2023 results are in line with market expectations
The company announced 2023 results: revenue of US$950 million, excluding exchange rate impact +15.8% YoY; net loss to mother of US$480 million (US$4.4 billion in 2022). Adjusted net loss of $430 million ($5.0 billion in 2022; this caliber excludes one-time effects such as equity incentives and impairment of non-current assets). The company issued multiple forecasts from March 8 to 26, and the 2023 results are in line with market expectations.
Development trends
The three expenses showed a downward trend in 2023, with increased financial costs and losses on one-time/non-cash provisions. The year-on-year revenue growth rate for each sector after excluding exchange rate effects is as follows: coronary artery +16%, orthopedics +7%, cardiac rhythm management -1%, aortic and peripheral +32%, neurological intervention +22%, heart valves +33%, and surgical robotics +258%. The company's gross margin was -3.7 ppt, the sales expense ratio was -3.8 ppt, the management expense ratio was -8.2 ppt, and the R&D expense ratio was -10.0 ppt. Financial expenses increased to $96 million ($78 million in 2022), and impairment losses on illiquid assets of $160 million ($0.24 billion in 2022).
The debt problem has been solved, and the 2024-26 loss reduction target has been clarified. On April 5, the company announced that it will issue US$150-200 million convertible bonds (new bonds, annual interest rate of 5.75%, conversion price HK$7.46) to repay old bonds that are about to expire (approximately US$448 million). The lenders include Gao Lin Capital, the company's CEO Dr. Chang Zhaohua, and several management members (advanced by Gao Lin). The company estimates that the lenders will hold 10.27% of the company's shares in total this time, assuming a complete share conversion. It was also agreed that the company's net profit for 2024-26 should not be less than -275 million/ -55 million/ +0.9 billion US dollars. Furthermore, the company is also expected to receive credit support of more than 300 million US dollars from various financial institutions to repay old debts. We judge that the pressure on the company's convertible bonds is expected to be resolved at this point.
The management guidelines are optimistic and concerned about the implementation of operations. The company expects the revenue side to achieve 20-25% year-on-year growth in 2024 (excluding exchange rate effects, same below). The revenue growth rate for each sector is expected to grow year over year:
Coronary artery +10-15%, cardiac rhythm management +15-20%, orthopedics +10-12%, aortic and peripheral/neurological intervention/heart valves +30-40%, respectively, and surgical robots are growing rapidly. The company also guided gross margin of +2 to 4 ppt year on year in 2024, with a total of 25-30 ppt of the three cost ratios. Among them, the R&D expense ratio was controlled at around 20%, the sales expense ratio was less than 31%, and the management expense ratio was less than 15%; financial expenses will increase due to the landing of new bonds; large assets may be depreciated; and losses will narrow by about 60% in 2024.
We recommend that you keep a close eye on the implementation of the company's subsequent guidelines.
Profit forecasting and valuation
Considering the company's active expense control, we adjusted our 2024/25 net profit forecast from -2.14/-0.53 billion US dollars to -2.02/-40 million US dollars. We maintain an outperforming industry rating. Considering the continued pressure on the Hong Kong medical device sector, we maintained a target price of HK$10.6 based on the DCF model (WACC 9.2%, sustainable growth rate of 0.9%), with 57% upside compared to the current price.
risks
Various cost controls fell short of expectations, overseas business performance fell short of expectations, and collection price reductions exceeded expectations.