Golden Meditech (801.HK)   BUY (TP: HK$2.00 (Under review))

Revenue in-line; one-off charge lowered net profit

Golden Meditech (GM) announced FY10 results yesterday. Turnover at HK$285,5m was in-line with our estimate and up 3% excluding cord-blood operations, as the business was spun-off in 1Q10. GPM decreased from 67.5% to 60.5% on an adjusted basis, due to the lower pricing of ABRS. Net profit of HK$116.4m was diminished by a HK$102.4m non-cash charge for changes in fair value of convertible bonds and warrants but was still up 103.9% YoY. Excluding the fair value loss on financial assets and some other irregular net income on financial assets, net profit would be HK$167.9 which is 4.8% below our estimate of HK$176.3m. Golden Meditech is currently trading at HK$1.52, which translates into FY11F and FY12F PER of 9.4x and 7.6x, respectively. We have a BUY-rating on the stock with a TP of HK$2.00, but our model is currently under review. 

Medical devices sales in-line. At HK$233.7m total medical devices sales were about in-line with our estimate (-0.7%) of HK$235.3m. The equipment at HK$146.2m (incl. ABRS and new products) was 5.5% below our expectation and down 28.1% YoY, while consumables at HK$87.5m were up 19.7% YoY, 8.7% above our estimate of HK$80.5m. As expected, the lower revenue is a result of price reduction and market saturation in the upper-tier hospitals. Hospital management revenue at HK$51.8m was 3.3% above our estimate of HK$50.1m. The price reduction of ABRS also lead to a lower overall gross margin from 67.5% in FY09 to 60.5% in FY10 on an adjusted basis (excl. cord blood operations). Management is still hopeful, that ABRS will be able to penetrate into lower tier hospitals and that sales can benefit from increased government spending. The company further will try to get more management contracts for hospitals.

Funtalk contribution rose 58,5% YoY.  Funtalk contributed HK$76.0m, or about 45.3% to adjusted net profit, mainly due to an improved product-mix, which led to a higher gross margin of 15.1% in FY10 vs. 12.9% in FY09. Going forward Funtalk will issue 12m more shares in August, which is expected to generate US$100m. The offering will increase Funtalk’s 52.1m shares to 64.1m and decrease GM’s stake from 30% to 24.4%.