Behind the six consecutive drops in the stock price of KANGJI MEDICAL (09997) is the fact that low-value consumables cannot support the company's ambition.

In September, KANGJI MEDICAL (09997) experienced six consecutive drops in the secondary market. The company's stock price dropped from the closing price of 5.79 Hong Kong dollars on August 30 to a low of 4.91 Hong Kong dollars on September 11 after six days of consecutive declines, giving back all the gains since mid-February of this year. That evening, KANGJI MEDICAL urgently issued a clarification announcement stating that "on the date of this announcement, TPG maintains its shareholding unchanged in the company." It was only after the company's announcement that many investors realized the sudden drop in the company's stock price. The reason for this market sentiment fluctuation at KANGJI MEDICAL this time is that there were reports in the market that TPG, as the major shareholder of KANGJI MEDICAL, had "sold" all of its KANGJI MEDICAL shares as can be seen on the Hong Kong Stock Exchange's official website. It is understood that TPG is currently the largest institutional shareholder of KANGJI MEDICAL, with a stake of 17.86%. If TPG chooses to completely divest its stake in the company, it will obviously have a significant negative impact on KANGJI MEDICAL's stock price and market value. However, according to KANGJI MEDICAL's clarification announcement, this is an internal compliance disclosure following an internal adjustment at TPG and does not involve any trading of TPG's shares in KANGJI MEDICAL. After the clarification announcement on September 11, KANGJI MEDICAL's stock price rebounded significantly in the following two trading days, with gains of 4.39% and 2.49%, respectively, and the stock price returned to around 5.5 Hong Kong dollars. However, even ignoring this "small episode," since the release of the 2024 interim report on August 20, KANGJI MEDICAL's stock price has not shown any improvement, in stark contrast to the nearly 15% increase in stock price after the release of the 2023 annual report in the first half of the year. This may be due to investors' changing views on the market growth space in the low-value consumables sector and the valuation growth curve of companies in the industry. Accelerating the layout and investment in high-value consumables On August 20, KANGJI MEDICAL disclosed its 2024 interim report. The financial report showed that KANGJI MEDICAL achieved revenue of 458 million yuan in the current period, a year-on-year increase of 13.6%; gross profit of approximately 363 million yuan, a year-on-year increase of 12.9%; and net profit attributable to owners of the parent company of approximately 286 million yuan, a year-on-year increase of 11.9%. If we take the company management's statement at the 2023 annual report performance meeting that "the company's future three-year revenue growth is expected to be 20-25%" as a benchmark, KANGJI MEDICAL's revenue growth in the first half of this year can only be described as flat. In addition, the difference...Towards high-end, towards overseas.As mentioned above, as a domestic leader in the MISIA medical device industry, KANGJI MEDICAL can fully rely on its own market channel construction and first-mover advantage to establish a moat. However, under the logic of centralized procurement, from the perspective of the company, the continuous internal competition will only further compress profit margins, and the overall market value-added space will also be greatly reduced. Therefore, while stabilizing the foundation of low-value consumables, KANGJI MEDICAL urgently needs to seek the next incremental market. There are two directions facing KANGJI MEDICAL now. One is to accelerate the transformation of products from low-value consumables to high-value consumables with higher innovation capabilities, and the other is to break the internal competition in the domestic market and export products to overseas markets. These two directions are not mutually exclusive, but require KANGJI MEDICAL to make efforts simultaneously. Investors can clearly see from KANGJI MEDICAL's recent financial reports that the company is accelerating its development towards high-value consumables such as ultrasonic knives, staplers, and endoscopes, but obstacles also come along with it. Firstly, its financial structure, relying on low-value consumable products to build a "low research and development, low capital expenditure" and high gross and net profit structure, is somewhat impacted. Compared horizontally with enterprises specializing in ligation clips and hemostatic clips in China, the gross profit margin is generally between 70-85% and the net profit margin is between 25-40%. As one of the top players in the industry, KANGJI MEDICAL has excellent financial data which has always attracted investors' attention in the secondary market, but entering the high-value consumables market is undoubtedly "stepping out of the comfort zone". As mentioned earlier, products such as ultrasonic knives and endoscopes are constrained by labor and production process costs, resulting in naturally lower gross profit margins. When the company accelerates its layout and promotion, it will continue to lower its comprehensive gross profit margin. However, transitioning to high value consumables also has its pros and cons. For example, at the end of 2020, KANGJI MEDICAL obtained the domestic registration certificate for staplers, which brought in 12 million yuan of incremental market for KANGJI MEDICAL by 2023. According to the 2023 annual report, by the end of 2023, KANGJI MEDICAL had a total of 92 products registered with the China National Medical Products Administration (NMPA), and the company's technological barriers were steadily established. Compared to the domestic market, the overseas market seems to be more attractive to KANGJI MEDICAL. According to the previously disclosed 2023 financial report, KANGJI MEDICAL's investment in the overseas market is mainly focused on two aspects: increasing overseas market registrations and increasing the output of its own brands. In 2023, KANGJI MEDICAL had 22 products registered in overseas markets such as Central and South America and Southeast Asia, while increasing registrations, KANGJI MEDICAL also gradually increased the output of its own brands. In the past, Chinese minimally invasive surgical product companies mainly focused on OEM for going abroad, with fewer self-owned brands, and Chinese brands did not establish brand recognition in the global market. Although KANGJI MEDICAL's previous layout of the overseas market was also primarily focused on OEM, it is currently adjusting its layout step by step, with a significant 67.3% year-on-year increase in revenue from overseas distributors in 2023, far exceeding revenue from ODM customers. According to the latest financial report, in the first half of this year, KANGJI MEDICAL initiated the optimization of its overseas customer structure, increasing the number of countries and regions covered by its products to 69, an increase of 22 compared to the same period last year. The company obtained 141 overseas customers, an increase of 43 compared to the same period last year. During the reporting period, the company obtained 11 new overseas registration certificates, some of which were registered through OEM customers and distributors. However, KANGJI MEDICAL's steps to "go global" still seem somewhat conservative. Compared with competitor Hangzhou AGS Medtech, whose overseas revenue reached 138 million yuan in the first half of 2024, a year-on-year increase of 35.3%, accounting for 52% of total revenue. In contrast, KANGJI MEDICAL's target is for overseas revenue to account for 15% in the next 3 years. Perhaps compared to going global, KANGJI MEDICAL prefers to stabilize its domestic foundation.