AK Medical reported 1H24 revenue of RMB657mn, up 1.3% YoY and largely in line with our forecast, accounting for 46% of our previous full-year estimate. Attributable net profit increased by 5.0% YoY to RMB139mn, reaching 52% of our previous full-year estimate. Attributable net profit margin expanded 0.8ppt YoY to 21.2% thanks to effective cost management, partially offset by a decline in gross margin. AK Medical’s gross profit margin declined by 1.3ppts YoY to 60.6% in 1H24 due to a higher proportion of revenue from VBP products. The ongoing anti-corruption campaign continued to negatively affect domestic sales of non-VBP products in 1H24. We estimate that AK’s domestic sales of non- VBP products decreased by approximately 12% YoY while sales of VBP products grew around 6% YoY in 1H24.
Joint implant sales demonstrated resilience despite a high base in 1H23. In 1H24, sales of joint implants grew 0.5% YoY to RMB555mn, following a robust performance in 1H23 fueled by a recovery in orthopedic surgery demand. We estimate that the overall surgery volumes have rebounded from the challenging business environment in 2H23. However, revision products and partial knees were still under pressure due to a high base and the anti-corruption campaign. With the implementation of VBP renewals from 2H24 and the low base effect, we expect AK Medical’s hip and knee replacement implants will deliver strong revenue growth of 28% YoY in 2024E. AK Medical’s primary knee implants secured a 40% volume increase and over 15% price rise during the VBP renewals. Prices of ceramic-on-ceramics (C-on-C) hip joints and ceramics on polyethylene (C- on-P) hip joint also improved by approximately 15% and 12%, respectively. AK Medical's prices of primary hip implants are now on par with other manufacturers, enabling the Company to incentivize distributors to promote AK’s products with competitive margins.
3D printed spine products drove robust revenue growth of spinal and trauma implants. Revenue of spinal and trauma implants reached RMB69mn in 1H24 (+37.6% YoY), primarily driven by 3D-printed vertebral bodies which are not covered by the national VBP of spinal implants. AK Medical rapidly expanded its hospital coverage by entering 56 new hospitals, including 30 provincial hospitals, in 1H24. We expect continued robust growth for spinal and trauma implants.
Maintain BUY. We expect AK Medical’s revenue and attributable net profit to increase by 25.0% /44.8 % YoY in 2024E. We revise our TP to HK$5.27 based on a 9-year DCF model (WACC: 10.11%, terminal growth rate: 2.0%).