The number of domestic cases continues to recover, and the number of overseas cases climbed higher than expected
The company achieved 2023 revenue/net profit/adjusted net profit of 1,476/0.53/179 million yuan (+16/-75/ -16% yoy). Revenue grew steadily throughout the year and profit declined, mainly due to: 1) The number of domestic cases continued to recover, and the domestic adjusted net profit increased steadily (+30% yoy). 2) The number of overseas cases climbed rapidly (the number of cases in the whole year was 33,000, exceeding the 20,000 cases previously indicated by the company), but due to the large investment of expenses during the start-up period, overseas adjusted losses of 210 million yuan. Looking ahead to 24 years, we are optimistic that the company will contribute more than 300,000 cases during the year. Consider: 1) the domestic children's version and COMFOS will continue to strengthen and optimize the competitive landscape; 2) the overseas company will drive a rapid rise in the number of cases with good product strength+gradual maturity of the sales team. However, considering the company's overseas expenses for 24 years, we expect the company to adjust EPS to 1.07/1.70/2.58 yuan in 2024, and give the company 80 times PE in 2024 (considering that the company has the target scarcity plus rapid climbing growth in overseas business, giving a premium of 55 times compared to A-share companies), and a target price of HK$93.04 to maintain a “purchase”.
Cost side: The gross margin continued to be optimized. The number of overseas cases led the company to achieve a gross profit margin of 62.4% in 2023 (compared to 61.9% gross profit margin in 2022). The main reasons: 1) the continuous restoration of domestic demand for invisible correction products led to an increase in the company's capacity utilization rate; 2) the company continued to reduce costs and increase efficiency within 23 years. Looking ahead to 24 years, considering that overseas markets are still in a startup phase, but domestic demand continues to recover, we are optimistic that the company's gross margin will remain stable during the year. In addition, the company guides overseas business to level out cash flow in 3Q24, and is expected to achieve monthly profit break-even by the end of '25. We are optimistic that overseas business will drive 25-year reporting fee rate optimization.
Domestic business: Continued restoration within 23 years. I am optimistic that Children's Edition+COMFOS will lead the growth of the company's invisible correction solutions to achieve revenue of 1.28 billion yuan (+6%) in 23 years, mainly due to domestic market restoration at the case-level level (212,000, +15.3% yoy), but the ASP level was affected by product restructuring and reduced revenue recognition due to past case delivery. Looking ahead to 2024, we are optimistic that the number of domestic cases of the company will show a double-digit increase (corresponding to about 240,000 cases) and a steady increase on the revenue side. Consider:
1) The company will continue to focus on the promotion and distribution of the children's version and COMFOS versions, and actively explore third-tier and fourth-tier cities; 2) the domestic competition pattern or trend is easing, and I am optimistic that the company's single product line ASP will continue to be stable; 3) the company will continue to focus on technological innovation to drive product strength upgrades.
Overseas business: In the first year of 2023, there were outstanding responses. The second growth curve realized that the Chinese company completed 33,000 overseas cases in 23, and the number of overseas cases climbed rapidly in 2H23. Looking ahead to 24 years, we are optimistic that the number of overseas cases will continue to grow rapidly (it is expected to hit 70,000 cases throughout the year). Considering: 1) On the product side, we are optimistic that the company's product strength is not inferior to overseas competitors based on years of experience in dealing with complex cases domestically. 2) On the service side, the company's overseas sales team+localized clinical support structure continues to be built, laying a solid foundation for volume release. 3) On the production and supply chain side, I am optimistic that the Brazilian factory will provide solid support for global supply (currently a delivery cycle of about 8.5 working days in the global regional market).
Risk warning: Market competition risk, overseas expansion falling short of expectations, risk of slowing domestic industry growth.