From late March to early April, driven by earnings releases and positive industry signals, AK MEDICAL (01789) experienced a significant rally, reaching an interim high of HK$7.15 on April 13 following six consecutive positive sessions. However, the stock failed to sustain its upward momentum, instead undergoing a technical correction in line with the broader Hong Kong healthcare sector. Over the past month, the Hang Seng Healthcare Index has notably retreated, with a maximum decline of 17.21%. During the same period, AK MEDICAL's share price fell by as much as 17.62%. This performance is concerning for a company already on the brink of being removed from the Stock Connect program.
The final month of the battle to maintain Stock Connect eligibility has officially begun. In fact, AK MEDICAL has been hovering near the removal threshold since the second half of last year, though market conditions were more favorable then. Following the release of its interim report last year, the stock entered a roughly three-month period of sideways consolidation, with a minimal gain of 0.36% from August 29 to November 25. During this time, buying funds managed to absorb selling pressure, locking in most positions around the accumulation zone with an average cost near HK$6. High concentration of holdings helped keep price volatility technically low, which was key to maintaining its Stock Connect status in the latter half of the year.
This year, however, the pressure to stay in the program is greater. The market capitalization threshold for small-cap stocks in the Southbound Stock Connect has been rising, increasing from around HK$60 billion last year to approximately HK$65 billion. As of May 20, the exit threshold stands at HK$67.13 billion. Against this backdrop, persistent stock price declines pose a significant risk for any Stock Connect constituent. The next periodic review for the Hang Seng Index and Stock Connect is set for June, with results announced on August 25, covering the review period from July 1, 2025, to June 30, 2026. Currently, AK MEDICAL's average daily market capitalization during this review period is HK$67.77 billion, only HK$0.64 billion above the current HK$67.13 billion threshold, representing a coverage ratio of 95.95%.
With just over 40 days remaining until the end of the current review period in late May, AK MEDICAL needs to maintain a minimum average closing price of HK$5.95 per share for the remaining days to secure its eligibility. On May 20, the stock hit an intraday low of HK$5.89. Given the ongoing downward trend, the company faces substantial pressure. Can northbound capital once again be the key to its survival?
In the second half of last year, during a nearly two-month period of low-price consolidation, China Investment (Shanghai-Hong Kong Stock Connect) emerged as the largest buyer, accumulating 46.186 million shares. This strong buying support was crucial in stabilizing AK MEDICAL's average daily market cap. Over the past five trading days, as the stock trended lower, northbound capital again played the role of the largest net buyer. Broker data shows the top five selling seats were HSBC, Citibank, Bank of China, Societe Generale, and HaFu, selling 2.695 million, 1.8667 million, 306,000, 174,000, and 160,000 shares, respectively. Meanwhile, China Investment (Shanghai-Hong Kong Stock Connect) was the largest buyer, purchasing 3.674 million shares. Currently, China Investment and China Chuangying (Shenzhen-Hong Kong Stock Connect) hold 15.05% and 9.29% stakes in AK MEDICAL, respectively.
With fundamentals failing to drive the share price, what could trigger an oversold rebound? Against the backdrop of a sustained recovery in the orthopedic consumables industry, many companies have reported strong performance. AK MEDICAL is no exception. Its 2025 annual report showed revenue of RMB 14.82 billion, a 10.1% year-on-year increase, and net profit attributable to shareholders of RMB 3.39 billion, up 23.8%. This growth was driven by accelerated import substitution facilitated by centralized procurement and increased demand for surgical procedures involving the company's products.
By category, hip implant revenue reached RMB 8.45 billion, up 15.9%, while knee implant revenue was RMB 4.36 billion, a 7.6% increase. The company maintains a leading market share in hip and knee replacement implants. Overseas revenue grew 20.1% to RMB 3.30 billion, accounting for 22.2% of total revenue. The export business added five new clients with orders exceeding RMB 10 million each, contributing to a compound annual growth rate of approximately 40% from 2020 to 2025. In a market environment that favors clear earnings delivery, AK MEDICAL's fundamentals are not a drag. Its stock volatility is more related to broader market liquidity and fund preferences.
Over the past year, southbound capital's holdings in Hong Kong healthcare stocks have increased by about 2 percentage points. As of March, among Stock Connect constituents, there were 250 stocks with southbound ownership exceeding 20%, with the healthcare sector leading at 54 stocks. However, southbound capital is a double-edged sword for the sector. Recent preferences have shifted towards internet and banking stocks, attracting marginal inflows, while the healthcare sector's share of total main board turnover has declined from 7% at the start of the year to lower levels.
AK MEDICAL has been caught in this sector-wide liquidity discount. While the trading theme is labeled "healthcare," the focus has been on innovative drug companies. Notably, the Hong Kong Stock Connect Innovative Pharma ETF (159570), the largest healthcare ETF by size, faces concentrated redemption pressures, leading to significant selling during market downturns and contributing to the Hang Seng Healthcare Index's correction. Innovative medical device companies like AK MEDICAL, despite more stable fundamentals, have recently exhibited the same risk sensitivity as innovative drug firms, forcing the entire innovative medical device segment into a "liquidity discount" phase despite fundamental improvements.
On a positive note, the Hong Kong Stock Connect Innovative Pharma ETF (520880) has seen net subscriptions exceeding RMB 535 million over the past ten days, with its share count reaching a new high of 5.342 billion units. This trend indicates that while mainstream capital is exiting the healthcare sector, some smart money is accumulating positions at lower levels. This is a positive signal for AK MEDICAL. After the recent correction, AK MEDICAL's P/E ratio has fallen to 18.17x, below the industry average and 5% lower than its three-month average, presenting a potential opportunity for contrarian investment amid smart money's accumulation in the sector.