Analysis: China’s Covid Test Firms Wave Goodbye to the Days of Easy Money
Chinese Covid-19 test companies are facing shrinking profits despite higher demand, as the government has further cut prices and competition has grown fiercer.
Over the past three months, the country has been battling its worst wave of outbreaks since 2020. In May, the central government set a target of having a Covid testing facility within a 15-minute walk for residents in major cities, in a bid to detect infections as early as possible.
Under the guidance, many cities and provinces have rolled out programs for regular nucleic acid tests, also known as PCR tests. The campaigns are paid for by local governments and often conducted by test companies, and require residents to undertake tests within mandated frequencies ranging from 48 hours to seven days.
As regular testing becomes the new normal, demand for the service has never been greater, which is a boon to test companies. However, as local government budgets come under higher pressure, authorities have slashed the prices test companies can charge.
On May 25, the National Healthcare Security Administration announced the fifth cut to caps on Covid PCR test prices since 2021, requiring that government-organized mass or regular pooled testing should cost no more than 3.5 yuan per person.
The cost of testing everyone in China’s first- and second-tier cities — some 505 million people — could reach 970 billion yuan a year if tests are done every 72 hours, Soochow Securities Co. Ltd. analysts estimated in a May 7 report, based on an average cost per person of 16 yuan. That amounts to 0.85% of China’s GDP in 2021, or 4.79% of the country’s fiscal revenue.
This cost would drop to about 210 billion yuan if each test is only 3.5 yuan, according to Caixin calculations based on the Soochow estimates.
The falling pricing means thinner profit margins for test companies, which have already been squeezed over the past year.
Sansure Biotech Inc. (688289.SH), whose main business is production of PCR reagents, saw its net profits drop 14.3% to 2.2 billion yuan in 2021 — which it attributed chiefly to decreasing prices of Covid tests — reversing a surge of more than 60 times the previous year. In the first quarter of this year, its net profits rose 4.8% year-on-year, well below the 222% growth in the same period in 2021.
Other testing companies like BGI Genomics Co. Ltd. (300676.SZ) and Shanghai ZJ Bio-Tech Co. Ltd. (688317.SH) also reported slippage in profits.
BGI’s net profits in 2021 fell 30.1%, reversing a jump of more than 650% the previous year, according to its latest annual report. The company’s performance in 2021 was affected by price cuts for Covid testing reagents amid fiercer competition, analyst Du Xiangyang at Southwest Securities Co. Ltd. said in an April 23 research note. In the first quarter of 2022, BGI’s net profits fell 37.1% year-on-year, reversing an increase of 275% in the same period last year.
Despite the price cuts, private sector companies are still trying to cash in, intensifying competition and putting more pressure on profits. There were about 13,000 qualified Covid PCR testing labs across the country by May, according to the National Health Commission.
Companies that either have robust supply chains or produce their own gear will be able to better weather these headwinds by better controlling costs, industry insiders said. But expanding manufacturing capacity is risky, because long-term demand prospects are murky as policies may shift.
A senior executive at a testing company told Caixin that it usually takes three to six months to set up a testing firm, which involves obtaining special qualifications and licenses.
In addition, testing companies are facing greater regulatory pressure. Several test service providers have been criticised, investigated or punished for misconduct so far this year, as the government has ramped up a crackdown on illegal activities including Covid testing fraud and relevant corruption.
Zhang Yukun contributed to this report.
Contact editors Lin Jinbing (firstname.lastname@example.org) and Joshua Dummer (email@example.com)
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