We maintain our previous revenue forecasts unchanged and slightly raised FY20/21E net profit forecasts by 2.8%/ 4.6% to reflect the margin expansion. As the orthopedic surgery demand is resilient, we expect mild impact from COVID-19 outbreak. Maintain BUY and lifted our DCF-based TP to HK$17.9.
- FY19 results in line. FY19 revenue / net profit grew 54.3% / 84.2% YoY to RMB927mn/ RMB267mn, which was 1.4% / 1.1% above our forecasts. GPM improved by 1.3ppt to 69.4% thanks to faster growth in high-margin products. Other income increased from RMB5mn in FY18 to RMB20m in FY19, mainly due to a one-off insurance compensation from JIR. Marketing and admin expense ratio dropped by around 2ppt due to economies of scale. NPM climbed by 4.7ppt to 28.8% in FY19.
- Strong growth of joint implant and 3D-printed product. By products, 3D-printed products grew 76.5% YoY to RMB123mn, due to 1) continuous academic marketing activities, 2) new product launches, 3) adoption by more hospitals and 3D ACT platform increased coverage to 964 hospitals. Hip implants grew 54.7% YoY to RMB544mn, of which hip volume increased by 39.9% YoY and knee implants grew 58.3% YoY to RMB230mn, which were attributable to 1) the 3D-printing technology and the implementation of the international clinical education resources, 2) new product launches with higher selling price, and 3) penetration into more hospitals.
- Moderate impact from COVID-19. Orthopedic surgery volume shrank in 1Q20 due to COVID-19 outbreak. However, hospitals resume surgeries gradually since early Mar. In our view, orthopedic surgery demand is delayed instead of disappeared. AK has fully resumed production in China and total capacity will exceed 250,000 sets in 2020E. In our view, AK’s sales will catch up from 2Q20E and achieve its full-year revenue growth target of 30% in 2020E.
- Abundant cash for M&A. As of 31 Dec 2019, AK had cash and cash equivalents of RMB499mn on hand. Those, together with recent placement of HK$783mn, amounted to over RMB1bn, which are sufficient for sizeable acquisitions. We believe AK will seek targets in the spine and trauma fields, and orthopedic products with new technology and new material.
- Maintain BUY; Lifted TP to HK$17.90. We are optimistic on AK’s long-term prospects. We raised FY20/21E net profit forecasts by 2.8%/ 4.6% to reflect margin expansion resulted from economies of scale. We derive our new TP of HK$17.90 based on DCF model.
- Catalysts: 1) new product launch, 2) M&A, and 3) earlier end of the COVID-19 outbreak.
