Core view: Focus on R&D and active overseas, and embark on a new journey in the post-collection era. 1) At present, all three segments of orthopedics have been collected. According to the order of collection and implementation and price reduction, the joint industry affected by collection is relatively fast. At present, the penetration rate of joint surgery in China is still low. The company is a leader in the joint field, and is expected to accelerate market share after collection; 2) the company is leading the 3D printing technology industry and continues to increase investment in R&D. Emerging directions such as orthopedic surgery robots and bone biomaterials are expected to drive the company's overall performance growth in the future; 3) After collection, the company has gradually paid attention to overseas layout. Currently, its products have covered more than 30 countries, and its own products have a clear competitive advantage in emerging markets. The share of overseas business has increased steadily over the past few years.

The orthopedic market is growing steadily under the aging trend, and procurement is accelerating the trend of domestic substitution. In 2021, China's orthopedic implants market reached 39.7 billion yuan, and the compound growth rate in 2016-2021 reached 12.77%. Affected by collection policies and the like in 2022, the market size declined to 34 billion yuan. Under the aging trend, the prevalence of orthopedic diseases has increased markedly. Compared with developed countries, the penetration rate of orthopedic implant surgery in China is clearly low, and the penetration rate of surgery will continue to increase. At present, all three segments of orthopedics have been collected. According to the order of collection and implementation and price reduction, the joint industry affected by collection is relatively fast. Terminal prices dropped relatively large after orthopedic collection. Channel profits for some imported brand products were drastically reduced, making them less attractive to dealers, and the share of domestic manufacturers is expected to increase. Compared with leading enterprises, the large-scale advantages of small and medium-sized enterprises in manufacturing, channel logistics, sales promotion, and R&D capabilities are expected to be further highlighted, and industry concentration is expected to continue to increase.

Elken Medical is a leading orthopedic joint company in China, and has a clear first-mover advantage in the 3D printing field. The company is the first medical device company in China to commercialize and apply 3D printing technology to orthopedic implants. It has four major platforms: Beijing Elken, Changzhou Tianyan, British JRI, and Beijing Liber, and has a complete orthopedic product line. The main products include conventional hip and knee replacement implants, spinal fixation systems, trauma products, and ICOS customized products and services. Among them, the ICOS customized platform can use patient-matching design and 3D printing technology to manufacture orthopedic implants according to the differentiated lesions and pathological characteristics of different patients, meeting patients' personalized diagnosis and treatment needs.

Using collection to seize the market, the impact of the policy gradually became clear. In the 2021 national joint collection, the company received a total of about 100,000 sets of intended purchases, accounting for about 18% of the total number of hospital reports, ranking first among all the winning brands. In 2017-2020, the company's revenue grew rapidly, with a CAGR of 40%; in 2021, due to collection, the company's revenue was 761 million yuan, down 26.5% year on year; in 2022, the joint collection policy was implemented, and the localization rate of the industry increased. The company's products entered many core top three hospitals, increasing the share of the middle and high-end market. Revenue reached 1,054 million yuan (up 38.2% year on year), and net profit to mother reached 205 million yuan (+120.4% year over year). In 2023, the company achieved revenue of 1,100 billion yuan (year-on-year increase of 4.44%) and net profit of 182 million yuan (year-on-year decrease of 11.07%). Affected by increased compliance requirements in the medical industry, the number of surgeries in hospitals declined in 2023, causing sales of the company's products to be greatly affected. At the same time, the company increased investment related to R&D and market development, and the profit side declined year-on-year.

Focus on research and development+ active overseas, and embark on a new journey in the post-collection era. The company is an R&D-driven orthopedic consumables company, and continues to increase investment in R&D after collection. In terms of orthopedic implants, the company fully relies on the advantages of 3D printing technology and continues to expand in complex repair and reconstruction, small joints, etc.; at the same time, the company focuses on emerging fields such as digital orthopedic robots and bone biomaterials, and has developed different digital orthopedic platforms for different markets (middle and high-end markets, mass markets). The first product, the VTS hip surgery navigation system, was approved and launched domestically in December 2022. Future orthopedic robots are expected to drive the company's implant sales volume. In addition, the company has had an overseas business layout for many years, and has gradually paid attention to overseas layout after collection. Currently, its products have covered more than 30 countries. Our products have a clear competitive advantage in emerging markets. The share of overseas business has increased steadily. In 2023, overseas revenue was 227 million yuan, an increase of 37.1% over the previous year, which is higher than the company's overall revenue growth rate.

In the short term, we look at the recovery of joint surgery volume and the catalysis of collection and contract renewal policies; in the medium to long term, we look at increasing domestic penetration rates, new product development, and overseas business expansion. In the short term, after compliance in the medical industry is strengthened, the market gradually adapts, and the number of joint replacement surgeries is expected to resume high growth; at the same time, joint collection renewals are expected to be implemented in the near future. Referring to previous collection and renewal rules for coronary stents and orthopedic trauma, we believe that subsequent joint collection renewal negotiations are unlikely to further drastically reduce prices. Some manufacturers may increase prices, and price spreads are expected to narrow, benefiting some leading domestic companies. In the medium to long term, the penetration of joint replacement surgery in China is still relatively low. Under the trend of population aging, the joint industry still has a large room for growth. The company has a first-mover advantage in the 3D printing field, and innovative joint products outside of the standard are also expected to be rapidly released. At the same time, during the post-collection period, the company will accelerate the expansion of overseas markets, and its share of overseas revenue continues to increase, which is expected to become a new performance growth point for the company in the future; in addition, the company actively lays out digital orthopedic platforms and bone biomaterials fields such as orthopedic navigation systems and surgical robots. Capabilities, channel advantages, and brand advantages maintain the leading position in the industry.

Profit forecast and investment rating: We expect the company's 2024-2026 revenue to be $1,409, 17.81, and $2.93 billion, respectively, with corresponding growth rates of 28.81%, 26.38%, and 23.15%, respectively; net profit of 2.58, 3.32, and 417 million yuan respectively, corresponding growth rates of 41.71%, 28.73%, and 25.44% respectively. Based on the closing price on April 9, 2024 (HK$5.41 per share), PE will be 24, 18, and 15 times, respectively, maintaining the “buy” evaluation grade.

Risk warning: risk of changes in industry policies, increased risk of market competition, risk of R&D progress falling short of expectations