The procurement risk is gradually being cleared, and AK MEDICAL is stepping onto the digital orthopedic wind to return to double-digit revenue growth

Since April of this year, the Hong Kong stock market has experienced significant fluctuations due to external factors, with many individual stocks undergoing notable corrections. However, there are also several stocks that quickly rebounded after hitting bottom, and AK MEDICAL (01789) is one of them.

According to the observation from the Zhitong Finance APP, since the trend began to rise on February 6 of this year, the stock price of AK MEDICAL has steadily moved upwards along the 30-day moving average. Even when the stock price plummeted by 11.35% on April 7 due to severe market fluctuations, falling back to the 30-day moving average, AK MEDICAL's stock price was still able to quickly rebound the next day, maintaining a stable position above the 30-day moving average, demonstrating strong risk resistance.

From the perspective of performance support, according to the company's disclosed 2024 annual report, during the reporting period, the company's revenue reached RMB 1.346 billion, a year-on-year increase of 23.1%; the annual profit attributable to equity shareholders was RMB 274 million, an increase of 50.4% year-on-year.

This reflects that in 2024, the pricing risk of joint products, which account for the majority of AK MEDICAL's revenue, has basically been cleared, and after the execution of the national procurement results for joints in the second half of last year, the company's revenue growth has achieved a recovery.

While the risk resistance capability of defensive assets has strengthened, AK MEDICAL is also accelerating its transformation towards digital orthopedics and orthopedic surgical robots, seeking more offensive asset increments.

Behind the Increasing Southbound Capital Purchases

Since December of last year, southbound Hong Kong Stock Connect funds have accelerated their holdings in AK MEDICAL. From November of last year to now, the holding ratio has increased from 16.73% on December 2 of last year to 21.61% on April 16 of this year, with the market value of holdings rising to nearly HKD 1.4 billion.

However, it is evident from the company's stock price fluctuations that there has been a change in the logic of southbound capital increases. In December of last year and January of this year, AK MEDICAL's stock price fell by 8.99% and 6.78% respectively, but in February and March of this year, the company's stock price rose by 6.85% and 21.77% respectively.

It is not difficult to see that in December of last year and January of this year, the buying by southbound funds aligned with the previous logic of "buying more as prices fall." However, starting in February, southbound funds began to accelerate their purchases regardless of the company's stock price increases, only slowing down in April due to the impact of the Hang Seng Index. This may be related to the favorable developments in both defensive and offensive assets of AK MEDICAL.

The Zhitong Finance APP observed that since peaking at HKD 26.89 in July 2020, AK MEDICAL has entered a 22-month downtrend, with the stock price continuously declining to a low of HKD 3.68 in April 2022, a cumulative drop of 86.31%. Although AK MEDICAL's stock price rebounded by 49.23% in 2022, it fell again by 35.46% and 21.74% in 2023 and 2024, respectively The valuation of AK MEDICAL in recent years may be somewhat related to centralized procurement. The domestic orthopedic industry was significantly impacted by centralized procurement from 2022 to 2023, with the expected price-volume trade-off not being met, leading to a substantial shrinkage of the market size. However, in the follow-up procurement of joint national procurement that took place last year, AK MEDICAL was selected in Group A across various product categories. Except for the bid price of the less demanded gold-plated hip joint (which accounted for 2% of the total bid volume for hips and knees) that saw a decline, the bid prices for other products were all increased, with some products achieving an increase in factory prices.

Therefore, AK MEDICAL's revenue in 2025 is expected to achieve a recovery growth from a low base, reversing the risks brought by previous centralized procurement. The performance disclosed by the company this time aligns with market expectations.

According to Zhito Finance APP, the results of the joint national procurement follow-up have been gradually implemented in various provinces since July last year, and AK MEDICAL continued to perform excellently in this national procurement follow-up. In terms of procurement volume, the quantity in this round of procurement increased by about 10% compared to the first round of centralized procurement; in terms of pricing, except for the bid price of the less demanded gold-plated hip joint which saw a decline, the bid prices for other products were all increased.

Driven by the simultaneous increase in volume and price, AK MEDICAL's revenue from centralized procurement products grew by 30% year-on-year, with the proportion of company revenue rising to 61% year-on-year. This also means that the centralized procurement risks in its core business line have basically been cleared.

In addition, data shows that AK MEDICAL is gaining more market share in top-tier hospitals domestically. According to the latest reported sales, AK MEDICAL currently holds a 20% market share in the domestic market, and its market share in the implant market of the top 10 hospitals has risen for the fourth consecutive year, reaching 19% in 2024. In terms of overseas markets, during the reporting period, the company's overseas revenue grew by 21% year-on-year, and if cooperative sales are included, the year-on-year growth reaches 38%, with an increase in product registrations and market expansion into emerging markets.

Can it seize the digital orthopedic opportunity?

In recent years, while centralized procurement has led to a comprehensive price reduction in the four traditional orthopedic fields of artificial joints, trauma, spine, and sports medicine, orthopedic surgical robots have gradually become a unified direction for the development of leading enterprises.

From a market perspective, according to Frost & Sullivan's forecast, the global and Chinese surgical robot market is expected to grow rapidly in the future. It is estimated that by 2030, the market size of surgical robots in China will reach RMB 70.952 billion, with a compound annual growth rate of 36.9%.

Data from the National Medical Products Administration shows that between 2014 and 2020, only 10 domestic surgical robot products from 8 companies were approved in China, with only 4 products from 3 companies being approved. By the end of 2024, a total of 115 surgical robot products from 64 companies will have been approved nationwide, covering various subfields of surgical robots including laparoscopic, orthopedic, neurosurgery, and puncture. Among them, domestic brands account for 81.7% of the total approved, reaching 94 products, while imported brands total 21, accounting for 18.3% Currently, domestic surgical robots are still dominated by laparoscopic surgical robots and orthopedic surgical robots, which together account for approximately 74% of the entire domestic surgical robot market.

According to Zhitong Finance APP, orthopedic surgical robots are mainly used in joint replacement surgeries, spinal surgeries, and orthopedic trauma surgeries, among which robot-assisted joint replacement surgery is the most widely used and complex type of these three surgeries.

Since 2022, the number of registered orthopedic surgical robots in China has surged, and in September 2024, the first sports medicine surgical robot in China was approved for market launch by the National Medical Products Administration. As of now, the proportion of domestically registered products has exceeded 90%. By 2024, the domestic orthopedic surgical robot market's localization rate is expected to exceed 70%. This means that currently, in the field of orthopedic robots, domestic robots and overseas products are at the same starting line in terms of development.

At present, in the emerging digital orthopedic field, AK MEDICAL is the only domestic manufacturer that provides a premium full-process solution. The company's 3D customized joint implants combine preoperative planning, the iCOS customized platform, 3D printing manufacturing, and surgical navigation robot systems to form a technological closed loop, achieving commercialization at various stages. In addition, the company has successively launched the Joint VTS visualization intelligent auxiliary navigation system (by the end of 2024, VTS has assisted in completing over 1,000 surgeries domestically and internationally) and hip joint surgical robots. The knee joint surgical robot was approved in 2024, completing the company's comprehensive layout in the digital orthopedic hip and knee track.

The company's management expects to launch comprehensive solutions in the digital orthopedic field, including the intelligent orthopedic surgical system (ICOS) and consumables, with expected revenue reaching 100 million RMB within three years.

However, from the perspective of market competition, domestic orthopedic surgical robot companies currently include MicroPort Robotics, Jianjia Medical, Yuanhua Intelligent, and Tianzhihang, among others. In 2024, Tianzhihang ranked first in both sales volume and sales value market share in the domestic orthopedic surgical robot complete machine market. In the domestic joint orthopedic surgical robot market, Tianzhihang and Stryker consistently rank in the top two, while Jiemai Bangmei and Yuanhua Intelligent rank third and fourth. Their market CR4 is close to 80%.

Therefore, for AK MEDICAL, although the risk of centralized procurement has gradually cleared, there is still significant room for improvement and catch-up in more aggressive assets such as digital orthopedics and orthopedic robots. However, the market remains optimistic about its competitiveness in this field. Huatai Securities previously pointed out that looking ahead to 2025, considering the gradual recovery of surgical volumes both within and outside the scope, as well as the potential for joint re-procurement to drive gross margin improvement, they are optimistic about AK MEDICAL's net profit growth rate of 23% year-on-year in 2025, believing that the company is likely to enter a new cycle of simultaneous volume and price increase this year