1H22 results missed our forecast
　　MicroPort Scientific Corporation announced its 1H22 results: Revenue increased 5.3% YoY to US$405mn. Excluding the impact of forex rates, revenue grew 10% YoY. Loss attributable to shareholders expanded YoY to US$198mn due to increased R&D investment and non-cash expenses on the equity incentive plan. The firm’s 1H22 results missed our forecast and market expectations as the COVID-19 resurgence affected surgeries at hospitals and the manufacturing and sales of medical equipment.
　　Trends to watch
　　Cardiovascular, orthopedics, and cardiac rhythm management businesses under pressure. In 1H22, revenue (excluding the impact of forex rates) declined 7.2% YoY for its cardiovascular business but increased 2.4% and 7.2% YoY for its orthopedics and cardiac rhythm management businesses. Revenue from the three businesses missed market expectations to different degrees. We believe that the firm’s cardiovascular and cardiac rhythm management businesses were affected by the COVID-19 resurgence that impeded surgeries at hospitals and impacted product delivery. The orthopedics business was dragged by both COVID-19 and the centralized procurement of joint prosthesis in China. Excluding the impact of forex rates, revenue from its aortic and peripheral vascular intervention, aortic valve, and neurovascular intervention businesses rose 26.6%, 44.8%, and 22.9% YoY. The management remains confident about the firm’s full-year earnings growth despite the COVID-19 resurgence, expecting overall revenue to grow 20% and the gross margin to rise about 61-63% in 2022. Specifically, the management expects a 12-14% YoY revenue growth in its cardiovascular business, a 7-10% YoY growth in its cardiac rhythm management business (15-20% growth for domestic revenue), and an 11-13% YoY growth in the firm’s orthopedics business (double-digit growth for domestic revenue from joint prosthesis).
　　Continued to make progress in R&D and innovation. Since early 2022, the firm’s R&D efforts for different business lines have borne fruit. Its products such as Rega (magnetic resonance cardiac pacing), Neurohawk (vascular recanalization stent), disposable electronic endoscope for ureteropelvic surgeries, and disposable clips (for digestive tract surgeries) have won the approval of the Center for Drug Evaluation (CDE). Its Honghu Orthopedic Surgery Robot had been approved for marketing by Chinese and American regulators. The firm also submitted a registration application for the second generation of high-speed optical coherence tomography systems. The firm’s prostatic urethral lift (PUL) technology has completed the functional independence assessment (FIM) and the self-developed transcatheter mitral valve replacement technology has also entered the FIM stage. In addition, intravascular ultrasound (IVUS) technology has finished preliminary animal tests.
　　Watch policy tailwinds for high-value consumables. Shanghai Medical Insurance Bureau added transcatheter aortic valve replacement (TAVR) consumables to the medical insurance catalog in May, with a reimbursement rate of 75-80%. Beijing Medical Insurance Bureau announced favorable measures for the charging of dorsal root ganglion innovative instruments. National Healthcare Security Administration (NHSA) said in August that it was working on relevant policies and urging local governments to include such innovative instruments in the medical insurance catalog. We note that since 2022, the price cuts have been moderate during centralized procurement for pacemakers, coronary artery medicine balloons, and Guglielmi detachable coils for intracranial consumables. Meanwhile, reasonable rules for group bidding were made for spine and cardiac electrophysiology consumables. We believe that policies are providing stronger support for technologically innovative products or those that provide clinical benefits. We expect the relevant favorable policies to be implemented in the future and domestically-made medical equipment to ramp up, benefiting MicroPort and other platform-based domestic providers of innovative medical equipment.
　　Financials and valuation
　　As the impact of COVID-19 persists, we lower our attributable net loss forecasts from US$284mn to US$308mn for 2022 and lower our attributable net loss forecasts from US$238mn to US$293mn for 2023. We maintain an OUTPERFORM rating but cut our DCF-based TP by 5% to HK$23.4, offering 42.9% upside.
　　Risks
　　Price cuts in government procurement; intensifying competition; failure of R&D activities; disappointing commercial development of new products.