Venus Medtech is the leading transcatheter heart valve medical device maker and dominated China transcatheter Aortic Valve Replacement (TAVR) market with 79.3% market share in terms of implantation volume in 2018. China TAVR market is in its infancy with the first TAVR from Venus Medtech commercialized in 2017. We are bullish on China TAVR market given the large pool of untapped patients and more physicians and hospitals eligible for performing TAVR procedures. We like Venus Medtech, the TAVR pioneer and initiate BUY with DCF-based TP of HK$54.9.
- Tapping into the fast-growing transcatheter valve replacement market. According to Frost & Sullivan (F&S), the penetration rate of TAVR procedures was only 3.5%/ 0.1% in global/ China market in 2018. F&S forecasts China TAVR market to grow from US$28.7mn in 2018 to US$956.6mn in 2025E with 65.0% CAGR, driven by 1) the improving penetration of TAVR, 2) the increasing number of hospitals and physicians eligible for TAVR procedures and 3) indication expansion to low-risk patients. Venus Medtech’s VenusA-Valve was the first approved TAVR by NMPA in 2017.
- Diversifying product portfolio with ancillary products to provide comprehensive valve replacement solution. Venus Medtech has a comprehensive product pipeline covering all four heart valves, namely TAVR, TPVR, TMVR and TTVR. Beyond that, it has key ancillary products, including vavuloplasty balloons (V8/TAV8) and CEP device (TriGUARD3) to provide one-stop transcatheter heart valve replacement solution, which allows the Company to implement a flexible pricing strategy and provides diversified revenue sources.
- Moderate near-term impact from COVID-19 outbreak. In our view, the outbreak of COVID-19 will have moderate negative impact to the business in 1H20E. Due to the extension of CNY holidays, there have been delays in production and suspension of marketing activities. Meanwhile, TAVR surgeries will also be suspended during Feb due to the disease outbreak. However, we expect sales recovery from 2Q20E because of rigid demand in TAVR treatment for patients.
- The profitable year estimated to be 2020E. We expect total revenue to grow 97%/ 79%/ 130% YoY in FY19E/20E/21E and estimate VenusA-Valve sales unit to be 1,550/ 2,700/ 6,000 in FY19E/20E/21E. Venus Medtech recorded net losses of RMB157mn/ RMB300mn in FY17A/18A. We expect it may continue to incur net loss of RMB341mn in FY19E and may generate net profit of RMB46mn/ RMB316mn in FY20E/21E.
- Initiate BUY with TP of HK$54.9. Venus Medtech’s future cash flow relies on sales ramp up of VenusA-Valve and further commercialization of pipeline products. We believe DCF would be a reasonable valuation method to value the Company. We derive TP of HK$54.9 based on a 11-year DCF model (WACC:10.6%, terminal growth rate: 4%).
