MICRO-TECH(NANJING)(688029)：SMOOTH PROGRESS IN MEDICAL VISUALIZATION PRODUCTS;EXPANDING GLOBAL PRESENCE

　　2021 earnings in line; 1Q22 earnings under short-term pressure

    Micro-Tech (Nanjing) announced its 2021 and 1Q22 earnings: In 2021, the company’s revenue grew 46.77% YoY to Rmb1.95bn and its net profit attributable to shareholders rose 24.54% YoY to Rmb325mn, in line with market expectations. In 1Q22, the company’s revenue rose 12.50% YoY to Rmb443mn but its net profit attributable to shareholders fell 35.12% YoY to Rmb43mn with earnings under short-term pressure.

    　　Trends to watch

    　　Major business lines growing steadily; 1Q22 earnings under short-term pressure. In 2021, the company's major business lines grew steadily. Revenue from hemostasis and closure products grew 53.1% YoY to Rmb0.89bn, revenue from biopsy products rose 33.7% YoY to Rmb0.24bn, revenue from dilation products increased by 16.2% YoY to Rmb0.19bn, revenue from endoscopic retrograde cholangiopancreatography (ERCP) products grew 28.7% YoY to Rmb0.13bn, revenue from endoscopic mucosal resection (EMR) and endoscopic submucosal dissection (ESD) products rose 66.1%YoY to Rmb0.26bn, revenue from endoscopic ultrasonography (EUS) and endobronchial ultrasound (EBUS) products increased by 48.5% YoY to Rmb18.05mn, and revenue from microwave ablation needle products rose 58.9% YoY to Rmb0.13bn. In 1Q22, the company's net profit attributable to shareholders fell 35.12% YoY to Rmb43mn with earnings under short-term pressure, mainly due to: 1) declines in the volume of diagnosis and treatment at hospitals caused by COVID-19 outbreaks; 2) relatively low gross profit margin of medical visualization products; and 3) declining revenue from overseas markets caused by geopolitical conflict and changes in business model.

    　　R&D investment growing; smooth progress in medical visualization products. In 2021, the company’s R&D investment grew 53.40% YoY to Rmb153mn. Meanwhile, the company made smooth progress in medical visualization products. Its disposable choledochoscopy product gained approval for marketing in November 2021, and miniature consumables for the product are likely to be gradually launched. The company has submitted applications for type inspection for its disposable bronchoscopy and disposable visualized brain lavage system products. For the disposable bronchoscopy product, the company has submitted applications for registration at US FDA, CE marking registration, and registration in China, and the company expects to gain approval for these applications in 2022. Meanwhile, the company expects to gain approval for registration at US FDA for its disposable visualized brain lavage system product in 2022.

    　　Expanding global presence. In 2021, the company’s revenue from overseas markets grew 44.53% YoY to Rmb742mn. The company launched the EurUp project in Europe, and established wholly-owned subsidiaries focusing on direct sales in the Netherlands, the UK, and France, and a wholly-owned subsidiary to support distributors in Japan, laying a solid foundation for the company to strengthen its presence in developed markets with broad growth potential. Meanwhile, the company has reached a settlement with Boston Scientific regarding patent infringement claims, paving the way for the sales growth of the company’s key products in major overseas markets.

    　　Financials and valuation

    　　Due to declines in diagnosis and treatment at hospitals in eastern China caused by the COVID-19 outbreak in Shanghai, we lower our 2022 and 2023 net profit forecasts by 15.6% and 15.5% to Rmb438mn and Rmb586mn. The stock is trading at 28.9x 2022e and 21.6x 2023e P/E. We maintain our OUTPERFORM rating but lower our target price by 29.9% to Rmb125.30 (38.3x 2022e and 28.6x 2023e P/E), offering 32.5% upside.

    　　Risks

    　　Excessive exposure to overseas businesses; failures in R&D and commercialization of new products; marketing campaigns disappoint; losing bids for centralized procurement; sharper-than-expected price cuts.