The established state-owned enterprise equipment leader focuses on the main business and starts again. Xinhua Medical was founded in 1943 and listed on the Shanghai Stock Exchange in 2002. The actual controller of the company is the Shandong Provincial State-owned Assets Administration Commission. Currently, the company has four major business segments: medical devices, pharmaceutical equipment, medical commerce, and medical services. It is one of the enterprises with strong comprehensive strength and a complete range of products in the domestic medical device industry. The company's development since 2011 can be divided into three stages. 1) M&A expansion phase in 2011-2016: Mergers and acquisitions of multiple targets, expansion of business territory, and rapid growth in revenue scale. 2) Digestion and adjustment stage in 2017-2021: The company adjusts the management policy to “integrate, upgrade, and improve efficiency”. 3) Focus on the main business stage from 2021 to the present: the company proposed “restructuring, strengthening the main business, improving efficiency, and preventing risks”, concentrating superior resources to focus on developing manufacturing products in the medical device and pharmaceutical equipment sectors, and gradually increasing the overall gross margin level.

Focus on medical devices and pharmaceutical equipment.

1) Gradual optimization of the medical device product structure: The company's medical device sector includes nine major product lines, among which sensory control, radiology, and surgical instruments all occupy leading positions in the domestic market. As the company promotes the development of high-end medical device products and consumables, and the device product structure continues to be optimized, profitability is expected to improve.

2) Improvement in the profitability of pharmaceutical equipment: The company covers four major pharmaceutical equipment fields, and has strong biopharmaceutical strength with Chengdu Yingde as the core, which can meet the needs of traditional or disposable processes; launched the world's first dual-mode high-speed continuous BFS in the injectable sector; it will expand to small-volume formulations in the future. Pharmaceutical equipment has become the company's pillar industry as subsidiaries turn losses into profits one after another, profitability has increased, and revenue in the superposition sector has grown rapidly.

Three major investment highlights:

1) Major shareholders' participation increases confidence, and employees motivate improvement to maintain growth. The fixed increase was implemented in 2023, and Shandong Yiyang Health, the majority shareholder, subscribed to 17.96 million shares (accounting for 32.7%), demonstrating confidence in the company's development. In 2021, the company announced an equity incentive plan. The growth rate of the company's net profit after deducting non-return from parent in 2022 reached 159% compared to 2020, exceeding the incentive target.

2) Promoting product structure optimization in multiple dimensions, gross margin is expected to continue to increase. Company product structure optimization route:

Focus on the main business and continue to promote the increase in the revenue share of medical devices and pharmaceutical equipment business; the development of medical device products to the high-end; increase the share of consumables products; and increase the share of consumables products; and promote product structure upgrading through fixed investment projects.

3) Overseas business is developing rapidly, and the prospects for international business are promising. The company's 2022-2023H1 overseas revenue grew rapidly, the overseas marketing structure was gradually improved, and market development began to bear fruit. There have been important breakthroughs in the fields of medical devices and pharmaceutical equipment. The company's 2023H1 international revenue accounts for only 2% of total revenue, so the prospects for the long-term international business sector are promising.

Investment advice: Considering that the company focuses on the main business of medical devices and pharmaceutical equipment, and the development of products towards high-end and consumables, the product structure upgrade is expected to increase profitability, and at the same time, overseas markets are expected to open a new chapter. We expect the company's net profit from 2023-2025 to be 7.1 billion yuan, 90 million yuan, and 1.11 billion yuan respectively, up 41.3%, 27.2%, and 22.8% year on year, corresponding to EPS in 23-25, 1.52, 1.94, and 2.38 yuan, respectively. Referring to comparable companies, we gave the company an 18 times valuation in 2024, corresponding to a target price of about 35 yuan. First coverage, giving a “recommended” rating.

Risk warning: 1. Fund-raising projects have not progressed as expected; 2. Product development progress has fallen short of expectations; 3. Overseas market development has fallen short of expectations.