As a domestic orthopedic joint leader, the company continued its excellent bid winning performance in the first round of joint collection during the continuation of joint procurement during the year. In the short term, although the company is still affected by anti-corruption in the industry in 2024, as the anti-corruption impact subsides and the risk of joint harvesting becomes clear, the visibility of the company's performance growth increases, and revenue growth is expected to accelerate in 2025. On a long-term perspective, the company attaches importance to technology research and development. It is the first domestic company to use metal 3D printing for orthopedic implants. In the future, it can use 3D printing, ICOS and surgical robots to build a digital orthopedic platform to further expand the middle and high-end market, and have both short-, medium- and long-term development potential. First coverage, with a “buy” rating, with a target price of HK$6.8.

Although the orthopedic industry is under pressure due to anti-corruption in the short term, it will still benefit from “large patient base+increased surgical penetration rate+domestic replacement” in the long term. Referring to A orthopedic company data, the 9M24 industry revenue and net profit ratio was +3%/+1%. The short-term anti-corruption campaign was still affected, but the large-scale implementation of medical anti-corruption has been going on for more than a year. 1Q/2Q/3Q24 revenue is -9%/+3%/+17% year over year, and the revenue growth rate is already picking up.

Although the normalization of anti-corruption has had a profound impact on the orthopedic industry, we believe that the general development logic of the orthopedic industry has not changed. Over the long term, the number of orthopedic surgeries is expected to increase steadily as the country's population ages and the penetration rate of surgery increases. Furthermore, foreign brands are investing more in leading benchmark hospitals after collection. Overall investment in China has been reduced, and domestic substitution is expected to accelerate.

The risk of collecting the company's core products was clarified, and the visibility of the company's performance increased in 2025. Hip and knee products are Elken's core revenue source (1H24 contributed 85% of revenue). In the joint procurement process, which was launched during the year, Elken was selected in Group A in each product group and won the bid price. Except for the lower demand for gold for hip joints (accounting for 2% of total hip+knee coverage), the bid price for all other products increased. Individual products achieved factory price increases in the factory price dimension. As joint harvesting risks are cleared and factory prices are basically flat, compounded by further normalization of anti-corruption, the company's revenue in 2025 is expected to recover and grow at a lower base this year, while the net profit side is expected to enjoy more significant scale effects and continuous cost rate optimization after continuing procurement.

Open up room for growth through “digital orthopedic+internationalization” for a long time. Elken is the first company in China to use metal 3D printing for orthopedic implants, and has a first-mover advantage in the field of orthopedic 3D printing. The ICOS customized platform launched by the company based on 3D accurate construction technology (3D ACT) and the ITI medical engineering interaction platform can meet the core needs of patient customization, shortening surgery and recovery time, and has great potential for promotion in the middle and high-end markets. In addition, the company's VTS and surgical robot products have been launched one after another. In the future, it will combine ICOS to build a digital orthopedic platform and use the digital orthopedic platform to further boost consumables sales. In addition, the company has both Elken and JRI brands overseas, and has full product line advantages and large-scale potential, and the overseas market is expected to become the company's second engine for long-term growth.

The initial “Buy” rating was given, and the target price was HK$6.8. We expect the company's 2023-2026E revenue CAGR of 22%, giving the company a target valuation multiplier of 22x 2025E PE, which is the same as the company's average for the past 3 years. Covered for the first time and given a “buy” rating.

Investment risks: Subsequent batch collection and renewal prices dropped significantly, the growth rate of surgery volume fell short of expectations, the impact of anti-corruption policies continued, and progress in internationalization was slower than expected.