AK recorded encouraging 1H19 results. 1H19 revenue/ net profit reached our previous forecasts of 54.5%/ 68.2%. We raised our FY19/20E revenue forecasts by 10.1%/ 15.1%. We expect AK Medical to deliver 37.9% CAGR in FY18-21E. Key growth driver is the import substitution in the joint implant industry. Besides, given that policies on drug bulk procurement have been eased, we believe procurement policies of high-value device may also soften. We raise our 12-month target price to HK$7.20, with 15% upside potential. Maintain BUY.
- Forecast-beating 1H19 results. 1H19 revenue was RMB438mn, up 59.2% YoY, driven by strong off-the-shelf implants and solid 3D-printed products. 1H19 net profit was RMB153mn, up 81.5% YoY and adjusted net profit (excluding one-off item) was RMB114mn, up 60.7% YoY. 1H19 revenue and net profit reached our full-year forecasts of 54.5%/ 68.2%, beating our estimates.
- Stronger-than-expected off-the-shelf implants and 3D-printed products. Knee implants grew 52%, hip implants grew 57% and 3D-printed products grew 88.2% in 1H19 driven by enhanced academic marketing activities. AK strengthened internal sales management in 1H19 and also held more marketing events such as international roadshows, discovery tours of artificial joints and face to face interaction with masters, etc. Hospitals covered increased to over 5,300 in 1H19. We believe AK will continue to gain market share onwards from MNCs given 1) comprehensive joint product line, and 2) current favorable policies to domestic brands. 2018 joint implant market share of MNC/ domestic brand was 55%/ 45% by volume and 70%/ 30% by sales, and import substitution is still underway in this niche market.
- Device procurement policy may soften. We see that Nanjing and Anhui have already implemented volume-based device procurement in a few selected varieties. In our view, device procurement execution may vary from province to province. Besides, given that policies on drug bulk procurement has been eased, we believe device procurement may also soften.
- Maintain BUY with new TP of HK$7.20. We raise FY19E/20E revenue forecasts by 10.1%/ 15.1% to reflect stronger off-the-shelf We raise selling expenses due to more academic marketing activities onwards. We lift FY19/20E net profit by 22%/ 15%. We derive our new TP of HK$7.20 based on DCF model. AK currently trades at 25x/ 20 FY19E/20E P/E. Catalysts: 1) launch of custom designed 3D-printed products, and 2) M&As.
