The 2022 results are in line with our expectations
Elken Healthcare announced its 2022 results: revenue of 1.05 billion yuan, an increase of 38.2% over the previous year; net profit of 210 million yuan, corresponding to earnings of 0.18 yuan per share, an increase of 121.1% over the previous year; the performance was in line with our expectations.
Development trends
National joint collection has been implemented, and leading enterprises have entered a new growth cycle. As a domestic leader in joint implants, Elken Medical has a complete product layout, and its business has developed rapidly in recent years. In 2021, the joint industry as a whole was clearly affected by collection. Among them, the average price of product terminals fell by more than 80%. The company rebuilt the business model under the new price system, actively coordinated dealers, rationalized all aspects of the external supply chain, and adjusted the internal production and operation structure. With the implementation of collection, the hip and knee business achieved revenue of 660 million yuan and 270 million yuan respectively in 2022, up 39.5% and 59.2% year-on-year respectively. The company's core business has entered a new growth cycle.
Joint National Procurement won the bid, signed the contract, and was admitted to the hospital well, and the certainty of import substitution is strong. In the 2021 Joint National Procurement, all 4 categories of the company entered Group A and all won the bid, ranking first in the demand reported by hospitals (about 100,000 units, accounting for 18%); a total of 3,497 general hospitals were reported, and 953 new hospitals were added.
Standard products were converted to price for volume, and initial hip and knee sales in 2022 increased 81% and 130%, respectively; non-standard products also benefited from high growth in collection and volume, and revenue from refurbished products increased 60% + year-on-year in 2022. As the epidemic peaked in 2023, we think the backlog in surgical demand is expected to drive a further rebound and recovery of joint products, and we estimate that there is a high possibility that growth will continue to be high throughout the year.
Other non-articular businesses continue to grow, and the product line is well-stocked. 1) Spine and trauma products can be expected to increase in volume in the future: revenue in 2022 was 0.6 billion yuan, a decrease of 24.3% from the previous year. Regardless of the impact of provisions, the impact was basically the same as the previous year, mainly due to the impact of volume procurement; at present, channel inventory has been basically cleared, and it is expected that volume will resume steady growth after collection is implemented. 2) ICOS's strong product strength drives rapid business growth: The company uses its advantages in 3D printing and image processing to create an innovative customized orthopedic platform, which currently covers joints, spine, trauma, bone tumors, etc. Revenue in 2022 was 50 million yuan, an increase of 101.3% over the previous year. We expect to maintain a high growth rate of more than 50% in 2023. 3) There is a rich reserve of innovative products, and we are looking forward to their subsequent launch: On the digital platform side, the hip navigation system has now obtained a registration certificate, marking the Group's official entry into the field of orthopedic surgical navigation and robotic systems. Hip robots and handheld navigation systems are expected to obtain registration certificates in 4Q23; in terms of bone biomaterials, Pillar and bone powder have already obtained registration certificates, and SGB artificial bone is expected to obtain certification in 3Q23, and we look forward to an increase in the contribution of new products.
Profit forecasting and valuation
Considering the recent good recovery in terminal surgery volume, the 2023 EPS forecast was raised by 3.6% to 0.24 yuan, maintaining the 2024 EPS at 0.30 yuan. The current price corresponds to 2023-24 32.3 times and 24.6 times P/E. Maintaining the “Outperform the Industry” rating and target price of HK$10.88, corresponding to 38.4 times and 29.2 times P/E in 23-24, there is room for an increase of 18.8% from the latest closing price.
risks
The reduction in procurement prices exceeded expectations; progress in the launch of new products fell short of expectations; repeated COVID-19 outbreaks; medical emergencies.