Investment positives
We initiate coverage on MicroTech Medical Hangzhou with an OUTPERFORM rating and a target price of HK$38.13 (40.2% upside).
Why an OUTPERFORM rating?
Diabetes management medical devices a sizable and fast- growing market. The global markets for insulin pumps and continuous glucose monitors (CGM) reached around US$5.6bn and US$5.7bn in 2020; we think it may grow to US$20.7bn and US$36.5bn in 2030, with CAGRs of 14.0% and 20.3% over 2020- 2030. China's markets for insulin pumps and CGM may increase from US$0.13bn and US$0.14bn in 2020 to US$1.0bn and US$2.6bn in 2030, with CAGRs of 23.3% and 34.0% over 2020-2030, according to China Insights Consultancy (CIC).
MicroTech is only company globally to commercialize both patch insulin delivery system (Equil) and calibration-free CGM (AiDEX G7). According to CIC, Equil is the second commercialized semi- disposable patch insulin pump globally, and the first domestically developed patch insulin pump approved in both Europe (June 2017) and China (September 2017). The company expects to receive FDA approval for Equil in 1H22. AiDEX G7 is the second commercialized calibration-free real-time CGM in the world. It has been approved in Europe (September 2020) and China (November 2021). We believe those two products will seize market share via first-mover advantage and superior performance.
We expect MicroTech’s market share to grow. We believe MicroTech has four growth drivers. First, we expect the tubeless Equil to gradually replace tubed pumps. Second, AiDEX features a real- time free-calibration function and global leading performance. We think it has built distinct advantages in technology and costs. Third, we expect the firm’s capacity expansion to progress smoothly and new capacity to meet future needs. Fourth, we think a diabetes platform built on big data from the cloud, together with Equil and AiDEX, can form a closed loop data system for artificial pancreases.
How do we differ from the market　　We expect Chinese manufacturers to grow stronger and localization to boost the Chinese diabetes management medical device market. We also expect MicroTech to leverage its diverse product portfolio, multi-discipline R&D capability, active global and China’s expansion, and capacity expansion, yielding rapid growth in market share.
Potential catalysts: Better-than-expected commercialization of AiDEX G7 and better-than-expected application in the US
Financials and valuation
We forecast MicroTech's 2021-2025 revenues at Rmb145mn, Rmb324mn, Rmb690mn, Rmb1,357mn, and Rmb2,064mn, at a CAGR of 94.18%. We estimate adjusted net profits of -Rmb25mn, Rmb16mn, Rmb67mn, Rmb236mn, and Rmb472mn for the same period. Based on a DCF valuation, we initiate coverage with an OUTPERFORM rating and a target price of HK$38.13 (40.2% upside).
Risks
Falling short in clinical development, regulatory approval and commercialization of product candidates; lower-than-expected manufacturing capacity; failure to compete successfully against competitors.