1H23's performance met our expectations

Deshijia announced 1H23 results: revenue of HK$346 million, up 9.7% year on year; adjusted net profit of HK$70 million, up 31.7% year on year, in line with our expectations.

Development trends

There was a rapid rebound after the epidemic, and 1H23 revenue reached a record high. At 1H23, the company's revenue and gross profit were HK$346 and 168 million, a record high, with a year-on-year increase of 9.7% and 17.6%. 1) Presbyopia correction is in strong demand:

Driven by an aging population, the number of presbyopia patients is increasing, and surgery is the most ideal way to eliminate presbyopia and reduce dependence on reading glasses, so demand for presbyopia correction treatment is largely immune to inflation and economic downturn. 2) Post-epidemic demand release in mainland China: 1H23 Mainland business revenue was HK$73 million, an increase of 49.3% over the previous year, accounting for 21.0% of total revenue. Revenue from ICL implantation and lens replacement surgery was HK$0.17 million and HK$35 million, respectively, up 34.7% and 94.0% year-on-year.

Demand for crystal surgery is growing steadily, and overseas business continues to gain strength. 1) Crystal surgery maintained a high revenue share plus high growth: 1H23, the company's revenue from crystal replacement surgery (including monofocal and trifocal crystal replacement surgery) was HK$178 million, an increase of 31.2% over the previous year, accounting for 52.1% of total revenue, with impressive growth rates. Revenue from posterior-type intraocular lens (ICL) implants was HK$40 million, an increase of 10.7% over the previous year, accounting for 11.8% of total revenue.

2) Overseas: Germany's total revenue reached HK$183 million, an increase of 1.5% over the previous year, accounting for 52.9% of total revenue.

Revenue from ICL and refractive laser surgery declined by 3.6% and 14.7% year on year, respectively, mainly due to the decline in purchasing power of the younger generation due to inflation and economic recession. The company has adopted an effective pricing strategy, and the number of refractive surgeries gradually picked up in April. Denmark's 1H23 revenue was HK$43 million, up 42.3% year on year, accounting for 12.3% of total revenue, of which revenue from crystal replacement surgery was HK$38 million, up 43.9% year on year. At the same time, the increase in production capacity at the Copenhagen flagship clinic, which opened in '22, boosted performance growth, and promoted ICL implantation and refractive laser surgery with 15.7% and 6.3% year-on-year growth. Total revenue in the UK was HK$48 million, down 15.4% year on year. Affected by delays in surgery due to surgeons' training, it gradually recovered in July.

New opening+mergers and acquisitions promote the common development of endogenous and epitaxial development. 1) The completion of a new flagship clinic is expected to promote endogenous growth: 1H23 has opened flagship clinics in London, England and Hong Kong, China, all equipped with the latest Zeiss Visumax 800. The company expects the Hong Kong clinic to open on 4Q23 and will cooperate with ZEISS to build the ZEISS Center of Excellence. 2) Acquire German ophthalmology brands to further expand the European market: Recently, the company acquired German ophthalmology brands FreeVis GmbH and PMK, which were originally clinics specializing in crystal replacement and refractive laser surgery. The company expects the merger and acquisition will help the company further expand its European business.

Profit forecasting and valuation

Considering the slightly longer recovery cycle after the epidemic, the 23-24 EPS forecast was lowered by 6.0% and 5.3% to HK$0.48 or HK$0.60. The current price corresponds to 10.4 and 8.3 times P/E in 23-24. Maintaining the “outperforming industry” rating, we expect that the long-term expansion of the layout will guarantee the company's profitability. Maintaining the target price of HK$7.60, corresponds to 15.8 and 12.6 times P/E in 23-24, with room for an increase of 52.0% from the latest closing price.

risks

Insufficient supply of doctors; changes in private healthcare policies; risk of medical emergencies.