Core views
The company's 2023 performance was in line with expectations, and the new product, the AQ-300, was released quickly. Looking ahead to 2024, the equipment renewal policy is expected to make an incremental contribution to the industry. Driven by the new product AQ-300, the number of tertiary hospitals equipped with the company's high-end models is expected to maintain high growth, helping the company achieve the performance assessment target of equity incentives throughout the year. On the one hand, since AQ-300 was launched in November 2022, it has been in the early stages of product refinement, performance optimization, and academic promotion, and clinical recognition of product performance has gradually increased; on the other hand, due to increased compliance requirements in the medical industry last year, the AQ-300's bid and installation have been delayed, and it is expected that bidding will gradually resume this year. In addition, the company's new models will be approved in 2023, and the product range will be further enriched, which is expected to enhance the company's core competitiveness in tertiary hospitals.
occurrences
On April 9, 2024, the company released its 2023 annual report
According to the company's announcement, the company achieved revenue of 678 million yuan in 2023, an increase of 52% over the previous year; realized net profit of 58 million yuan, an increase of 167% over the previous year; realized net profit after deduction of 44 million yuan, an increase of 361% over the previous year, with basic earnings per share of 0.43 yuan/share. The 2023 profit distribution plan is: The company plans to distribute a cash dividend of 0.3 yuan (tax included) for each share to all shareholders. The capital will not be transferred from the Capital Provident Fund, and no bonus shares will be given.
Brief review
The performance was in line with expectations, and the AQ-300 achieved rapid deployment
The company's 2023 revenue, net profit to mother, and net profit after deducting non-return to mother were 678 million yuan, 58 million yuan and 44 million yuan respectively, up 52%, 167%, and 361% year-on-year respectively. Net profit to mother after share payments was 87 million yuan. The performance was in line with expectations and completed the previously set equity incentive assessment targets. The profit side achieved significant growth, mainly due to the company's low profit base for the same period last year. 23Q4 revenue, net profit attributable to mother, and net profit after deducting non-return to mother were 249 million yuan, 13 million yuan, and 007 million yuan respectively, up 52%, -3%, and 36% year-on-year respectively.
By business, the company's endoscopic equipment revenue in 2023 was 622 million yuan, up 59% year on year; endoscopic diagnosis and treatment consumables revenue was 42.57 million yuan, down 14% year on year. Competition in the domestic consumables market is fierce, and the company's consumables revenue is relatively small; endoscope maintenance service revenue was 12.35 million yuan, up 235% year on year. At home and abroad, the company's domestic revenue was 564 million yuan, up 64% year on year; overseas revenue was 113 million yuan, up 12% year on year.
High-end models have achieved rapid breakthroughs in tertiary hospitals. The new product, the AQ-300, is expected to accelerate the release of the company's high-end models (AQ-200 and AQ-300) in 2023, with 96 and 316 units installed (including winning the bid) in tertiary hospitals. The number of installed tertiary hospitals (including winning the bid) reached 73, while the number of tertiary hospital customers served by the company's AQ-200 was only 25 in 2022.
Looking ahead to the first half of the year and the whole year, driven by the new product AQ-300, the number of tertiary hospitals serving the company's high-end models is expected to continue to grow at a high rate, helping the company achieve the performance assessment goals of equity incentives throughout the year. On the one hand, since AQ-300 was launched in November 2022, it has been in the early stages of product refinement, performance optimization, and academic promotion, and clinical recognition of product performance has gradually increased; on the other hand, due to increased compliance requirements in the medical industry last year, the AQ-300's bid and installation were delayed, and it is expected that bidding will gradually resume this year. In addition, the company's many new lenses, such as fine lenses, split upper gastrointestinal endoscopes, and bifocal endoscopes, were approved one after another in 2023. The product range is further enriched, which is expected to enhance the company's core competitiveness in tertiary hospitals. The State Council recently issued a notice on the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”, which is expected to make an incremental contribution to the demand for medical equipment procurement. It is recommended to pay attention to the pace of implementation of subsequent policies.
Significant increase in gross margin and significant improvement in operating cash flow
The company's gross margin in 2023 was 73.78%, up 4.06 percentage points from the previous year. It is expected to be mainly due to the increase in revenue share of high-margin high-end models (AQ-200 and AQ-300). The sales expense ratio was 34.27%, up 4.66 percentage points year on year, mainly due to a high increase in employee remuneration, repair costs and travel expenses; the management expense ratio was 13.40%, down 5.54 percentage points year on year; the financial expenses ratio was -0.39%, up 1.00 percentage points year on year, mainly due to a decrease in interest income received in the current period; the R&D expense ratio was 21.68%, the same year on year. R&D expenses increased by 52.26% year on year, mainly due to a higher increase in employee remuneration and R&D fees. Net operating cash flow in 2023 was $37.41 million, a significant improvement over $41.9 million in the same period last year, mainly due to an increase in sales repayments; the number of inventory turnover days was 384.25 days, an increase of 14.29 days over the previous year, mainly due to the company preparing more raw materials; and the number of accounts receivable turnover days was 85.06 days, an increase of 5.44 days over the previous year. The rest of the financial indicators are generally normal.
The restricted stock incentive plan was launched to show the company's long-term development confidence. On October 12, 2023, the company released the 2023 restricted stock incentive plan (draft). The incentive plan granted a total of 113 people for the first time. The first incentive recipients included directors, senior managers, core technical personnel, middle management, and others that the board of directors deemed to need incentives. The performance evaluation index is operating income or net profit to mother (value after excluding share payment fees and impairment of goodwill). According to the goal of 100% ownership at the company level, revenue in 2024 is not less than 990 million yuan or net profit to mother is not less than 120 million yuan, revenue in 2025 is not less than 1.4 billion yuan or net profit due to mother is not less than 180 million yuan, revenue in 2026 is not less than 2 billion yuan, or net profit due to mother is not less than 270 million yuan. We believe that the equity incentive plan helps to fully motivate employees and demonstrates the company's confidence in long-term development.
The performance of the AQ-300 product continues to be optimized, and the variety of lenses continues to be enhanced. The company officially launched the next generation 4K flexible endoscope system AQ-300 in November 2022, achieving breakthroughs in key performance such as optical amplification and mirror control. 4K optical magnifying lenses, variable-hardness enteroscopes, and duodenoscopes have all been approved. Among them, duodenoscopes have a clear field of view and a larger lift angle, providing a better field of view, so that doctors can perform follow-up operations efficiently. In terms of product performance, the company continuously iterated the AQ-300 series based on clinical feedback, and met clinical operation requirements in various aspects such as handling performance, operation feel, and stability.
In addition, the company's many new lenses will be launched in 2023, including various fine mirror products such as the new UHD series duodenoscope and ultra-fine endoscope, UHD series bifocal endoscopes, split upper gastrointestinal endoscopes, etc., further enriching the company's range of lenses. In addition, the company continues to promote the construction of a marketing system, continuously deepening the market coverage and breadth of the company's products. At the same time, using a combination of online and offline methods, a series of special activities including endoscopy training courses, case sharing, and standardized diagnosis and treatment lectures have been carried out around the AQ-300 series, which have received good feedback from experts, customers and dealers.
Overall, driven by improved product performance, continued diversification of lenses, and continuous strengthening of academic promotion and channel construction, the company's AQ-300 is expected to achieve rapid deployment in tertiary hospitals with support from policies encouraging domestic substitution and stricter import verification.
In the short term, we are optimistic about the launch of the company's new products to accelerate domestic replacement. In the short term, we are optimistic about the booming development of the soft mirror circuit. In the short term, the performance of the company's flagship product, the AQ-300, has improved markedly, and the variety of lenses continues to be rich, and it is expected to achieve rapid deployment in tertiary hospitals. In the medium term, the company continues to deploy new products such as 3D digestive endoscopes, endoscopic robotic systems, and disposable endoscopes, which is expected to contribute new profit growth points. Looking at the long term, on the one hand, there is strong demand for gastrointestinal cancer screening. Currently, the domestic penetration rate is still low, and there is plenty of room for the company to increase its domestic market share; on the other hand, the company is actively exploring overseas markets, and there is plenty of room for long-term growth. We expect the company's revenue for 2024-2026 to be RMB 1,015 million, RMB 1,409 million, and RMB 2.001 billion, respectively, up 50%, 39%, and 42% year over year, and net profit to mother for 2024-2026 is expected to be RMB 119 million, RMB 178 million and RMB 277 million, respectively, up 105%, 50% and 56% year-on-year, respectively. Maintain a “buy” rating.
Risk warning
There are quarterly fluctuations in bidding and procurement in the medical equipment industry. In the short term, hospitals in some regions are waiting for the implementation of the renewal policy, and the quarterly results may fall short of expectations; the risk of high inventory; the risk of technological innovation and R&D failure: risk of core technology leakage; risk of loss of R&D personnel; market expansion and market competition risk (competitive risk brought about by competitor Olympus's next-generation X1 product, the subsequent domestic launch); the risk of restricted procurement of some imported raw materials (the main supplier of lenses and light sources for the company's endoscopic equipment is the United States) , agents or traders of original Japanese manufacturers, if relevant foreign suppliers stop exporting these raw materials to domestic companies in the future due to special trade reasons, may adversely affect the company's production and operation in the short term); quality control risks; tax preferential policy changes; accounts receivable recovery risk (if the company's customer's future business conditions or cooperative relationships with the company change adversely, accounts receivable recovery risk will increase, thereby adversely affecting the company's business performance); risk of exchange rate fluctuations; risk of asset restructuring and impairment of goodwill; risk of product certification; geopolitics risk.