AK medical reported FY20 revenue/ attributable net profit of RMB1,035mn/ RMB314mn, respectively, increasing 11.7% / 17.6% YoY, which miss consensus estimates due to CIVID-19 pandemic. Gross profit margin remained largely stable at 69.0% while net profit margin improved 1.5ppts to 30.3%. Selling expense ratio decreased significantly by 4.0ppts due to decreased amount of marketing activities during COVID pandemic. Meanwhile, admin expense ratio decreased 1.9ppts and R&D expense ratio increased 1.4ppts. Maintain BUY and trimmed our DCF-based TP to HK$12.95.
- Resilient growth in joint implants despite impact from COVID pandemic. Hip and knee replacement implants grew 4.9% and 12.3% YoY, respectively, accounting for 55% and 25% of total revenue. 3D-printed products grew 2.3% YoY to RMB126mn, accounting for 12% of total revenue. The Company’s 3D printing products, especially the 3D-printed spinal products, are targeted mainly at Class III Level A hospitals. Such large hospitals’ operations were more affected by the pandemic than lower-tier hospitals. We expect 3D printed product sales to recover in 2021E thanks to the ease of pandemic.
- Innovative 3D printed product pipelines. In 2020, AK medical obtained the first two registration certificates for 3D printed customized products approved by the NMPA, namely pelvis implants and customized cervical fusion which will facilitate complex customized surgeries. Besides, the Company obtained CE Full Quality Assurance System Certification for its hip and knee systems and 3D-printed interbody cage, which allows the Company to enter into the EU market. AK plans to launch 56 new products between 2021 and 2025, further enhancing its leading position in innovative orthopedic devices.
- Impact from volume-based procurement. In Nov 2020, the NHSA initiated the centralised procurement of coronary stents and triggered more than 90% price cuts in stents. Meanwhile, local governments, such as Jiangsu, Fujian, Zhejiang and Anhui, also carried out volume-based procurement for high-value orthopedic consumables during 2020, leading to significant price cuts ranging from 32%-86%. We think it’s likely that the NHSA will conduct volume-based procurement for joint implants in 2021 and the retail price may be lowered to the current ex-factory level. We think AK could offset the price cut pressure by increasing sales proportion from high-end 3D printed products.
- We are optimistic on AK’s strong R&D capabilities. We trimmed FY21/22E net profit forecasts by 24%/ 25% to reflect the impact from COVID-19 and the coming national-wide volume-based procurement. We derive our new TP of HK$12.95 based on DCF model.
- Catalysts: 1) new product launch, 2) M&A, and 3) earlier end of the COVID-19 outbreak. Risk: worse-than-expected volume-based procurement.
