AK Medical Holdings Ltd. (HKG: 1789) is a family-owned Chinese firm that is focused on orthopedic joint, trauma and spine implants. The medical device company has been performing and has managed to almost triple revenue while maintaining software-like profit margins and giving shareholders a +500% total return in a short span of time. The company was established in 2003 and listed on the Hong Kong Stock Exchange in 2017. According to a bullish thesis by Alexander Eliasson, there is “a unique opportunity to grab shares at a discount in a world-class compounder.”
The whole Medical Devices sector in China is down -40 to -50% in just a short couple of months on fears that centralized procurement will devastate profits. But, according to thesis, the actual impact will be minimal. The thesis emphasizes that “this undiscriminating index-selling as a unique opportunity to grab shares at a discount, in a world-class compounder.” A report by ResearchAndMarkets notes that the Chinese medical device industry is a relatively ‘dormant’ gold mine with the full potential to be exploited.
China – one of the fastest growing healthcare markets – is a aged society, according to WHO and UN standards. The country has 249 million people aged 60 or older, compared to 248 million people aged 15 or younger.
In just 15 years, China’s senior citizen population (age over 60) is expected to reach 400 million, representing 28.5% of the total population (WHO). In short, China is facing one of the worst demographic pyramids in the world and it will inevitable lead to an immense demand for healthcare services.
So, the aged population would need to spend money for better health and joints. Total healthcare expenditure is projected to reach $964 billion this year (McKinsey & Co) and CAGR 8% to 2030. The inclusion of medical devices in medical care insurance coverage has boosted the demand and acceptance for orthopedic implants. Last year, 823 000 surgeries requiring partial or full joint replacement was performed, up from 473 000 in 2015.
AK is a perfect position to grow over the next years. It is the only Chinese orthopedic medical device manufacturer having NMPA, FDA (USA) and CE (Europe) approval. The company has commercialized the application of 3D printing technology in orthopedic joint, trauma and spine replacement implants in mainland China, becoming a leading player in the Chinese orthopedic implant market. Furthermore, the firm has developed a proprietary system assisting surgeons in simulating and planning for implant surgeries, as well as to model and produce customized 3-D printed implants.
AK is a total-solution provider in orthopedic medical devices. The company’s products have been made available at +6700 hospitals and in 30 countries. The company has made impressive growth over the past years.
International revenue grew +45% year-over-year last year and constituted 13.7% of total revenue. In 2019 revenue grew +54% YoY and profits grew +82.2% YoY. Gross profit margin improved 1.3 ppt to 69.4% thanks to faster growth in high-margin products. Hip implants grew +55%, Knee implants grew +58% and the fastest growing area of 3D-printed implants grew +76% YoY.
Shares of AK Medical Holdings Ltd. (HKG: 1789) have gained more than 13% over the past 12 months, while the stock has jumped more than 220% over the last three-year period. However, the share price has plummeted over 44% over the last six months.