1H23's performance met our expectations
Elken Medical announced 1H23 results: revenue of 650 million yuan, up 22.1% year on year, net profit of 130 million yuan, corresponding profit per share of 0.1 yuan, up 5.5% year on year; the performance was in line with our expectations.
Development trends
After harvesting, the volume of knee joints accelerated, and the growth rate of overseas income was impressive. As a leader in domestically produced joint implants, Elken Medical's business has maintained rapid development in recent years. As post-epidemic surgery returned to normal and collection progressed, the core product, the knee joint business grew significantly. 1H23 achieved revenue of 210 million yuan, an increase of 64.7% over the previous year, mainly benefiting from the volume of initial products and new products within the standard; hip revenue was 3.4 billion yuan, an increase of 4.2% over the previous year.
By region, domestic business revenue accounted for 82.5%, of which collection covered products, refurbishment, 3D spine+customization, and single condyle accounted for 52.4%, 26.0%, 11.9%, and 6.3% respectively; overseas business revenue was 110 million yuan, an increase of 78.3% over the previous year, showing results in actively developing overseas markets.
Joint products: Collection promotes an increase in the share within the standard, and more products outside the standard have blossomed. 1) Standard: After the launch of the National Joint Harvest in April 2022, the total number of hospitals reported by Elken exceeded 5,900. Compared with before the collection, more than 2,400 new hospitals were added. By the end of '22, the market share had reached 20.2%, rapidly achieving domestic replacement. The volume of products within the 1H23 standard was significant, and sales of the initial hip and knee products all achieved impressive growth. 2) Off-standard: We estimate that revenue from 1H23 refurbished products increased significantly year-on-year; 1H23, a single-condyle product, which was newly approved in July '22, began to contribute a significant increase in revenue. We believe that with the continuous release of backlog demand, the promotion of domestic substitution, and the expansion of market share for products with advantages outside the standard, there is a high degree of certainty that the company's products will maintain a high level of growth throughout the year.
Extra-articular products: Continue to promote the full orthopedic product line+intelligent platform layout. 1) Spine+trauma: 1H23's revenue was 50 million yuan, an increase of 10.8% over the previous year; in March '23, the national procurement of spine categories promoted the entry of 3D printed spines into high-grade hospitals, accelerated domestic replacement, and 1H23's revenue growth rate was impressive. 2) ICOS: The company has taken advantage of its advantages in 3D printing and image processing to create an innovative orthopedic customization platform. Currently, it has covered joints, spine, trauma, pelvis, etc.; 1H23's revenue was 280 million yuan, an increase of 31.5% over the previous year. At the same time, it has been approved for 2 customized products. We expect to maintain a high growth rate of more than 30% throughout '23. 3) Innovative product reserves are abundant: In terms of digital orthopedic platforms, the hip navigation system has obtained a registration certificate, the company expects the hip robot and handheld navigation system to be approved in 4Q23, and the hip robot system is expected to be approved in 2Q24; in terms of bone biomaterials, Pillar and bone powder have obtained registration certificates, and SGB artificial bone company is expected to obtain certification in 4Q23, and is looking forward to increasing the contribution of the new product.
Profit forecasting and valuation
Considering the recent good recovery in terminal surgery volume, the EPS forecast for 2023-24 remains essentially unchanged at 0.24 and 0.31 yuan. The current price corresponds to 20.2 times and 15.3 times P/E in 2023-24. Maintaining the “outperforming industry” rating, considering the recent downward shift in the valuation center of the sector, the target price was lowered by 21.9% to HK$8.5, corresponding to 31.2 times and 22.9 times P/E in 2023-24. There is room for an increase of 49.4% from the latest closing price.
risks
Collection price cuts exceeded expectations; new product launch progress fell short of expectations; policy adjustments; medical emergencies.