Recurring net profit in line with our estimate
　　Weigao Group Medical Polymer (Weigao) announced that in 2021, its restated revenue increased 13.2% YoY to Rmb13.15bn, and net profit grew 7.6% YoY to Rmb2.24bn (after financial consolidation of Rad Source). Its revenue increased 15.9% and recurring net profit grew 20.3% YoY in 2021, if not restated and adding back one-off product lawsuit and equity incentive expenses at subsidiaries. The firm's revenue missed our expectations, due to the impact of low-value consumables and centralized procurement of orthopedics products. Its recurring net profit was in line with our estimate.
　　Trends to watch
　　Major businesses grow steadily in 2021. Management expects revenue　to increase 15% in 2022. In 2021, revenue from clinical care, orthopedics, pharma packaging, interventional products, and blood management increased 7.2%, 21.7%, 20.4%, 10.0%, and 19.0% to Rmb4.58bn, Rmb2.13bn, Rmb2.04bn, Rmb1.77bn and Rmb980mn. In 2021, the firm completed the centralized procurement of about 50% of low-value consumables, with product prices dropping 50-60%. Weigao, through centralized procurement, increased offerings to large clients and boosted sales volume. Meanwhile, it reduced selling expenses. As a result, centralized procurement of low-value consumables in a handful of regions had limited impact on the firm's profit. The impact of centralized procurement of orthopedics products on the firm's ex-factory prices was also limited. The sales volume of such products at Weigao increased, and the firm gained market share. Management expects the orthopedics business segment to continue growing in 2022. The prefillable syringe business grew 35.2% in 2021, with production capacity reaching 600mn units by end-2021. Management expects production capacity of this product to increase at a CAGR of 30% in the next three years. Based on fixed FX, revenue from Argon Medical's interventional products and Rad Source's blood irradiators increased 20.8% and 28.6% YoY in 2021. We estimate that revenue from the two business segments will respectively maintain a double-digit growth and a growth of more than 20% in 2022.
　　Multiple products in the pipeline; digitization strategy improves the　overall competitiveness. Weigao is increasing its presence in respiratory, anesthesia, urinary and rehabilitation sectors. The company expects to receive approval for selling dozens of products in the next threeyears.
　　Interventional products: Weigao expects Argon Medical to receive approval for selling 8-9 products in 2022 (including the approval for selling the thrombus removal system in the US, received in February 2022).
　　Orthopedics: Its products in the pipeline include products for sports medicine (the firm expects to receive approval for absorbable rivets in 1H22), neurosurgery (it expects to receive approval for polyether ether ketone (PEEK) skull pieces in 1H22), endoscopic spine systems and arthroscopic systems (the firm expects to receive approval by end-2022), and ceramic heads (Weigao expects to receive approval in 1H22).
　　Pharma packaging: Weigao has cooperated with pharmaceutical companies to develop innovative products. It may roll out one-off injection pens for high-end drugs and one-off dry powder injectors in the short term.
　　Weigao's operating cash flow reached nearly Rmb3bn in 2021. The company keeps adding products to its pipeline through domestic and overseas M&A deals. In addition, Weigao has increased efforts to execute the digitization strategy. Its mobile care systems, smart inpatient wards, nurse systems, hospital-level robots, and the upcoming HIS system can help the firm win customers among major hospitals and enhance customer stickiness, in our view.
　　Financials and valuation
　　We cut our core EPS forecasts 5% to Rmb0.61 for 2022 and 9% to Rmb0.68 for 2023, to reflect the pressure of centralized procurement. The stock is trading at 12.9x 2022e and 11.4x 2023e P/E. We maintain an OUTPERFORM rating, but cut our target price 13.5% to HK$13.5. Our TP implies 19.1x 2022e and 16.9x 2023e P/E, offering 48.0% upside.
　　Risks
　　Larger-than-expected price cuts; new product launch slower than expected.