2023 results fall short of our expectations
The company announced 2023 results: revenue of US$359 million, +1.4% YoY; adjusted net profit of US$37.48 million, or -22.9% YoY. Due to macroeconomic factors in many regions affecting the development of the company's energy source medical and injection filling business, as well as temporary cost increases due to the company's distribution to direct sales, the 2023 results fell short of our expectations.
Development trends
Asia Pacific and North America grew well in 2023, with pressure on other regions. In 2023, by region, North America's revenue was +9.2% year over year, and Asia Pacific revenue was +11.8%. The growth trend was relatively good. European revenue was -14% year-on-year due to the challenging macroeconomic environment, high interest rates affecting customers' willingness to buy energy source equipment and fluctuations in the regional situation; revenue in the Middle East and Africa was -25.6%; and revenue in Latin America was -14% year-on-year. By sector, the revenue from the energy source medical and aesthetic business was +3.2%; the revenue from the dental business was -49.4%, mainly due to the company's divestment of a product line with lower operating profits; revenue from the injection filling business was +9.3% year-on-year, and 2H23 declined year-on-year, mainly due to fluctuations in the situation in some regions and the impact of exchange rates.
The proportion of direct sales continues to expand, and the cost rate has increased. In 2023, the company continued to firmly pursue the strategy of expanding its direct sales business, acquiring the Chinese dealer Feiden, and establishing new direct sales offices in Japan, the UAE, etc., increasing the company's overall direct sales revenue share by 12 ppt to 78%; the company's gross margin increased by 4.1 ppt to 61.1%, the sales expense ratio increased by 6.8 ppt, and the management expense ratio increased by 1.3 ppt. The company said that the operating profit margin can be maintained at 10-11% in the short term, and is expected to continue to increase after completing the direct sales transformation.
New products are constantly being launched, and we look forward to China's strength in the injection-filling sector. Since 2023, the company's flagship hair removal equipment platform Soprano Titanium, Alma Veil for skin diseases and vascular diseases, and Voffat, an adipose tissue atomization device, have each been approved for sale in the US; Opus, a skin rejuvenation and facial tightening device, has been introduced to international markets outside the US; LMNT, a medical-grade home beauty device, has launched second-generation products; and the company has established cooperation with Prollenium, a high-quality Canadian injectable filler certified by the FDA.
As of March 2024, the marketing applications for Profhilo Hyaluronic Acid and Long-acting Botox Daxxify have respectively been accepted by the China National Drug Administration. The company is expected to receive approval one after another starting with 2H24. We expect these two products to bring incremental revenue to the company.
Profit forecasting and valuation
Considering the impact of macroeconomic fluctuations in multiple regions on the company's energy source medical and injection filling business, we lowered our 2024 core net profit forecast by 31% to US$41 million, and first introduced a 2025 core net profit forecast of US$48 million. The current stock price corresponds to 5.3/4.6 times the 2024/25 core price-earnings ratio.
We maintain our outperforming industry ratings. Considering that the pharmaceutical sector of Hong Kong stocks continues to be under pressure, we lowered our target price by 40% to HK$5.2, corresponding to the 2024/25 core price-earnings ratio of 7.7/6.6 times, with 44% upside compared to the current stock price.
risks
The macroeconomic situation affects consumption recovery, geopolitical conflicts affect business development, R&D progress falls short of expectations, commercialization of new products falls short of expectations, and the competitive landscape deteriorates.