PW Medtech : Raising PT – Significantly Accretive Acquisition(2014-05-26)

PW Medtech : Raising PT – Significantly Accretive Acquisition
By Morgan Stanley

We attribute the incremental HK$1.50 per share inour price target to the major acquisition of BeijingTianXinFu, a biomaterials company which couldbroaden PW Medtech’s product portfolio andimprove its distribution network.

We estimate 49% accretion to 2015 earnings:TianXinFu’s net profit was Rmb90mn in 2013, about70% of PW Medtech’s total profit. We project 12% YoYgrowth for its profit in 2014. Our new 2014 EPS estimatefor PW Medtech is up 26%, assuming the acquiredbusiness will be consolidated for 5 months in 2014. Our2015 and 2016 EPS estimates are 49% and 41% higher.

2015e P/E of 16x on our new estimate looksattractive: Our new price target of HK$5.80 suggests22x 2015e P/E and 45% upside from the current level.

Further diversification into other consumablessegments: This new business adds to the existingadvanced infusion sets and orthopedic implants, whichis consistent with its development strategy of focusingon high-growth/high-margin medical consumablessegments. Management expects synergies in R&D,production and distribution in the future.

Fast-growing market: We estimate the market in Chinafor artificial dura mater, the main product of the acquiredcompany, was Rmb207mn in 2010 (based on the latestavailable data), up from 109mn in 2008, representing aCAGR of 24%. However, the size of the biomaterialsmarket in China (including artificial dura mater, spinaltissue, and nerve shealth) was Rmb450mn with agrowth rate of 12% in 2013. We expect it to increasesubstantially with new applications for the biomaterials.

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