Incidents:

Zhenghai Biotech released its 2022 annual report: In 2022, the company achieved operating income of 433 million yuan (+8.26%), net profit of 185 million yuan (+10.02%), and net profit of non-return mother of 173 million yuan (+7.29%).

The performance was in line with expectations.

Key points of investment:

The main business line is steady and improving. In 2022, the company's revenue from dental repair membranes was 207 million yuan (+8.00%), revenue from absorbable hard brain (spine) membrane patches was 156 million yuan (-1.05%), bone repair materials revenue was 39 million yuan (+11.01%), and revenue from other products was 103 million yuan (+101.38%).

The implementation of dental implant collection is expected to stimulate rapid growth in demand for dental repair membranes. In 2022, due to the impact of the epidemic and the expected price reduction of dental implant collection, industry demand was temporarily suppressed. Along with the implementation of collection and the decline of negative effects such as the epidemic, demand for dental implants is expected to grow rapidly in 2023, and the company is expected to enjoy the dividends of the rapid development of the industry. Furthermore, in January 2023, the company successfully won the bid for absorbable hard brain (rib) membrane patches in Anhui Province, maintaining that all six provinces collected the bids, stabilizing the company's market advantage.

The product line continues to be enriched. The company adopted a “sales generation, registration generation, clinical generation, and R&D generation” product development strategy. In 2022, self-acidifying adhesives, active biological bone, and hard brain (spine) membrane patches were approved for registration and listing one after another, further expanding the company's product lineup.

Among them, active biological bone is the first product in China to combine rhBMP-2 with bone stent material with a natural bone tissue pore structure. Clinical trials have shown that its bone induction ability is superior to traditional bone repair materials. The company is actively strengthening its sales team in the orthopedic field. After active biological bone is marketed for sale, it is expected to gain market share with excellent performance and first-mover advantage, opening a new growth curve for the company.

Continue to push for cost reduction and efficiency. In 2022, the company launched a VSM project in first-line production positions and produced a total of 26 production improvement proposals. By optimizing production process control standards and operating methods, production efficiency was further improved, and costs were reduced and increased efficiency was achieved. The company's overall gross margin remained at 88.72% (-0.39pct) in 2022, of which the gross profit margin of dental repair films was 91.37% (+0.98pct), and the gross profit margin of absorbable hard brain (rib) membrane patches was 91.73% (-0.85pct).

Profit forecasts and investment ratings: We expect the company's operating revenue to be 571 million yuan, 728 million yuan and 916 million yuan respectively in 2023-2025, up 32%, 28% and 26% year-on-year; the net profit of the mother is 245 million yuan, 307 million yuan and 380 million yuan respectively, up 32%, 25% and 24% over the previous year. The company's core product, dental prosthetic membrane, is expected to enjoy the rapid growth dividends of the industry, and the innovative product, active bioboskeleton, provides new momentum for growth. First coverage, giving a “buy” rating.

Risk warning: the risk of dental restoration films falling short of expectations, the risk of increased competition in the industry, the risk of new product promotion falling short of expectations, corporate governance risks, and industry policy risks.