half of 2023 is about -90 million yuan, down 383.48% from the previous year.

“Affected by the environment in the reproductive health industry, the company's clinical business and other requirements declined during the reporting period compared to the same period last year, and sales revenue and profit levels declined year-on-year.” Berry Gene stated in the performance forecast.

Meanwhile, the “multiomics big data service and synthesis business”, one of BGI's main businesses, generated 328 million yuan in revenue, an increase of only 4.58% over the previous year.

However, the revenue growth of the “tumor prevention, control and translational medicine services” business, which has a relatively small base in BGI's business, is quite impressive. The first half of 2023 generated revenue of 218 million yuan, an increase of 38% over the previous year. The gross margin for the same period was 32.75%, an increase of 7.33 percentage points over the previous year.

BGI claims that it has expanded many application scenarios for the tumor testing business during the reporting period.

“During the reporting period, the company took Huaxuean genetic testing as the core in the field of hematologic oncology, provided more accurate personalized genetic testing services for leukemia patients, expanded more cancer types and clinical application scenarios, and gradually realized the full 'diagnosis, distribution, and monitoring' process and full course of disease testing.” BGI said.

Perhaps the more central reason comes from channel advantages. In the reporting period, China Gene has established cooperation with more than 2,300 medical institutions in China, of which the top three hospitals have reached more than 500.

“The company's business has covered more than 100 countries and regions around the world, including more than 2,000 scientific research institutions and more than 2,300 medical institutions in China, including more than 500 of the top three hospitals; more than 3,000 overseas medical and research institutions cooperating in Europe, America, Asia Pacific and other regions. It has established cooperative relationships with health authorities in more than 30 countries and regions, and has established cooperative relationships with health authorities in more than 30 countries and regions to establish a point-to-line-level network of government business relationships.” BGI pointed out.

Some market participants believe that an important part of the development of the cancer testing business currently comes from public medical institutions.

“Relatively speaking, private hospitals (IVD products) are less restricted and are progressing faster, but entering public hospitals is more helpful in establishing the clinical value of the brand and has important guiding and benchmarking significance for other channels.” Zhu Yeqing, chairman of Nuohui Health (06606.HK), which is the first company in early cancer screening, pointed out.

However, BGI's sales expenses are also substantial. Sales expenses for the first half of 2023 were 464 million yuan, accounting for 22.40% of revenue. R&D investment during the same period was only 283 million yuan, accounting for only 13.66% of revenue.

When to get out of the quagmire of declining growth is a difficult problem facing BGI.