20171130-中国银河国际证券-微创医疗-00853.HK-COMPANY___INDUSTRY_NEWS_5页_1mb

MicroPort Scientific Corporation Summary

Core Content

MicroPort Scientific Corporation (853.HK) is a leading medical device manufacturer with a focus on Cardiovascular, Orthopedics, and Endovascular sectors. The company is currently fairly valued, with a share price of HK$8.66 and a market cap of US$1.615 billion. The report highlights the company's strategic and financial position, emphasizing its turnaround in the Orthopedics business and the challenges posed by its recent acquisition of the CRM business from LivaNova.

Main Points

1. Orthopedics Business Turnaround

• The Orthopedics business is on track to break even in Q4 2017.
• Key factors contributing to the turnaround include:
  • Cost savings from GSC (Global Supply Chain) in raw materials and instrument supply.
  • Shifting manufacturing from the U.S. to China.
  • Adoption of the SuperPath® Hip Technique, which offers faster healing and smaller incisions compared to traditional methods.
  • Launch of the Keen product Evolution in China in August 2015, currently in the fast-growth stage.
• In 2018E, the company expects further growth through:
  • Sales focus on high gross margin products.
  • Cost savings.
  • Introduction of new products to increase the gross margin of Orthopedics to near the industry average of 70%.

2. Cardiovascular Business

• The Cardiovascular segment is the most profitable, contributing significantly to operating profit.
• In 1H2017, it had a profit margin of 43.7%.
• Two flagship products, Firebird 2 and Firehawk, account for 90% of Cardiovascular revenue.
• Firehawk is expected to continue strong growth due to its fast-growth stage, expansion into new overseas markets (e.g., India), and improved drug efficacy.
• New Cardiovascular products, such as Transcatheter Aortic Valve and Firesorb, are expected to launch in 2018-2020.

3. CRM Acquisition

• MicroPort acquired LivaNova's CRM business for US$190 million, which is expected to provide synergies with its existing Cardiovascular business and access to world-leading CRM technologies.
• However, the acquisition may have adverse financial impacts due to:
  • Need for refinancing, which could increase net debt to equity to over 70% and raise finance costs to ~US$9 million in 2018E.
  • Potential dilution of 2018E EPS if the company issues new shares to raise US$150 million, driving the valuation up to ~31x 2018E PER.
• Detailed synergy plans for the CRM business are still pending.

4. Financial Overview

• The company is currently trading at 27/23x 2017E/18E consensus PER, which is in line with its historical average of 28x.
• The expected EPS CAGR for 2017-19E is ~33%, indicating strong growth potential.
• Net profit is expected to grow significantly from 2017E onwards, with 2017E net profit at US$40 million, up from 2016A net profit of US$14 million.
• The company has a consistent dividend payout ratio, ranging from 23% to 28.5% in 2017-2018E, with an increasing dividend yield from 0.7% to 1.1%.

5. M&A Strategy

• The company's future M&A strategy focuses on acquiring businesses that align with its overall strategy and offer synergies with existing operations.
• These acquisitions are expected to be at reasonable prices and may include overseas assets, regardless of their current profitability.

Key Information

• Market Cap: US$1.615 billion
• Free Float: 40.4%
• Share Price: HK$8.66
• Shareholder Structure: Largest shareholder holds 26.85% stake
• Historical PE Band: ~28x (Figure 3)
• Current Valuation: 27/23x 2017E/18E consensus PER
• EPS CAGR (2017-19E): ~33%
• Expected EPS (2018E): US$0.041
• Dividend Yield (2018E): 0.9%
• ROE (2018E): 12.7%
• PBR (2018E): 4.1x

Risks

• Orthopedics Turnaround Risk: Slower-than-expected progress could delay profitability.
• CRM Synergy Execution Risk: Uncertainty in achieving the expected financial synergies from the CRM acquisition.
• Refinancing Risk: Increased debt or share dilution could impact financial health and shareholder value.

Conclusion

MicroPort Scientific Corporation is fairly valued based on current financial metrics and growth expectations. While the company has strong strategic initiatives, including the CRM acquisition and M&A strategy, the financial impact of these moves remains uncertain. Investors are advised to wait for clearer visibility on the performance of the CRM business and the realization of synergies before making investment decisions. The Orthopedics business is expected to break even in Q4 2017 and become profitable in 2018E, which could be a positive catalyst for the stock.