In the first three quarters of 2023, the company achieved revenue of 542 million yuan (+51.99% year-on-year) and net profit of 179 million yuan (+92.83% year-on-year). The company's performance improved quarterly, with impressive performance. In the short term, the company's three-quarter report revealed a contract debt of 82 million yuan. Compared with the same period before the epidemic, there is still room for release of market demand suppressed by the epidemic; in the medium term, the company continues to increase investment in R&D, and many achievements will be reaped; in the long run, in line with the aging population trend, policies clearly support the development of the rehabilitation industry, and industry concentration is expected to increase further, benefiting industry leaders. Considering that the company's recovery momentum continued to materialize in the first three quarters, we are optimistic about the company's full performance in 2023 and adjusted the company's 2023/24/25 EPS forecast to 1.59/1.96/2.41 yuan (the original forecast value was 1.43/1.75/2.16 yuan). The current price corresponding to PE valuation is 32/26/21 times, giving the company 40 times PE in 2023, corresponding to the target price of 63 yuan, maintaining the “buy” rating.

Strong recovery continued in the third quarter, and performance improved quarter by quarter. The company achieved revenue of 542 million yuan (+51.99% year-on-year) and net profit of 179 million yuan (+92.83% year-on-year) in the first three quarters of 2023. Looking at a single quarter, 2023Q3 achieved revenue and net profit of 207 million million/72 million yuan, respectively, of +52.70%/35.24%, respectively; 2023Q2 achieved revenue and net profit of 192 million million/62 million yuan, respectively, of +41.09%/128.65% of the same period; and 2023Q1 achieved revenue and net profit of 143 million/038 million yuan, respectively, of +68.25%/298.99% of the same period last year. The company's revenue and net profit have all improved step by step, and the recovery in performance continues to be realized. In the first three quarters of 2023, the company's gross margin was 68.58% (+1.09pcts for the same period), sales expense ratio of 23.02% (-7.49pcts), R&D expense ratio of 13.46% (-5.08pcts), and management expense ratio of 4.98% (-2.58pcts). Compared with the pandemic, the cost side continued to improve.

Technology research and development builds core competitiveness, and equity incentives highlight the company's confidence. In the first three quarters of 2023, the company continued to increase investment in R&D and launched a number of innovative products with independent intellectual property rights, such as piezoelectric shock wave therapy devices, three-dimensional core muscle group assessment and training systems, and transcranial magnetic AI navigation and positioning systems. The company's product line has been continuously enriched and upgraded. According to the company's announcement, in the first three quarters, the company added 18 new medical device registration/filing certificates, and obtained a total of 311 medical device registration/filing certificates; 51 new patents, a total of 1,483; 6 new software copyrights, and a total of 141. In July 2023, the company announced the 2023 restricted stock incentive plan. It plans to grant 1.8 million restricted shares to incentive targets, 1.44 million shares for the first time. The initial incentive target is 163 people, and the grant price is 32 yuan/share. The equity incentive plan is expected to give full play to the team's subjective activism and help the company develop rapidly. The specific performance assessment goals are as follows:

In the first vesting period, based on 2022 operating income, the revenue growth rate in 2023 is not less than 50%; or, based on non-net profit deducted in 2022, the growth rate of non-net profit is not less than 70% in 2023.

In the second vesting period, based on operating income in 2022, the growth rate of operating income in 2024 is not less than 80%; or the growth rate of non-net profit in 2024 is not less than 120%, based on non-net profit deducted in 2022.

A number of policies support the development of the industry, and payment by disease type highlights the value of the rehabilitation industry. In April 2023, the National Health Commission issued the “Notice of the General Office of the National Health Commission on Further Promoting Work Related to Accelerated Rehabilitation Surgery”. The document mentions strengthening early intervention in rehabilitation, and clarifies the specific calculation method for the early rehabilitation intervention rate of accelerated rehabilitation surgery in the “Evaluation Index for Accelerated Rehabilitation Surgery”, providing a specific starting point for implementing the accelerated rehabilitation surgery diagnosis and treatment model. In May 2023, the State Administration of Traditional Chinese Medicine and the National Health Commission jointly issued the “Notice on Carrying Out Comprehensive Actions to Improve the Quality of Medical Care (2023-2025)”, which includes improving the “early rehabilitation intervention rate” in the 2023-2025 monitoring index system of each province's actions, into the scope of assessment of the quality of medical behavior. Early intervention is an important principle of rehabilitation treatment, and improving the early rehabilitation service capacity of general hospitals is of great significance in meeting the rehabilitation needs of the general public. Under the payment model by disease type, rehabilitation tends to be early intervention, moving from a single rehabilitation department to multiple departments. Early rehabilitation intervention can significantly improve the quality of treatment, increase patient satisfaction, and achieve a win-win situation for doctors and patients from the perspective of health economics.

The industry has been booming for a long time, concentration needs to be improved, and the competitive advantage of industry leaders is obvious. Rehabilitation science in China is still in a period of development. Demand for primary medical institutions is strong, and there is considerable future market space. Combined with factors such as an aging population, the rehabilitation medical field is promising for the long term. Rehabilitation equipment has a wide range of applications, and the needs of various departments vary, leading to a fragmentation of the competitive landscape. Frost & Sullivan (quoted from Weiss Healthcare's prospectus) predicts that in 2020, the rehabilitation equipment terminal market will be about 40 billion yuan, and the corresponding factory price range is about 15 billion to 20 billion yuan. As the leading rehabilitation equipment in China, the company had revenue of 496 million yuan in 2022. Based on this estimate, the company's domestic market share in 2020 was only about 3%, and there is huge room for improvement in industry concentration. The company has strong R&D efforts, sufficient intellectual property reserves, continuous product platform-based development, and a perfect product matrix that has a synergistic effect. It is one of the few enterprises in the industry that can provide integrated clinical rehabilitation solutions. At the same time, the company's sales channel construction has been improved, and the tripartite factors of R & D+platform+marketing resonate. The company's growth rate is expected to exceed the industry average.

Risk factors: Macroeconomic pressure; new business development falls short of expectations; raw material costs have increased dramatically; R&D progress falls short of expectations; industry competition has intensified; industry policy has changed beyond expectations.

Profit forecast, valuation and rating: In the short term, the company's 2023 quarterly report disclosed a contract debt of 82 million yuan. Compared with before the pandemic, market demand suppressed by the epidemic still has room for release; in the medium term, the company continues to increase investment in R&D, and many achievements will be reaped; in the long run, in line with the aging population trend, policies clearly support the development of the rehabilitation industry, and industry concentration is expected to increase further, benefiting industry leaders. Considering that the company's recovery momentum continued to materialize in the first three quarters, we are optimistic about the company's full performance in 2023. We adjusted the company's 2023/24/25 EPS forecast to 1.59/1.96/2.41 yuan (the original forecast value was 1.43/1.75/2.16 yuan), and the current price corresponding to PE valuation is 32/26/21 times. Considering that Xiangyu Medical's current profit is stable, using PE relative valuation, referring to Mindray Healthcare, Kaifu Healthcare, and Huitai Healthcare, which belong to the same medical device sector and have recovered after the pandemic, the three comparable companies Wind unanimously predicted an average PE of 40 times in 2023, giving the company 40 times PE in 2023, corresponding to a target price of 63 yuan (previous target price of 51 yuan), maintaining a “buy” rating.