Goldman Sachs: Maintains AK MEDICAL "Buy" Rating with a Target Price of HKD 79
Goldman Sachs maintains a "Buy" rating on AK MEDICAL, with a target price of HKD 79. It is expected that the net profit in 2025 will align with market expectations, with a net profit margin stabilizing around 20%. The gross profit margin will improve due to VBP contract renewals and better profitability in overseas operations, but the costs associated with the new factory's production will partially offset the positives. Earnings per share (EPS) for 2025-2026 have been revised down by 2.7%/3.1%, while both revenue and net profit are improving, and operating cash flow has significantly increased
According to the Zhitong Finance APP, Goldman Sachs released a research report stating that it maintains a buy rating on AK MEDICAL (01789) and has lowered the earnings per share (EPS) estimates for 2025-2026 by 2.7%/3.1% to reflect a slightly conservative attitude towards the improvement of gross margins after volume-based procurement, and has introduced forecasts for 2027. The firm has set a 12-month target price of HKD 79 (previous target price HKD 76), based on an expected price-to-earnings ratio of 21 times for 2027 (down from 2024 due to market volatility), with a three-year compound annual growth rate (CAGR) of EPS at 11% (down from the original 20% due to a higher base in 2025), and a discount rate of 10% (implied cost of equity).
The firm stated that in line with positive earnings expectations, the company's revenue (RMB 689 million, a year-on-year increase of 54.8%) and net profit (RMB 135 million, a year-on-year increase of 172%, net profit margin 19.5%) are both improving. As the regulatory environment normalizes, the industry is gradually recovering, especially given the low base in 2023. The sales volume of hip and knee replacement products under volume-based procurement (VBP) has increased, with gross margins slightly declining to 59.4%, lower than 60.6% in the second half of 2023 and 61.7% for the fiscal year 2023, mainly due to the increased proportion of VBP products. Operating cash flow has significantly increased from RMB 344 million in the fiscal year 2023 to RMB 450 million in the fiscal year 2024, due to a reduction in inventory days (369 days compared to 424 days), a decrease in procurement volume (RMB 380 million compared to RMB 424 million), and more proactive management. Affected by the Spring Festival holiday, the number of surgeries in January was weak, with a slight rebound in February.
Management expects net profit in 2025 to align with market expectations (as of March 27, the expectation is RMB 330-340 million), with net profit margins expected to stabilize around 20%. Gross margins are expected to improve due to VBP contract renewals and increased profitability from overseas operations, although costs arising from the commissioning of new factories will partially offset this benefit. Management pointed out that the impact of Diagnosis-Related Group/Diagnosis-Related Payment (DRG/DIP) is limited, with no significant price declines.
Striving for More Market Share in Top Hospitals Domestically
According to the latest reported sales, AK MEDICAL currently holds a 20% market share in the domestic market and continues to seize opportunities for import substitution. In the future, the focus will be on leading hospitals, with its market share of implants in the top 10 hospitals increasing from 16%/11%/8% in 2023/22/21 to 19% in 2024, while smaller brands struggle to maintain due to the service-intensive nature of orthopedics.
Overseas Business, Especially in Emerging Markets, Achieves High Growth
Overseas revenue increased by 21% year-on-year (38% year-on-year growth after including cooperative sales), with more product registrations and market expansion into emerging markets. The company adopts a dual-brand strategy, aiming to increase the proportion of overseas revenue from 20% in the fiscal year 2024 to 30% in the next five years.
Digital Orthopedic Platform Expected to Contribute More Revenue in 2-3 Years
The second-generation knee robot system is expected to be approved by the National Medical Products Administration (NMPA) in 2025. The total knee replacement, total hip replacement, and partial knee replacement robot systems are expected to be approved in April 2025. Management expects to launch comprehensive solutions, including the Intelligent Orthopedic Surgery System (ICOS) and consumables, with expected revenue reaching RMB 100 million within three years Main downside risks include: 1) Anti-corruption impact exceeds expectations; 2) Slow progress in the production of new products; 3) Slow recovery of electric surgical instruments; 4) Shortage in the supply chain of key components (such as ceramic raw materials)
