Incident: In 2023, the company achieved revenue of 1,209 million yuan, up 0.58% year on year; realized net profit of 278 million yuan, down 9.72% year on year; 2023Q4 achieved operating income of 416 million yuan, down 5.7% year on year; realized net profit of 97.2 million yuan, down 0.8% year on year.

The impact of procurement has gradually weakened, and sales of joint prostheses have been growing steadily: returns and exchanges of orthopedic joint products were cleared in the 3rd quarter of 2022; the impact of spinal returns and exchanges was reflected in the first 3 quarters of 2023, and the impact on profits for the full year of 2023 ranged from 80 million to 100 million yuan. Due to the impact of medical compliance policies in the second half of 2023, hip sales in 2023 were basically the same as in 2022, and knee sales increased by about 18.5% year on year; excluding the impact of spinal returns and exchanges, spine sales increased by more than 70% year on year in 2023.

The results of the international business layout are gradually showing, and operating cash flow has increased dramatically: in 2023, overseas sales achieved revenue of 198 million yuan, an increase of 81.73% over the previous year, accounting for 16.41% of overseas revenue. Up to now, the company's product sales cover 50+ overseas countries and regions. Product competitiveness continues to increase. Volume procurement affects the gross profit margin of domestic joint prosthesis products. It is expected that the increase in overseas sales will further optimize the revenue structure of the company's joint prosthesis products. The company's operating cash flow increased sharply from 41 million yuan in 2022 to 512 million yuan in 2023, indicating that the company pays attention to cash flow recovery while expanding the market.

The R&D pipeline is continuously optimized: As of December 31, 2023, the company has 124 registration certificates and registration certificates for medical devices (covering joint, spine, sports medicine, dental, PRP and other products) in China, of which 47 are Class III medical device registration certificates, 27 are Class II medical device registration certificates, and 50 are Class I medical device registration certificates. The acquisition of multi-category registration certificates has further enriched the company's product line and expanded the company's layout in the medical field.

Investment advice: The impact of collection is gradually weakening, and new product development is gradually contributing to incremental revenue. We expect the company to achieve operating income of 1,474/18.72/2,378 billion yuan and net profit to mother of 325/3.96/488 million yuan in 2024-2026. The corresponding PE was 22.21/18.26/14.82 times, respectively, maintaining the “gain” rating.

Risk warning: Compliance policies affect doctors' willingness to operate; the impact of collection on factory prices exceeds expectations; product development falls short of expectations.