1H23 Revenue side recovery is in place, optimistic about the subsequent contribution of overseas business
Times Angel 1H23 achieved revenue of 6.2 million yuan (+8% yoy) and adjusted net profit of 49.49 million yuan (down 39.7% year on year). We believe the revenue side is back in place (the total number of cases in 1H23 reached 95,400, +23.6% yoy), but since the company invested a lot of money during the year to build a complete overseas team, the 1H23 performance side was under pressure. Looking ahead to the year, we are still optimistic that the company will contribute about 22w of cases during the year (over 20% yoy), mainly due to: 1) sales in third- and fourth-tier cities and promotion of children's products plus volume within the Alliance Collection Center; and 2) initial overseas growth (the number of cases during the year may impact 20,000 cases), while the profit side may decline during the year as 2H23 continues to spend overseas. We expect the company's return EPS to be 0.35/1.66/2.47 yuan in the year 23-25. Considering that the company has gone through the start-up period overseas in 24-25, spending is expected to drop significantly. We gave the company 57 times PE in 24 years (considering the scarcity of the target plus the apparent growth rate of the company's profit side in 24 years, 34 times the average premium compared to A-shares), with a target price of HK$102.85 to maintain “buying”.
Domestic market: Sales strategies continue to be optimized, focusing on grassroots expansion throughout the year
The company's 1H23 gross profit margin was 59.3% (year-on-year +1.3 pct), mainly due to: 1) domestic demand recovery for invisible orthodontic products; 2) improvements in the company's production technology and continuous cost optimization, compounded by insufficient capacity utilization in the same period in '22. We are optimistic that the company's gross margin will continue to recover and is expected to exceed 62% during the year. In addition, the company's market strategy during the year focused more on: 1) children's products and cost-effective varieties, increasing the expansion of third-tier and fourth-tier markets; 2) optimizing supporting business. 1H23 has launched an academic interface platform, has obtained a domestic registration certificate for anti-caries devices, reached strategic cooperation with well-known oral cleaning brands, and upgraded remote follow-up tools, etc., and is optimistic about increasing patient stickiness.
Invisible Orthodontic Solution: The overall price was stable during the year, and the children's version led the growth
1H23's domestic invisible orthodontics solutions contribute 90% of overall revenue. Looking ahead to the year, we estimate that the number of domestic cases will show a double-digit increase (we are optimistic that more than 200,000 cases will be achieved). The main reasons are: 1) the three product lines won the bid for the Shaanxi Alliance to collect a volume effect or show; 2) The classic version benefits from medical treatment recovery and maintains a stable growth rate; 3) The champion version takes into account technical upgrades and expansion of indications and maintains a stable price system; 4) The children's edition uses cartoon IP cooperation to drive treatment adherence + third- and fourth-tier cities to increase promotion efforts; and 5) COMFOS is highly cost-effective Compared to, it continues to gain strength and sink market. In terms of price, the company indicated that there was no active price reduction strategy during the year. We estimate that the weighted ASP fell by only a low single digit in '23. The main reasons were: 1) changes in the product structure due to the sinking market and increasing contribution; 2) the rapid increase in relatively inexpensive child care lines affected the average price.
Overseas business: The number of cases has been impressive, and the self-built team is beginning to take shape
1H23 completed 9400 overseas cases, but due to the start-up period, it was necessary to build localized teams, data compliance, and IT systems in Brazil/Australia. The company spent too much on SG&A and R&D in the first half of the year, and 1H23 lost 12 million US dollars. We estimate that overseas contributed about 10% of the company's total number of cases in 23 years, with a profit and loss balance of 1H24. Consider: 1) Brazil's Aditek products cover traditional+invisible orthodontic needs and cooperate closely with local doctors; 2) Australian cases are steadily rising, and cash flow is basically balanced.
Risk warning: Market competition is fierce, overseas expansion falls short of expectations, and there is a risk of price reduction in collection.