AK Medical issued a positive profit alert revealing that FY19E net profit will grow no less than 80% YoY, beating our estimates by 13%. For recent COVID-19 outbreak, we expect mild impact on AK Medical. As the orthopedic surgery demand is resilient, we expect AK Medical to resume growth in 2H20E and continue its market share gain from MNCs. We raised our FY19E/20E earnings forecasts by 14%/16% and lifted our 12-month TP to HK$18.6, with 22% upside potential. Reiterate BUY.
- FY19E net profit surges over 80%, beating expectation. AK Medical announced a positive profit alert, revealing that FY19E revenue is expected to grow over 50%, and net profit is expected to grow over 80% due to 1) economies of scale and 2) effective cost control. This implies FY19 revenue and net profit would be no less than RMB901mn/ RMB260mn, which are 1.9%/13% higher than our previous estimates.
- Moderate near-term impact from COVID-19. For the hospitals covered by AK Medical, we believe orthopedic surgery growth remained intact in Jan, while surgery volume in Feb shrank due to COVID-19. Meanwhile, its production and marketing were nearly suspended in Feb, given the labor return delay and travel restriction in many cities. In our view, the orthopedic surgery demand is delayed instead of disappeared and generally speaking, the first quarter is a low season. We expect surgery volume will resume in 2H20E and AK will resume its production and business operation in late Feb.
- Device volume-based procurement may delay. It is estimated that volume-based procurement will spread to nationwide in 2020E. In our view, current top priority of government and authorities is to fight against COVID-19 and thus roll-out of volume-based procurement in each province may delay.
- Regulation on customized medical device to accelerate the commercialization of 3D-printed customized implant. In Jul 2019, NMPA released Notice in relation to Provisions on the Supervision and Administration of Customized Medical Devices (Trial), which was effective since 1 Jan 2020 and paved way for the commercialization of AK’s 3D-printed customized products. In Jan 2020, AK implanted the first 3D-printed customized spine for commercial use. Prior to that, 3D-printed customized prosthesis could only be used for medical research. We believe the marketing approval of 3D-printed implant may be granted by NMPA in mid-2020.
- Reiterate BUY with new TP of HK$18.6. Despite the short term impact from COVID-19 disruption, we are optimistic on AK’s long-term prospects. We raised FY19E/20E revenue forecasts by 3.3%/ 2.4% and lifted FY19/20E net profit by 14%/ 16% to reflect effective cost control. We derive our new TP of HK$18.6 based on updated 9-year DCF model, rolling over to FY20E.
- Catalysts: 1) launch of 3D-printed customized products, and 2) M&As.
