1H22 results in line with our forecast
Weigao Group Medical Polymer (Weigao) announced that revenue and net profit attributable rose 12.0% and 20.6% YoY in 1H22 to Rmb6.98bn and Rmb1.46bn. Excluding the firm’s investment income from Weigao Blood Purification and expenses for a share incentive plan, recurring net profit attributable rose 15.0% YoY to Rmb1.39bn. The firm’s results were in line with market and our expectations. Management estimates the impact of COVID-19 and supply chain disruptions led to a revenue decline of around Rmb400-500mn in 1H22, but the firm maintains its full-year guidance that revenue will rise 15% YoY.
Trends to watch
General consumables: Centralized procurement mostly complete; impact is limited. Revenue from clinical care and pharma packaging increased 9.2% and 10.3% YoY in 1H22 to Rmb2.30bn and Rmb1.06bn. Weigao estimates that it has completed about 66% of the centralized procurement of general consumables (e.g., safety needles, infusion devices, and flush syringes), with average product prices dropping 50-60% YoY and sales volume rising 40-50%. The decline in profit margin was less than 4ppts, with the pressure from centralized procurement gradually easing, posing a limited impact on profit. Revenue from the prefilled syringe business rose 22% YoY, suggesting that growth was slower due to supply chain disruptions leading to disappointing order delivery and capacity expansion. The firm believes downstream demand for prefilled syringes remains robust and maintains its capacity expansion guidance of 1bn units in 2023 (vs. 600mn units in 2021).
Orthopedic consumables: Pressure from centralized procurement to remain in 2H22; wait for national procurement of spine products. After the completion of centralized procurement of artificial hip joint and knee joint prosthesis products, the percentage of hospitals covered by Weigao rose to 60% from 30%. The firm is confident in achieving double-digit growth in revenue and profit from the orthopedics business in 2022. Weigao plans to provide consumer-level orthopedic health solutions (outside the centralized procurement plan) targeting prolonging the lifespan of worn-out joints, reducing post-surgery pain, facilitating recovery, among other aspects. We expect the firm to complete the national centralized procurement of spine products in 2H22. We also expect Weigao to digest the impact of centralized procurement in the next one to two years. Revenue from Argon Medical's interventional products grew 4.4% YoY to Rmb790mn in 1H22. Given that orders worth more than US$10mn were undelivered due to supply chain disruptions overseas, we estimate that revenue will rise 20% YoY.
Optimizing expense structure; focus on promoting new businesses. Due to centralized procurement, the COVID-19 impact, changes in product mix (revenue from anti-COVID-19 products rose Rmb200mn YoY), and process improvement, gross margin at Weigao fell 8.1ppts YoY in 1H22, with the selling and G&A expense ratio down 6.4ppts YoY. R&D expenses rose 18.8% YoY to Rmb245mn, with a ratio of 3.5%. The R&D investments are mainly used in key projects such as anesthesia machines and electron microscopy of the urinary system in the Suzhou R&D center; spine, joint and sports medicine products (e.g., arthroscopy, piezoelectric devices, and bio-active smart implants for post-surgery rehabilitation) at Weigao Orthopedic; and automatic injector pens and safety devices at WEGO Prefills. Weigao continues promoting the digitalization of operations and client services, as well as production automation and smart healthcare. The firm plans to expand into the overseas market, expecting revenue from that to account for 50% of total revenue in 10 years.
Financials and valuation
We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 13.8x 2022 and 12.1x 2023 P/E. We maintain OUTPERFORM and our TP of HK$13.50 (19.2x 2022 P/E and 16.9x 2023 P/E), offering 39.2% upside.
Risks
Larger-than-expected price cuts; new product launch slower than expected.