20220901-招银国际-爱康医疗-01789.HK-Net_profit_beat_due_to_significant_volume_growth_post_VBP_6页_1023kb

AK Medical (1789 HK) 1H22 Summary

Core Content

AK Medical reported strong financial performance in the first half of 2022 (1H22), with revenue and net profit both exceeding expectations. The company's success was driven by significant volume growth in artificial joints following the implementation of the national joint Value-Based Purchasing (VBP) program, as well as the growth of high-margin products like revision and reconstruction implants and ICOS customised products.

Key Financial Highlights

• Revenue: RMB531.2 million, up 18.7% YoY.
• Gross Profit: RMB338.5 million, up 9.8% YoY.
• Gross Margin: 63.7%, higher than the previously guided 55-60%.
• Net Profit: RMB126.0 million, up 13.1% YoY.
• Net Profit Margin: 21.04% (1H22), reflecting better-than-expected operating margins.

Main Points

1. VBP Implementation and Sales Growth

• The national joint VBP program was implemented in most provinces except Shanghai and Anhui, starting in April 2022.
• AK Medical won VBP tenders for approximately 81,000 sets of joint implants, representing 15.1% of the total purchase volume.
• This led to the expansion of hospital coverage to 3,497 hospitals, including 953 new ones.
• Sales volume for primary hip and knee systems increased by 70% and 64% YoY, respectively, despite price cuts.
• Revenue for hip and knee implants increased by 15.9% and 16.6% YoY, respectively.

2. High-Margin Product Growth

• Revision & Reconstruction Products: Contributed 22.1% of total revenue in 1H22, up from 15.1% in 2021.
• ICOS Customised Products: Sales increased by over 100% YoY in 1H22 and are expected to grow by 100% in the full year of 2022.
• These products are not affected by VBP and are positioned as the next growth drivers for the company.

3. Earnings and Valuation

• The company raised its target price (TP) from HK$7.69 to HK$9.20, based on a 9-year DCF model.
• The TP implies a 35.0% upside from the current price of HK$6.82.
• The DCF valuation model assumes a WACC of 10.24% and a terminal growth rate of 3.0%.

Financial Forecast and Performance

Key Growth Drivers

• VBP Tender Wins: Enabled expansion into new hospitals and increased sales volume.
• Product Innovation: Focus on revision & reconstruction and ICOS customised products has driven new revenue streams.
• Margin Improvements: Higher gross margins due to delayed VBP implementation and lower raw material costs.

Analyst Recommendations

• Rating: BUY (Maintain)
• Target Price: HK$9.20
• Reason: Stronger-than-expected earnings and growth in high-margin products.

Shareholding and Stock Data

Share Performance

Key Figures

• Shareholding Structure:
  • Ximalaya Limited: 45.3%
  • Gaojing Fund: 6.4%

Valuation and Sensitivity Analysis

| Terminal Growth Rate | 3.0% | - | - | - |
| WACC | 10.24% | - | - | - |

Summary of Financial Model

• FCFF (Free Cash Flow to Firm): Increased significantly across years.
• Net Debt to Equity: Negative in 2022, indicating strong cash flow.
• Current Ratio: Improved to 3.5 in 2022.
• Receivable Turnover Days: Stabilized at 150.0.
• Inventory Turnover Days: Reduced to 360.0.
• Payable Turnover Days: Increased to 200.0.

Conclusion

AK Medical has demonstrated strong performance in 1H22, with revenue and net profit growth exceeding expectations. The expansion into new hospitals through VBP tender wins, combined with the growth of high-margin products, has driven significant sales volume increases. The company's improved gross margins and operating margins have supported its profitability. Analysts maintain a BUY rating, raising the target price based on the DCF model, indicating positive outlook for future performance.