Medtronic-Weigao distribution joint venture terminated earlier than expected

Medtronic is seen to sell entire stake in Weigao.

Here's from OSK HK:

As we wrote in our 19 Nov 2012 report, the JV’s break-up did not surprise us in view of i) the JV has taken longer than expected to revamp its distribution channel, and ii) Medtronic’s takeover of China Kanghui (KH.US Non-rated), China’s No.2 domestic orthopaedic device maker in 2011. However, the dissolution came in earlier than its expiry date of Feb 2014, as per its Dec 2007 agreement.

According to the latest announcement, the JV will transfer all the existing inventory of Weigao-branded products to the Group at net book value as of 31 Dec 2012.

Orthopaedic sales forecast to stay but JV earnings cut. Following the early dissolution of the JV, Weigao stated that it will i) resume the nationwide distribution and sales of its orthopaedic products in China; ii) explore the international market with its high-quality low- cost orthopaedic products. Therefore, we are keeping our FY12F orthopaedic sales projection unchanged and maintaining our FY13F orthopaedic sales growth forecast of 25% y-o-y, in line with management’s previous guidance. Assuming i) the JV will not sell any products to its end customers in Dec 2012, and ii) the early dissolution of the JV will be
completed successfully by end-2012; we cut our FY12F JV earnings forecast to RMB62m (from RMB69m previously) and we expect the JV to cease generating earnings for Weigao in FY13F-FY14F. Our new FY12F JV earnings estimate now accounts for 5.5% of our Group core net profit forecast (from 6.1% previously). 

Medtronic may exit from Weigao’s shareholdings. In view of the above development, we expect Medtronic to sell its entire 12.4% stake in Weigao in the near future. We note that Medtronic is now able to sell its H-shares (233.1m) via the open-market at any time, while the sale of non-listed shares (322.9m) will only require approval from China Securities Regulatory Commission (CSRC).