AK Medical reported 2023 revenue of RMB1,093.9mn, up 4.0% YoY. Gross profit was RMB674.5mn, up 6.0% YoY. Gross profit margin improved 1.2 ppts to 61.7% thanks to effective cost control and an increased proportion of overseas revenue.
　　Attributable net profit was RMB182.1mn, down by 11.1% YoY, and the attributable net profit margin dropped by 2.8 ppts to 16.6% in 2023 mainly due to an increase in selling expense ratio as the company expanded overseas.
　　Rapid growth of overseas business offset the negative impact of
　　domestic business decline. Due to the decreased orthopaedic surgery volumes in China since Aug 2023, AK Medical's domestic revenue fell by 2.2% YoY to RMB866.7mn. In response to the challenging business environment in China, AK Medical proactively expanded its overseas markets under the AK and JRI brands. The AK brand has expanded to over 30 countries, partnering with approximately 45 distributors, with a primary focus on emerging markets such as Mexico and Vietnam. The JRI brand targets developed markets such as the UK, Spain and Germany. Thanks to the active exploration of overseas markets, AK Medical’s overseas revenue grew by 37.1% YoY to RMB227.1mn in 2023. Sales in APAC, EMEA and Latin America exhibited significant growth, with YoY increases of 54%, 43%, and 37% respectively.
　　Domestic business may recover thanks to the growing pent-up demand and the implementation of a new round of VBP. AK Medical’s domestic
　　revenue from non-VBP products increased by approximately 30.8% YoY in 2023, accounting for 47.9% of the total domestic revenue. Notably, the domestic revenue of non-VBP products experienced remarkable growth of over 60% YoY in 1H23, indicating robust growth momentum. However, the revenue remained flat in 2H23 due to physicians’ hesitancy in adopting non- VBP products during the anti-corruption campaign. As the regulatory environment gradually normalizes, we expect orthopaedic surgery volumes to resume growth in 2024E, and forecast the strong growth momentum in sales of non-VBP products to resume. Additionally, we expect the new round of VBP of joint products will start implementation in 2Q24E, which should help AK Medical to gain market share.
　　Orthopedic surgical robots enter the commercialization stage. AK
　　Medical received its first NMPA approval for the iBot hip surgery robot in Nov 2023. Its knee surgery robot may receive approval in 2024E. Based on overseas industry dynamics, we believe robotic systems will gradually become the mainstream of orthopaedic surgery, driving the long-term growth in orthopaedic implants.
　　Maintain BUY. We think the increasing proportion of revenue from non-VBP products and overseas sales will enhance AK Medical’s profitability. We expect AK Medical’s revenue and attributable net profit to increase by 30.7% /48.2 % YoY in 2024E. We revise our TP to HK$7.20 based on a 9-year DCF model (WACC: 10.11%, terminal growth rate: 3.0%).