Key points of investment:

Established in 1999, Runda Medical Technology Co., Ltd. is committed to the field of in vitro diagnostic distribution services. Its main business is to provide comprehensive services for in vitro diagnostic products and professional technical support to various medical laboratories (mainly public hospital laboratories of level 2 and above) through its own comprehensive service system. It is one of the earliest enterprises in the industry to explore overall comprehensive services. The largest shareholder of the company is Hangzhou Gongshu District State-owned Investment Holding Group Co., Ltd.; as of October 13, 2023, it accounted for 20.01% of the shares and was the actual controller of the company.

In the first three quarters of 2023, the company achieved operating income of 6.890 billion yuan, down 9.74% from the same period last year, and realized net profit attributable to shareholders of listed companies of 283 million yuan, a year-on-year decrease of 7.38%. Net profit after deduction was 187 million yuan, a year-on-year decrease of 35.23%, and earnings per share of 0.49 yuan. Net cash flow from operating activities was $184 million. Among them, in the third quarter, the company achieved operating income of 2,369 billion yuan, a year-on-year decline of 17.55%, net profit of 108 million yuan, a year-on-year decrease of 25.95%, and net profit after deduction of 30.259 million yuan, a year-on-year decline of 78.60%.

The main reasons for the decline in the company's performance are: 1) Influenced by objective factors in the same period last year, the scale of third-party laboratory testing business in East China increased significantly, but after the elimination of objective factors in the same period this year, the impact on the overall revenue base was obvious; 2) medical policies disrupted hospital-side medical demand.

Judging from the cash flow situation, the company's net cash flow from operating activities in the first three quarters of 2023 was 185 million yuan, a sharp increase of 126.48% over the previous year, mainly due to the improvement in hospital repayments in 2023.

In terms of profitability, the company's gross sales margin for the first three quarters was 25.84%, down 0.31 percentage points from the same period last year, mainly due to the decline in gross margin in the third quarter. The company's gross margin for the third quarter was 23.64%, down 4.12 percentage points from the same period last year. It was mainly disturbed by current medical policies. The third quarter was affected by the medical policy environment. The growth of the company's business on the revenue side slowed, but fixed costs such as instrument depreciation remained unchanged, leading to a decline in marginal effects and a phased decline in gross margin and net profit margin. Then, as the medical policy environment gradually improves, the company's various businesses gradually resume normal growth, and the company's gross margin will return to normal levels.

Future outlook. The impact of medical policies is declining marginally, and the concentration of the IVD industry is expected to increase. In the future, the company's IVD business is expected to improve month-on-month, and the industrial sector is optimistic about the development prospects of the AI business. The company's industrial sector includes the R&D and production business of VD products and the business of digital inspection information systems. In recent years, the company has continued to increase its investment in the R&D of AI products, actively cooperated with major domestic model technology companies such as Huawei, and developed a large-scale model of inclusive AI medical services based on Huijing product development in combination with HUAWEI's Pangu model technology. In response to the analysis and interpretation of inspection data, Runda has developed AI products such as “Smart Inspection - Artificial Intelligence Interpretation and Inspection Report System” and “Huihao - Internet Platform for Full Cycle Health Management”.

Facing B-side medical institutions, develop AI medical model products such as smart medicine, smart services, and smart management to improve clinical diagnosis and treatment levels, patient service levels, and operation management levels; at the same time, develop professional and trustworthy healthcare models for C-side ordinary people to provide the public with professional and trustworthy interpretation of test results, scientific and accurate health science, and active and friendly health management services, and provide scientific, personalized and friendly health management services.

I am optimistic about the future development space of this series of products.

Profit forecasts and investment advice. Considering the impact of recent medical policies on the company, the company's profit forecast was lowered. The company's earnings per share for 2023, 2024, and 2025 are estimated to be 0.71 yuan, 0.90 yuan, and 1.16 yuan respectively, corresponding to the closing price of 19.57 yuan on November 1, and the price-earnings ratio is 27.56 times, 21.74 times, and 16.87 times. Considering the development space of the company's large AI model, the company's “buy” investment rating is maintained.

Risk warning: risk of medical policy uncertainty, risk of new product promotion falling short of expectations, collection risk