20181116-招银国际-爱康医疗-01789.HK-Leading_orthopedic_joint_manufacturer_with_novel_3D-printed_technology_33页_2mb

Summary of AK Medical (1789 HK)

Core Content

AK Medical is a leading orthopedic joint implant manufacturer in China, known for its innovative use of 3D-printed technology and its comprehensive product line. The company is a wholly-owned subsidiary of China Merchants Bank and has been actively expanding its market presence through technological advancements and strategic initiatives.

Main Points

Market Position

• Top 1 player in China's orthopedic joint implant market by volume with a 15% market share.
• Ranked 5th by revenue in 2017 with an 8% market share.
• The orthopedic joint implant market is expected to grow at 13.9% CAGR from 2016 to 2021E, driven by the aging population and increasing access to orthopedic surgeries.

3D-Printed Technology

• First and only manufacturer in China to obtain approvals for 3D-printed orthopedic joint and spine implants from CNDA.
• Sales of 3D-printed products grew from Rmb1.1mn in 2015 to Rmb33.4mn in 2017.
• Expected 80.7% sales CAGR for 3D-printed implants from 2017 to 2020E, due to:
  • Replacement of traditional implants with 3D-printed ones.
  • Market expansion.
  • Launch of custom-designed 3D-printed implants.

3D ACT System

• A software platform that helps surgeons simulate and plan implant surgeries.
• As of June 30, 2018, it has collected 3,036 surgery data and served 647 hospitals (an increase of 101 from 2017).
• The system helps AK penetrate more hospitals and promote both off-the-shelf and 3D-printed implants.
• Only company in China providing one-stop orthopedic surgical solutions from modeling to manufacturing.

Product Portfolio

• Offers a comprehensive product line for both low-end and high-end markets.
• Products have evolved from metal implants to ceramic implants and now to 3D-printed implants.
• Ceramic liner was approved in September 2018, which is a high-end component for hip systems.
• Off-the-shelf hip and knee implants have recorded 32.4% and 30.7% CAGR in FY14-17, and are expected to grow at 35.4% and 27.9% in FY17-20E, driven by:
  • Import substitution.
  • New product launches.
  • 3D ACT platform integration.

Key Information

Financial Forecasts

• Revenue growth expected at 56.8% in FY18E, 29.7% in FY19E, and 27.7% in FY20E, implying a 37.4% sales CAGR in 2017-2020E.
• Net profit expected to grow at 42% in FY18E, 33.7% in FY19E, and 33.2% in FY20E, implying a 36.2% net profit CAGR.
• Net profit is expected to reach Rmb266.5mn in FY20E.

Valuation

• Initiate BUY with a target price of HK$6.30 per share.
• Based on a 5-year DCF model with a WACC of 11.1% and a terminal growth rate of 3%.
• FY19E PER is expected to be 28.8x, which is considered reasonable given the robust growth and technology moat in the 3D printing field.

Investment Risks

• Potential price cut pressure from group centralized tenders.
• Additional cost from the "two-invoice" system.
• Competition from peers on price, quality, and new product launches.

Shareholding and Performance

• Shareholder structure is dominated by management (63.9%) and OrbiMed Asia (7.5%), with 28.6% free float.
• Share performance has shown strong growth:
  • 1-month: +8.0%
  • 3-months: +18.5%
  • 6-months: +24.3%
• 12-month price performance is shown in the attached chart.

Market Opportunities

• The orthopedic implant market in China is expected to grow at 10.6% CAGR from 2016 to 2021E, reaching Rmb20.3bn.
• Trauma and joint implant markets are the largest segments, with the joint implant market growing at 13.9% CAGR.
• Osteoarthritis is a major driver of joint implant demand, with the number of affected elderly increasing due to the aging population.
• The penetration rate of orthopedic implant surgery in China is lower than in developed countries, but is expected to rise due to:
  • Increasing disposable income.
  • More orthopedists.
  • Improved concepts and affordability.

Competitive Landscape

• AK is the leading player in the orthopedic joint implant market by volume, with 15.1% market share in 2017.
• The import substitution trend is accelerating, supported by:
  • Favorable reimbursement policies.
  • Hospital cost control.
  • Centralized tenders.
• Domestic players are gaining ground, with AK and Chunli being the only HK-listed companies in the orthopedic implant sector.

Additional Growth Drivers

• M&A activities and continuous product launches are expected to boost growth.
• 3D-printed technology and 3D ACT system provide a technology moat and help in market expansion and product differentiation.

Conclusion

AK Medical is well-positioned to benefit from the fast-growing orthopedic joint implant market, import substitution trend, and innovative 3D-printing technology. Its comprehensive product line, exclusive CNDA approvals, and 3D ACT platform give it a competitive edge. With strong revenue and net profit growth forecasts, the company is recommended as a BUY with a target price of HK$6.30 per share.