Dean Diagnostics is a leading third-party diagnostic service provider in China, adopting a “service+product” two-wheel drive development strategy. In terms of “service” business, the company has now built a nationwide chain of independent medical laboratories, which can provide accurate and timely outsourced testing project services to medical institutions. In terms of “product” business, the company already has national distribution channels for more than 1,000 products and three self-produced product lines. It can provide medical institutions with equipment, reagents, consumables and technical support services required for self-inspection business, and has the advantages of a large-scale supply chain.

China's ICL industry has great potential, and the special inspection market deserves particular attention. The testing items covered by independent medical laboratories (ICL) can be divided into two categories: general examination and special examination. Compared with the general inspection business, the special inspection business is more technically difficult and more expensive. China's ICL industry started relatively late, and the industry penetration rate is far lower than that of developed countries. However, in recent years, China's ICL industry has developed rapidly, and the number of ICL institutions has increased from less than 70 in 2009 to more than 2,100 in 2021. According to Frost & Sullivan's forecast, in 2021-2026, China's ICL market is expected to grow from 22.263 billion yuan to 51,311 billion yuan. The CAGR during the period will reach 18.2%, of which the special inspection market is expected to grow to 28.880 billion yuan. The CAGR will reach 23% during the period, which is higher than the growth rate of the industry.

The company is in the first tier of the ICL industry and continues to strengthen its competitive advantage by improving the quality of customer service. The company's core competitiveness in the “service” business is mainly reflected in: 1) the company's perfect sales network layout, which has significant leading effects; 2) the company adheres to the “precision center” and “cooperative construction” business models, vigorously develops special inspection services, and enhances the cooperation efficiency and stickiness of hospitals. Among them, the company's “precision center” business can help hospitals create an integrated accurate diagnosis and treatment model; 3) informatization and digital capabilities enable the company's digital business development.

Channels enable a second increase in performance, and self-development guides future product directions. In the “product” business, the company is deeply involved in channel products, built a complete channel network and product collaboration services, and has become one of the leading IVD channel providers in China. At the same time, the company has stepped up research and development efforts, continued to obtain results from self-developed products, and the scale of self-developed product business continues to increase. The channel and self-developed product business help enhance the company's ability to integrate R&D, production, marketing, and inspection, and enhance customer stickiness.

We forecast the company's earnings per share for 2023-2025 to be 1.31, 1.92, and 2.40 yuan, respectively. As the service+product strategy continues to drive the company forward, we believe that the current reasonable valuation level of the company is 25 times the price-earnings ratio of 2023, and the corresponding target price is 32.75 yuan, which is the first purchase rating.

Risk warning

Under the influence of medical reform policies, the ICL industry undertakes the risk that the amount of outsourcing falls short of expectations; the risk that the profitability of channel products falls short of expectations; the profit level of precision centers falls short of expectations; and the risk of asset and credit impairment losses.