Key elements of the report:

On March 19, 2024, the company released its 2023 annual report. In 2023, the company achieved revenue of 2,869 billion yuan (YoY +47.99%), net profit attributable to mother of 1,888 billion yuan (YoY +47.08%), and net profit not attributable to mother of 1,831 billion yuan (YoY +52.95%). Among them, 2023Q4 achieved revenue of 699 million yuan (+55.55% YoY), net profit attributable to mother of 440 million yuan (YoY +62.20%), and net profit of 436 million yuan (YoY +87.73%) after deducting non-attributable net profit.

Investment highlights:

The medical beauty industry is recovering clearly, driving the company's high performance growth: benefiting from the obvious recovery trend of China's medical and aesthetic industry, the accelerated expansion of the market for compliant products, the restoration of consumption scenarios, and the gradual release of medical and aesthetic demand. At the same time, the company continues to make efforts on the product side and marketing side to enrich the product pipeline, help increase brand value, and achieve a significant increase in performance. In 2023, the company achieved revenue of 2,869 billion yuan (YoY +47.99%), net profit attributable to mother of 1,888 billion yuan (YoY +47.08%), and net profit not attributable to mother of 1,831 billion yuan (YoY +52.95%). Among them, the company's revenue/net profit attributable to mothers/ net profit net profit after deduction of net profit not attributable to mother in 2023Q4 were +55.55%/62.20%/87.73% year-on-year, respectively, to 6.99/4.40/436 million yuan, respectively. The growth rate increased significantly from 2023Q3.

The product pipeline is rich, and the core products are growing well: the injectable dermal fillers that have been marketed and approved by the company are divided into gel and solution injectable products, all of which achieved year-on-year growth in 2023. Among them, solution injection products achieved operating revenue of 1,671 billion yuan, an increase of 29.22% over the same period of the previous year; gel injection products achieved revenue of 1,158 billion yuan, an increase of 81.43% over the same period last year.

Among solution products, Hi-Body (including panda acupuncture) accounts for the largest share. After long-term clinical verification, the safety and efficacy of “Hi Body” has been fully recognized by downstream medical institutions and end consumers, and the brand value is increasing. Among gel products, the recycled product Wet White Angel accounts for the largest share. Since its launch in the second half of 2021, it has continued its good growth momentum and has become a strong support point for the company to build a phenomenal product matrix. It has now formed a good reputation foundation, and its brand influence is increasing. At the same time, the company is developing a rich inventory of products, including modified sodium hyaluronate gel with medical polyvinyl alcohol gel microspheres for treating backward chin contraction, type A botulinum toxin for removing dynamic wrinkles, second-generation facial implants for soft tissue lifting, simeglutide injections for chronic weight management, and injectable hyaluronidase for dissolving hyaluronic acid that can be injected subcutaneously. Furthermore, the company signed a “distribution agreement” with Jeisys Medical Inc. of Korea to introduce two non-invasive skin anti-aging devices already commercialized in Korea into the country, which will achieve a breakthrough in the company's energy source equipment pipeline.

Product structure optimization led to an increase in gross margin, and the net profit margin declined slightly due to cost increases: in 2023, the gross margin of solution products was 94.48%, +0.25pct year on year; the gross margin of gel products was 97.49%, +0.97pct year on year. The share of high-margin gel products continued to rise, from 32.91% in the same period last year to 7.44pcts to 40.35%, driving the company's overall gross margin increase. The company's gross margin in 2023 was 95.09%, +0.24pct year-on-year. The increase on the cost side caused the net interest rate to drop slightly by 0.73 pct, but it is still at a high level of 64.65%. Among them, due to the increase in labor costs and marketing activity costs, sales expenses increased 60.03% year on year, and the sales expenses rate increased by 0.68 pct to 9.07%; due to labor costs, confirmation of Hong Kong stock listing fees and rent and property fees, management expenses increased 15.02% year over year, but due to rapid revenue growth, the management expenses rate did not increase but decreased by 1.44pcts to 5.03% year on year; the company continued to guarantee investment in R&D innovation, increasing R&D output through independent R&D and foreign cooperation. R&D expenses increased 44.49% year on year, and R&D expenses decreased slightly 0.21pct to 8.72%.

Improve the medium- to long-term incentive mechanism to support long-term strategic development: The company implemented the first restricted stock incentive plan in 2023, and awarded 333,900 shares and 167.78 million restricted shares to eligible incentive recipients on March 31 and October 17, 2023, respectively. The grant prices were 282.99 yuan/share and 278.35 yuan/share, respectively. The performance assessment target is that based on 2022, the 2023-2025 revenue growth rate is not less than 45%/103%/174% (CAGR3 = 40%), or the 2023-2025 net profit growth rate of not less than 40%/89%/146% (CAGR3 = 35%). The incentive plan helps to further establish and improve the company's long-term incentive mechanism, attract and retain outstanding talents, and fully motivate employees.

Profit forecast and investment suggestions: In the short term, “Hi-Body” continues to grow, and the launch of the new regenerative product “Wet White Angel” and “Like a Living Angel” are expected to drive high growth in the company's performance; in the long term, the medical and aesthetic industry will continue to be booming, domestic substitution and stricter regulations will facilitate the development of leading compliant medical and aesthetic medicine. The company's main products are still in the growth stage, and reserve products will gradually be launched. It is expected that there is still considerable room for growth. We adjusted the profit forecast based on the company's latest data. It is estimated that in 2024-2026, the company's net profit to mother will be 25.55/ 34.54/4.360 billion yuan respectively (2024-2025 was 24.79/3.162 billion yuan before adjustment), up 37%/35%/26% year-on-year, and PE valuations corresponding to the closing price on March 20 will be 29/21/17 times, respectively. At present, the valuation is extremely cost-effective, taking into account the company's own strength and industry trends, and maintaining the company's “buy” investment rating.

Risk factors: industry policy changes, product development and registration risks, increased market competition