Moving forward in 2023, optimistic about 2024 recovery in surgery+contract renewal boost
The company achieved revenue of 1,094 million yuan (+4% yoy) and net profit of 182 million yuan (-11.1% yoy) in 2023. Among them, the slowdown in revenue growth was mainly due to environmental factors in the 3Q industry affecting implantation volume, while the profit side decline was mainly due to limited usage of high gross margin products outside the 2H23 standard and increased investment in R&D/market development. Looking ahead to 24 years, considering the industry's low growth base+gradual recovery in the number of surgeries during the year, we are optimistic that the company will achieve a 30% + year-on-year revenue growth rate and 40% + year-on-year net profit growth rate (regardless of the impact of contract renewals) throughout the year. We expect the company's EPS for 2024-2026 to be 0.24/0.31/0.40, and give Elken 32 times PE in 24 years (considering the company's collection risks and impacts are basically clear, adding a potential boost in joint renewal coverage, giving a premium of 24 times PE compared to its A-share peers unanimously predicting 24 times PE), and obtain a target price of HK$8.35 to maintain the “purchase”.
Joint sector: Optimistic about 24-year contract renewal opportunities. Overseas companies achieved revenue of 59/310 million yuan in 2023 (-10%/+17% yoy, a total decrease of 2.1% yoy). Compared with the semi-annual deceleration, the macroeconomic policy side mainly affected the company's 3-4Q surgery volume, where the knee growth rate was higher than that of the hip. The main reasons: 1) The company's knee products are new from generation to generation, and there is more room for competition/import substitution; 2) The bid price in the last round of hip procurement was low, and expansion was affected to a certain extent. Looking ahead to 24 years, we estimate that joint revenue is expected to impact 30% yoy, thanks to: 1) weak growth in the joint industry in 22-23 due to external factors; 2) the company continued import substitution, and the market share increased significantly (Beijing's joint business accounted for more than 20% in '23), which is optimistic that renewal coverage will increase and further benefit; 3) Hip joint is expected to reduce channel pressure through contract renewals, and is optimistic about the next phase volume increase and improvement; 4) Overseas JRI/Elken brands will accelerate expansion (where the revenue growth rate of the Southeast Asian market exceeds the year-on-year growth rate 50%).
The spine benefits from 3D printing varieties, and revenue from trauma renewals stabilizes
In 2023, the company's spine/trauma sector contributed a total revenue of 123 million yuan (+105.4% yoy, the growth rate includes the impact of the company's Liebel spine meter provision in '22). We are optimistic about steady revenue growth in the next 3 years. The main reasons: 1) in the field of trauma, Ribel will renew the contract again in 2023, optimistic about the steady starting logic of the next standard period; 2) 3D printing series products in the spine field have achieved rapid start-up (262 new hospitals added in 23 years), and we are optimistic about the spine sector's revenue in 5 years. The share impact is 5%.
We are optimistic about the return of high-quality ICOS platforms, and the company's customized platform will achieve sales of 49.59 million (+5.6% yoy) in 2023. We are optimistic that the segment's revenue will gradually return to high growth in 24 years: 1) In terms of smart devices, the hip navigation system VTS is optimistic that the hip navigation system will continue to be hospitalized during the year through differentiation+price advantage, and the knee navigation robot is expected to obtain certification in 2Q24; 2) In addition, small joint varieties, next-generation single-condylar repair products, Pillar and 3D printing second-generation products, or subsequent R&D priorities.
Risk warning: Risks related to contract renewal, increased market competition, risks related to new product launch/promotion, risk of surgical volume recovery falling short of expectations.