Smith & Nephew shares drop 12% after China slowdown hits revenue

Smith & Nephew has become the latest company to record trading being hit in China as the country’s economy struggles.
The FTSE 100 manufacturer of medical products has cut its full-year target for revenue owing to issues in China, as it faces the twin threats of weak consumer demand and difficulties with the country’s new bulk-buying procurement strategy.
Thegroup has reduced its guidance for revenue growth from between 5 per cent and 6 per cent to 4.5 per cent, prompting its share price to decline by 12.5 per cent, or 137p, to close at 961p.
Smith & Nephew said it had recorded “slower in-market demand” for its orthopaedic products such as hip and knee implantsfrom Chinese consumers.
The Chinese economy was once a reliable growth engine for UK companies, but it has since faltered from strict lockdown measures and a crisis in the real estate market.
The most recent data on output showed China’s GDP rose by 4.6 per cent in the three months to the end of September, which was below a target of 5 per cent set by the government and weaker than the levels achieved before the pandemic, when GDP growth was regularly more than 6 per cent.
The slowdown in demand has produced a string of warnings from operators acrossa wide range of industries, including healthcare, consumer goods and car manufacturing.
The market for medical goods has also been knocked by the country’s push to create more competitive tenders for pharmaceuticals and devices through its so-called volume-based procurement programme.
The drive has reduced prices paid by cities and provinces for products and has created a headwind for Smith & Nephew. The programme was meant to deliver higher sales volumes to compensate for lower prices, but Smith & Nephew warned the volume increases were “yet to come through” and it said the issues were expected to continue into 2025.
The company reported that its third-quarter revenues grew by 4 per cent to $1.41 billion for the quarter that ended on September 28.
Analysts at Stifel said the update also “revives debate on the perceived weakness” in the company’s internal modelling of its financial position.
Smith & Nephew, based in Watford, Hertfordshire, is one of the world’s largest medical technology companies, employing about 18,500 people and operating in more than a hundred countries. The group operates a number of specialist divisions including orthopaedics, sports medicine, ear, nose and throat, and wound management.
Deepak Nath, the chief executive, said that trading in China was a “significant headwind” that had masked strong performance in the group’s sports medicine division. Nath has been trying to bolster Smith & Nephew’s performance amid inconsistent trading and a high rate of churn at the top of the organisation. He has been seeking to reduce overdue orders, launch new products and improve productivity to deliver annual savings of $200 million by 2025.
Nath said: “We continue to deliver on longer-term growth drivers, including robotics adoption and product innovation as well as improving productivity.
“While the revised outlook reflects the headwinds across our surgical businesses in China, we remain convinced that our transformation to a higher-growth company, with the ability to drive operating leverage through to the bottom line, is on the right course.”
The Swedish activist investor Cevian Capital confirmed that it had built a stake in Smith & Nephew in July, saying that the company was running “fundamentally attractive businesses” in growing markets but needed to push through operational improvements. The investor, which has built a holding of 5 per cent, said there were cost savings that could be achieved across its different business areas and that the company needed to address “the remaining challenges in orthopaedics”.