Questor: buy into China’s stability and growth via this maker of artificial hips and knees

Richard Evans 9 October 2019 • 5:58am

Some of AK Medical's products — AK Medical focuses on hip and knee replacements. The firm makes use of 3D printing

Questor share tip: Hong Kong-listed AK Medical has an enormous market to tap and has turned itself into Chinese consumers’ ‘go-to’ brand

“The world has flipped on its head: emerging markets are now more stable and predictable than the West.”

This is the view of Carlos Hardenberg, an experienced investor who has worked all over the developing world and recently co-founded Mobius Capital Partners with Mark Mobius, the legendary emerging markets fund manager.

“The survival of the EU is in doubt, America has stoked up a trade war, there is huge uncertainty,” he said. “The most rational and predictable central banks are now to be found in the East, and regulators in the emerging economies are opening up their markets and privatising businesses while the opposite is happening in developed markets.”

With this in mind, readers may wish to invest some money directly in companies based in these nations. Today we look at a Chinese company, AK Medical, which makes replacement knees and hips.

“We always look if possible for a clear, concise, understandable investment case,” Mr Hardenberg said. “In China the number of older people is growing rapidly and use of hip and knee replacements is following suit, but current rates of joint replacement are far lower than in the West.”

Sign up to the Telegraph's Questor WhatsApp group for daily alerts and exclusive audio updates

He said AK Medical had spent a lot on product innovation – it makes some use of 3D printing, for example – and on its brand. “As a knee replacement patient you don’t just ask about the procedure, you ask about the actual product, and in China AK is the ‘go-to’ brand,” he added.

At one time the market was dominated by imports of foreign implants “but when the Chinese start doing something they want it to be the best”, the fund manager said. Regulators are also making life harder for importers. “This market was once almost 100pc imports but now domestic products dominate,” Mr Hardenberg said.

“Imported implants used to trade at unreasonable premiums to domestic ones but that is now changing as the Chinese versions are as good as imports. Foreign firms are completely losing their edge.”

This positive set of circumstances is driving “phenomenal” growth for AK Medical: earnings are expected to rise by 60pc this year, followed by rates of 40pc and 30pc.

Thanks to the “gigantic” domestic market the company doesn’t need to consider exporting, so it is immune from the trade war or indeed actively benefiting from it as a result of the increased barriers that China is erecting against foreign manufacturers.

Sign up to our new City Intelligence newsletter for incisive comment on the day's biggest business stories

Mr Hardenberg said the final piece in the jigsaw was that AK had a “strong management team with proper alignment with investors’ interests”, while “the books look clean, the return on capital is now about 30pc, there is no debt; it’s a perfect fit for us”.

His firm is trying to persuade AK to increase its dividend – “we think there is room to triple it thanks to the firm’s high cash generation” – and consider a second listing for its shares in addition to the existing Hong Kong quote. “We are having a constructive discussion,” he said.

The shares trade at about 12 or 13 times expected earnings for 2022, “not what you would call pricey for a stock with such strong growth potential”, Mr Hardenberg added.

Several British brokers trade in Hong Kong-listed shares. See telegraph.co.uk/go/overseasbrokers for details.

Questor says: buy

Ticker: 1789.HK

Share price at close: HK$7.37

Update: Sirius Minerals

We tipped Sirius, which is developing a polyhalite mine in Yorkshire, as a speculative buy last summer in our Sunday column but things have not gone well. It cancelled a bond issue last month and has said it will cut its workforce. It has also announced a strategic review.