Pw Medtech – An Undervalued Medical Device Manufacturer(2015-05-05)
PW
MEDTECH – AN UNDERVALUED MEDICAL DEVICE MANUFACTURER
2015-5-5
China Galaxy International
Company background.
PW MedTech is a medical device company with focus on fast-growing and high margin consumables. Its business can be classified into three segments: (1) orthopedic im-plants, (2) advanced infusion sets, and (3) regenerative medical biomaterials. In terms of 2013 sales revenue, the company ranked No.1 in artificial dura mater (人工腦硬膜) and No. 2 in advanced infusion sets, and is the third largest domestic orthopedic implant manufacturer.
Unlocking potentials from regenerative biomaterials segment: In Q3 2014, the company acquired 100% interest in Tianxinfu with a cash consideration of RMB802.6m, equivalent to 8.9x 2013 net profit. Tianxinfu is a leading regenerative medical biomaterials man-ufacturer focuses on artificial dura mater, which is used in craniotomy (开胪手术)for protection and preventing the leakage of cerebral spinal fluid. According to the management, about 50% of craniotomy performed in China would use artificial dura mater.
The management expects an annual growth rate of mid-teens for the business segment and the gross margin of the segment is 94.5% in 2014. As the deal was completed in August 2014, only around 5 months of revenue or RMB80m was booked in the P&L of PW MedTech in 2014.
Niche market dominated by local players: Artificial dura mater is a niche market dominated by two local players, Tianxinfu has a market share of 36.7%, followed by Grandhope of 30.8%. According to the company, the government has strict regulation on the import of bovine source biomaterial for the prevention of mad-cow disease and therefore all the import products are synthetic material. As medical practitioners prefer organic products over synthetic products, local players can therefore dominate the market.
Promising technology that can be applied to other fields: The dura mater of Tianxinfu is a kind of purified bovine source collagen modelled into desired shape. The R&D team puts effort in applying the collagen source in other areas and the company has already launched in April a new product line for repairing tendon surgery. The company is also developing second generation dura mater and products for use in dentistry.
Stable growth of orthopedic implants: The company is one of the three local manufacturers that offer products covering the three major sub-segments (trauma, spine and joint) in orthopedic implant industry. The company is the second largest local manufacturer in trauma products and also the fourth largest local manufacturer in spine products. Although it is difficult for local players to penetrate into the MNC-dominated first tier markets, we believe established local players like PW MedTech can still enjoy faster-than-industry growth (~18%) by taking market shares from smaller players.
Strategy change in promoting the joint products: The Company entered into the joint implants market in 2013 by acquiring Shenzhen Bone Medical Device. Originally the sales and marketing activities of the joint products are separated from the trauma and spine products. However, due to the short track record of the joint products (the products were launched in 2012) and a relatively small size of the Shenzhen factory, the sales and promotion were ineffective. In view of this, PW MedTech combined the two sales teams in late 2014, hoping to speed up the development of joint products by leveraging on the established brand name of trauma and spine products.
Infusion sets: transition period for sales team restructuring: As the second largest advanced infusion sets manufacturer in China, the company only manufacture high-end infusion kit sets. Precision filter infusion sets and non-PVC infusion sets respectively accounted for 82.4% and 14.3% of infusion sets sales in 2014. Due to the increasing awareness of the safety issues regarding to intravenous infusion process in China, the infusions sets will start to shift towards high end products. According to the man agement, currently high end infusion sets only accounted for around 7% of the infusion set market in China, still significantly traile d behind ~80% level in US and Europe market. In spite of the growth potential of infusion sets, the segment growth rate in 2014 was unsatisfactory (14.5% YoY growth) due to a slow tender process and the company’s lack of access to end-users due to the agency sales model. In view of this, the company has employed a new sales head for infusion sets and started restructuring the sales channel. The company believes 2015 will be a transition period for IV infusion sets.
Earnings outlook: Targeting ~30% growth. Driven by the full year contribution of the newly acquired regenerative biomaterial segment and organic growth of the other two segments, we believe it is achievable for the bottom line to grow by around 30% in 2 015 after discussing with the company. In future, the company believes profit growth will be driven by (1) organic growth of existing products,(2) launch of new products, and (3) M&As. Valuation: PW MedTech is currently trading at 2015E PER and PBR or 16.8x and 1.9x respectively, significantly lower than HK listed medical devices manufacturers. With (1) established business in orthopedic implants and advanced infusion sets, (2) market leadership in regenerative medical biomaterials, and (3) future M&A potentials, valuation of the company is undemanding.
Valuation: PW MedTech is currently trading at 2015E PER and PBR or 16.8x and 1.9x respectively, significantly lower than HK-listed medical devices manufacturers. With (1) established business in orthopedic implants and advanced infusion sets, (2) ma rket leadership in regenerative medical biomaterials, and (3) future M&A potentials, valuation of the company is undemanding.