A performance profit alarm has cast a shadow on the market prospects of Weigao shares (01066) again. According to the announcement, the company's revenue in 2023 is expected to decline by 2% to 5%, and the net profit attributable to the parent company will be **25% to 30% year-on-year. As soon as the results forecast came out, the company's stock price hit a record low of HK$5. From the highest point at the beginning of the year 1419 Hong Kong dollars so far, the biggest drop in the year has exceeded 6%.
As the saying goes, "golden eyes, silver teeth, copper bones", as a hot field in the medical industry, the orthopedic medical market is also affected by the intensification of the global aging population, the increase in the obese population and the recovery of medical demand after the epidemic, and the potential market space will continue to expand in the future.
However, while the long-term improvement is improving, the growth rate of the global orthopedic market has slowed down, and the competition is becoming increasingly fierce, and foreign giants have frequently reported business adjustments, layoffs and factory closures: in the past year, Globus Medical and Nuvasive announced the completion of a merger and a series of layoffs and restructurings, and Johnson & Johnson also decided to carry out a two-year restructuring plan for its orthopedic and neurosurgical company Depuy Synthes.
In China, market segments such as trauma, spine, and joints have become a red sea, and centralized procurement has suppressed the profits of related companies all the way down. Judging from the interim report, the performance of many orthopedic-related listed companies is somewhat unsatisfactory.
As a domestic orthopedic leader, when this valuation is at a historic low, is there anything worth buying for Weigao shares?
Orthopedic centralized procurement dragged down the performance.
According to the results forecast, for the year ended December 31, 2023, the revenue of Wego shares will be **2% to 5% compared with the accounting restatement income made due to the business combination under the same control in the same period last year; During the reporting period, the net profit attributable to the owners of the Company (excluding special items) was between 25% and 30% compared with the same period last year, taking into account the restated net profit of the business combination under the same control.
In fact, signs of the company's declining performance have already appeared in the interim financial report: in the first half of 2023, the company's revenue will be about 2 percent year-on-year6% to 689.8 billion yuan, net profit attributable to shareholders was about 21 year-on-year3% to 119.8 billion yuan, and the gross profit margin during the reporting period also increased from 52 in the same period last year4% down to 514%。
According to Zhitong Finance and Economics, Weigao shares are currently divided into six business segments: medical device products, orthopedic products, interventional products, drug packaging, blood management and others.
Among them, due to the impact of centralized procurement, the revenue of the orthopedic products segment decreased significantly, from about 1.2 billion yuan by 34% to 7$9.7 billion; Interventional products by 7$8.6 billion, up 20% to 94.8 billion yuan, with a good growth momentum; The revenue of medical device products and drug packaging business remained at about 3.5 billion yuan and 1 billion yuan respectively, and the income from blood management did not change significantly.
In contrast, corporate profits are more sensitive to centralized procurement reactions. Medical devices became the only segment with profit growth, as the company adjusted and optimized the product structure, and the growth of routine care consumables made up for the decline in epidemic prevention materials in the same period last year; The orthopedic segment suffered the largest profit decline, from 4900 million yuan fell to 10.3 billion yuan; The profit of interventional products decreased from 89.04 million yuan to 45.63 million yuan, and the profits of the two divisions of drug packaging and blood management decreased by about 30 million yuan.
It can be seen that the decline in the company's revenue is mainly dragged down by the centralized procurement of orthopedics, and the actual profit growth of the only medical device segment that has achieved profit growth is less than 10 million yuan. Thanks to the significant increase in sales in China, the revenue of the interventional product field has increased, but the profit has not been synchronized**.
Regarding the change in performance, the company said that the sales unit price of medical devices and consumables products of the company's different businesses decreased due to volume procurement in the country or in various places, coupled with the high sales base of epidemic-related products in the same period last year, and the year-on-year increase in US dollar interest rates caused the financing cost to rise, which had a certain impact on the company's profits.
In addition, the company's R&D expenses have also increased. For the six months ended June 30, 2023, R&D expenditure was approximately 29.5 billion yuan, accounting for 43%, compared to 35% is an increase of 08 percentage points.
According to Zhitong Finance and Economics, the company's net operating cash flow in the first half of 2023 will be 111.7 billion yuan, the cash content of the net profit attributable to the parent company exceeded 90%, and the financial position was relatively stable.
Can the "Go to Sea" strategy work?
Centralized procurement is both a challenge and an opportunity, and under the pressure of profitability, orthopedic enterprises still show a certain degree of business resilience. For example, iKang Medical (01789) benefited from domestic substitution and centralized procurement and volume, and achieved high performance; Dabo Medical (002901.)SZ) cross-border minimally invasive, neurosurgery and other subdivisions, and more companies expand overseas markets and seek new growth points.
In the case of the sluggish main business, Weigao shares are not without action. At the "2023 (3rd) International Conference on Medical Device ** Chain" held in June 2023, the company's management disclosed that Wego Group has formulated a new medium and long-term strategy, the main content of which is to increase R&D efforts and deepen overseas expansion. The company mentioned that it will go overseas through a combination of foreign cooperation, mergers and acquisitions, and the establishment of joint ventures.
As early as 2022, Wego established an overseas business department, successively invested in and acquired companies such as Radessos, Newask, and Ailang, and laid out R&D centers in the United States and Japan; The company has also invested in the construction of Weigao International Medical Device Industrial Park in Qingdao High-tech Zone and the construction of Weigao (Shanghai) International Research Institute project, which is expected to be delivered in mid-2024.
According to Zhitong Finance and Economics, thanks to the acquisition of Ailang Medical, Weigao's overseas revenue has continued to grow in recent years. Overseas revenue in the first half of 2023 was 161.2 billion yuan, accounting for about 234% from 20 in the same period last yearThis represents an increase of 6%, with business in the United States, Asia, Europe, the Middle East and Africa.
Ailang Medical is the world's leading medical device company in the United States, with its main business involved in three major fields: tumor intervention, vascular intervention and nursing intervention, and its core products rank among the top three in the U.S. market share. With the help of Ailang's sales network in the European and American markets, its understanding of the U.S. regulatory approval process and the rich experience of the management, it is indeed possible for Weigao's "going global" strategy to succeed with Ailang as a springboard for internationalization.
However, in August 2023, Bloomberg reported that Wego may explore the possibility of ** the US medical device business, and the company has hired consultants to find a potential buyer for Ailang Medical, and the transaction could be valued at more than $1 billion. If the rumors are true, Wego is tantamount to voluntarily giving up the possibility of an international market.
In terms of R&D, Wego still hopes to reverse the downturn in the orthopedic business through R&D investment and technological innovation. At present, the company has formulated five key directions in the orthopedic business: new materials, digital intelligence, customization, minimally invasive surgery and orthopedics, in addition to the layout of clinical care digital products, life information and support, endocrine and other new business segments, products involving respiratory anesthesia, urology, endocrine, endoscopic diagnosis and treatment, ** and other specialties.
However, although the future prospects are promising, they are still only "in the air" until they are actually translated into results. Such a decentralized layout not only raises concerns about whether there is a suspicion of too many but not sophisticated, but also puts forward higher requirements for the company's financing ability.
Since the overseas business is about the same as drinking doves to quench thirst, and the commercialization of new business is still early, Weigao can only seek more funds through other means. Recently, Shandong Weigao Blood Purification Products Co., Ltd., a subsidiary of Weigao, submitted a prospectus to the Shanghai Stock Exchange, and if it is successfully spun off and listed, it will become the fourth listed company under the "Weigao system".
Brief summary. Despite the lower-than-expected performance in 2023, CICC also pointed out in the report that it is expected that in 2023, orthopedics will complete all inventory returns and exchanges, and spine inventory will return to normal levels, and orthopedics revenue and profit are expected to ** by the second half of 2024.
From the perspective of the market, the market's valuation of Weigao shares mainly focuses on the orthopedic business, and in the case of the low technical threshold of most of the existing products, the lack of imagination for future growth also makes it difficult for the company to obtain the generally high valuation of the pharmaceutical sector. Until more positive news is released, the company's stock price may still lack some upward momentum.