The authors are analysts of Shinhan Investment Corp. They can be reached at bh.lee@shinhan.com and jiwoo100@shinhan.com, respectively. -- Ed.

Domestic market leader in artificial joints

Corentec designs, manufactures and markets orthopedic artificial joint systems. With its locally-produced artificial joints, the company successfully penetrated into a market that had been under the oligopolistic control of four global manufacturers, and now commands the largest share of the domestic market for total hip replacement systems. Corentec continues to expand its domestic market foothold with products optimized for Asians and prices set at competitive levels.

For 2Q22, Corentec recorded operating profit of KRW2.02bn (+56% YoY) on sales of KRW14.32bn (+35% YoY). The increase in top-line was driven by even growth in sales of hip, spinal, and shoulder systems.

NDR takeaways: 1) expansion into implants; 2) acquisition effects

Investor focus centered on: 1) Corentec's expansion into the dental implant business; and 2) acquisition of Sun Healthcare International. The company's tech transfer deal with US-based Rodo Digital Prosthetics for abutment technology (needed for removable implants) is set to be completed in 1H23. Corentec has been designing an abutment system compatible with major domestic implant products, and stands to see sharp growth in sales once the market for premium implants begins to grow in earnest in Korea.

Expectations are also growing for operational synergy between the recently acquired Sun Healthcare International, with its orthopedic surgical center and doctor network in the US, and Corentec’s spinal system business, which is making inroads into the US market. After relying on eastern states for 80% of sales in the US, Corentec should be able to expand its reach to the west coast through the California-based subsidiary to secure further growth in US sales going forward.

Favorable conditions for growth; CB overhang remains a burden

For full-year 2022, Corentec’s sales are forecast at KRW62bn (+39% YoY) and operating profit at KRW5.4bn (+42% YoY). The company offers its main products at prices roughly 10% lower than global rivals and secures around 20% of total sales from exports, benefiting from the recent increase in USD/KRW exchange rate. At home, its market share continues to rise, reaching 30% for hip replacement systems and 13% for knee systems.

According to a public disclosure made at end-June, Corentec’s remaining convertible bonds are equivalent to 3,201,539 common shares, or 25.9% of its total number of shares. Even if the company exercises its call option on 30%, potential dilution from convertible bonds remains a burden. For shares to record an uptrend despite overhang risks, Corentec will need to provide a clear growth story and deliver visible progress going forward.