Should You Consider AK Medical for Your Portfolio?

AK Medical Holdings Ltd (SEHK: 1789) is a Hong Kong-listed medical devices company with a market capitalisation of HK$20.82 billion (US$2.68 billion).

AK Medical listed its shares on the Hong Kong market in an IPO in December 2017. Since then, its share price has increased by almost 500%.

Let’s have a quick look at AK Medical’s business and prospects to see whether it’d be a good addition to investors’ portfolios.

What does AK Medical do?

AK Medical is a leader in the Chinese orthopaedic joint implant market. The company designs, manufactures and sells hip, knee, spine and other implants. These products are CFDA-approved.

Medical implants are quickly becoming essential as an ageing population demands more such products due to bodily wear and tear.

According to Statista, in 2019, 30% of China’s population was 60 years and older. With China’s demographics hinting at a surge in an ageing population in the next couple of years, demand for implants should continue to increase.

AK Medical has an extensive distribution network that spans numerous provinces in China and overseas markets, enabling it to sell millions of implants.

Financials

Over the past five years (from 2015 to 2019), AK Medical has delivered sky-rocketing annualised net profit growth of 40.72%.

This was on the back of higher revenue generated by the company as it sold more implants and expanded its product portfolio.

In 2019, the 3D-printed products business reported a 76.5% increase in sales compared to the prior year. Similarly, the knee & hip products business reported year-on-year sales growth of 55.7%.

Also, AK Medical has a pristine balance sheet at the end of 2019, with a net cash position.

In terms of valuation, the company sports a price-to-earnings (PE) ratio of 68x currently, indicating that it is richly priced.

But investors need to keep in mind that the company is growing at a compounded rate of 40% yearly.

Prospects

AK Medical saw greater adoption of its products as seen from management’s comments:

“In 2019, the 3D-printed spinal products also made a breakthrough with products adopted by more than 100 hospitals nationwide, more than half of which are well-known Class III hospitals.

It has gained more recognition from experts in fields related to intractable diseases and bone tumor.

In 2019, the Group also continued to promote 3D Accurate Construction Technology (“3D ACT”) to provide customers with personalized services. For the year ended 31 December 2019, such a platform has covered 964 hospitals, an increase of 142 hospitals compared with 2018.

The platform has assisted doctors in designing 4,741 surgical solutions, recording an increase of 1,063 cases compared with 2018.”

Apart from the above, AK Medical launched a new pelvic implant product. This expansion into making implants for other areas allows the company to expand its product portfolio and diversify its revenue streams.

Despite the company’s success management is not resting on its laurels, it is investing in R&D to make new-and-improved products.

As of the end of 2019, AK Medical had obtained numerous patents that span invention patent, utility patents and appearance patents and had many patents pending.

The strong patent portfolio demonstrates that the company is serious about its R&D activities and continues to invest in making better products.

Foolish verdict

AK Medical has a strong history of delivering outsized growth in revenue and profits.  With a demographic shift towards an aging populating and management’s focus on R&D to make new and improved products for the medical industry.

AK Medical seems like a company that could continue to deliver market beating returns in the future.

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