The global medical dressing industry has spawned several large market capitalization companies, and the development of the domestic medical dressing industry has lagged behind overseas for decades. According to Grand View Research, the global wound dressing market reached 13.7 billion US dollars in 2022, of which the high-end wound dressing market was 7.5 billion US dollars, accounting for 54%. The global wound dressing market is expected to reach 19 billion US dollars in 2030, with a CAGR of 4.1%, of which high-end dressings are expected to reach 10.6 billion US dollars and a CAGR of 4.5%. The global medical dressing industry has sprung up several large market capitalization companies such as 3M, Shi Lehui, and Kanebo. China's medical dressing industry is underdeveloped, the industry concentration is low. High-end dressings account for less than 20%. There is a big gap with the global average (> 50%), and the high-end dressing sector is almost monopolized by foreign investors.

Zhende Medical is a leader in the domestic medical dressing industry, and continues to expand from OEM export sales to domestic sales. Zhende Medical started as an overseas OEM for traditional medical dressings. The export value has been in the top three in the domestic industry for many years, and major overseas customers have developed strong adhesiveness. In recent years, the company has continued to develop new products, seize development opportunities in the domestic market, gradually expand domestic sales business, develop its own brands, and actively expand domestic medical, retail pharmacies and e-commerce channels. The domestic revenue share after excluding quarantine protective equipment reached 38% in the first half of 2023, a significant increase from 29% in 2019 before the epidemic. As the company promotes import substitution of high-end domestic dressings and consumer business expansion, the share of domestic business revenue is expected to continue to increase.

With five major “medical+health” sectors, stoma, modern wound care, and surgical sensory control businesses are expected to develop rapidly. Zhende Medical covers five major segments: basic wound care, stoma and modern wound care, surgical sensing control, pressure treatment and fixation, and sensory control protection. The surgical sensory control, stoma and modern wound care business is the company's key development business. On the one hand, it continues to increase technical self-research to achieve breakthroughs in pocket-making products; on the other hand, it is expanding “products+ channels” through epitaxial mergers and acquisitions, such as the acquisition of high-end dressing businesses in Shanghai Asia and Australia, and the acquisition of British subsidiaries to enrich the surgical sensory control product line and expand the British market. In recent years, surgical sensing, stoma and modern wound care businesses have developed rapidly, and the revenue share is expected to continue to increase.

Scale and brand effects build competitiveness. The company leads the industry in production scale and continuously optimizes the upstream supply chain and production links. It has a strong cost advantage, and is expected to seize more share in harvesting in the future. In addition, during the COVID-19 pandemic, the company greatly enhanced its brand influence through epidemic prevention products such as masks and protective clothing, and deepened the penetration of retail customers. It is expected that it will still enjoy brand dividends after the epidemic. At the same time, sales of products related to epidemic prevention have also accumulated good cash flow for the company, which is conducive to the company's expansion of product lines and channels through outreach.

Profit forecast and valuation: We expect the company's 2023-2025 revenue of 41.7/47.4/5.63 billion yuan, a year-on-year growth rate of -32%/14%/19%; net profit to mother of 2.0/4.8/610 million yuan, a year-on-year growth rate of -70%/139%/27%. With the deepening cultivation of the domestic C-side business and the continuous expansion of the high-end dressing business, the company's profitability is expected to increase; the impact of the 2024 epidemic related business will gradually clear up. As hospital surgeries resume and conventional product growth resumes quarter by quarter, the company is expected to usher in an inflection point in performance. The company was given PE 15-16x in 2024. The reasonable price range is 27.09-28.90 yuan, and the corresponding market capitalization range is 72-7.7 billion yuan. There is 31-40% premium space compared to the current stock price. For the first time, it was covered, and a “buy” rating was given.

Risk warning: Channel inventory output is slower than expected; integration of acquisition targets falls short of expectations; risk of price increases of raw materials; policy risks such as industry restructuring; risk of exchange rate fluctuations.