Core views
The company's annual report results are in line with expectations. Short-term results may be under pressure in the first quarter due to the influence of high base figures and industry policies on bidding. The growth rate is expected to increase in the second half of the year, and the equipment renewal policy is expected to make an incremental contribution to the industry. The company has released new products in the fields of ultrasound and endoscopy. The performance of the HD-580 has improved significantly compared to the previous generation of products. It is expected that it will continue to promote product upgrades and iterations in the future to maintain strong product competitiveness; the minimally invasive surgery team has been formed smoothly, channels are rapidly expanding, and the hard surgery business is expected to maintain rapid growth. In the medium to long term, the company's market share in the endoscopy industry is expected to increase steadily, and the profit side is expected to maintain rapid growth under the scale effect, which is expected to lead the domestic substitution process in the endoscopy field.
occurrences
The company released its 2023 annual report
On April 11, 2024, Kai Lai Medical released its 2023 annual report. In 2023, the company achieved operating income of 2.120 billion yuan, an increase of 20.29% over the previous year; achieved net profit of 454 million yuan, an increase of 22.88% over the previous year; realized net profit of 442 million yuan without return to mother, an increase of 29.52% over the previous year. EPS is 1.06 yuan/share. The 2023 profit distribution plan is to distribute cash dividends of 3.2 yuan (tax included) for every 10 shares, no bonus shares, and no capital increase from the Provident Fund.
Brief review
Performance is in line with expectations, steady growth in ultrasound, and rapid endoscopy volume
In 2023, the company achieved operating income of 2.120 billion yuan, an increase of 20.29% over the previous year; achieved net profit of 454 million yuan, an increase of 22.88% over the previous year; realized net profit of 442 million yuan without return to mother, an increase of 29.52% over the previous year. Based on this calculation, 2023Q4's revenue for a single quarter, net profit attributable to mother, and net profit without return to mother were $652, 1.34, and 121 million yuan, respectively, up 27.58%, 7.57%, and 3.43% year-on-year, respectively. The company's annual report performance was in line with expectations, and the increase in industry compliance requirements in the second half of the year had a certain impact on the medical equipment bidding process.
By sector, ultrasound business revenue was 1,223 billion yuan, up 13.28% year on year; gross margin was 65.88%, up 0.21 pct year on year; endoscopy business revenue was 850 million yuan, up 39.02% year on year; gross margin was 74.42%, up 4.85 pct year on year. The growth rate of ultrasound revenue is more affected by industry policies. The gross margin of the ultrasound and endoscopy business has increased, which is expected to mainly benefit from product structure optimization.
By region, domestic business revenue was 1,181 billion yuan, up 21.97% year on year; gross margin was 79.46%, up 1.55 pct year on year. Overseas business revenue was 939 million yuan, up 18.24% year on year; gross margin was 56.78%, up 3.37 pct year on year. Domestic and foreign businesses have maintained steady growth, and gross margins have increased.
Looking ahead to 24Q1 and the whole year, short-term industry policies may put some pressure on bidding. The growth rate is expected to increase significantly in the second half of the year. It is expected that the impact of short-term industry compliance increases on medical equipment procurement progress will continue, and the impact on ultrasound products is greater than endoscopy. However, equipment procurement plans with rigid clinical requirements are expected to continue. The first quarter is expected to be under high base, and the company's revenue and profit are under pressure, and the second quarter is expected to improve marginally. It is expected to achieve a high growth rate in the second half of the year under a low base. 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.
Continued upgrading of ultrasound and endoscopic products is expected to bring product structure optimization, and the S80/P80 series of next-generation ultrasound products will be officially launched on a small scale in 2023, improving full-body intervention and obstetrics solutions. It has received high praise in the clinical process. It is the world's first artificial intelligence technology based on automatic capture of standard sections based on dynamic images with a built-in ultrasound host. For the endoscopic product line, the company launched the HD-580 series products in 2023, achieving a comprehensive improvement over the HD550 series: 1) Optimized optical design, improved full-band resolution of various lenses, optimized photoelectric dyeing technology, and improved contrast and stereoscopic sense of superficial and middle mucosal vessels; 2) Achieved ultra-high-definition image display, which can provide higher resolution images; 3) Effective reduction of noise and particles through AI image noise reduction technology; 4) Using 6 different dyeing modes to make lesions easier to detect; 5) Endoscopy with magnifying endoscopy, ultrasound endoscopy, and duodenal finger Products such as mirrors and small ultrasonic probes are more compatible. The approval and launch of new products is expected to become a new driving force for the rapid growth of the company's endoscopy business.
The financial data is basically normal. Under the scale effect, the company's gross margin is 69.41% (+2.54pct). The gross margin for ultrasound and endoscopy is expected to increase mainly due to product structure optimization; sales expense ratio 24.73% (+0.72pct), management expense ratio 6.06% (+0.50pct), R&D expense ratio 18.12% (-0.54pct), financial expense ratio -2.11% (-0.41pct), and overall cost ratio remains stable. Net profit margin for full year sales 21.43% (+0.45pct). Net cash flow from operating activities was 489 million yuan, up 3.43% year on year. The growth rate was lower than the growth rate of net profit to mother. It is expected to be mainly due to factors such as increased preparation of long-term materials and a decrease in contract liabilities. The number of accounts receivable turnover days was 31.66 days, a year-on-year decrease of 9.91 days. The company has strengthened the management of accounts receivable in recent years, and repayment efficiency has continued to improve. The number of inventory turnover days was 290 days, a year-on-year decrease of 4 days, and remained stable.
New endoscopy products are expected to drive high business growth. Market share is expected to continue to increase in the medium to long term with improved product strength and policy promotion. In the short term, the increase in industry compliance requirements will have a certain impact on equipment bidding, and subsequent demand is expected to gradually recover. The performance of the company's new ultrasound product S80/P80 series and the new soft mirror HD-580 series have improved markedly, which is expected to lead to product structure optimization; minimally invasive surgery channels expand rapidly, and the hard mirror business is expected to maintain rapid growth. In the medium to long term, the company's market share in the endoscopy industry is expected to increase steadily, and the profit side is expected to maintain rapid growth under the scale effect, which is expected to lead the domestic substitution process in the endoscopy field. We expect the company's revenue in 2024-2026 to be 26.31 billion yuan, 32.57 billion yuan, and 4.022 billion yuan, up 24.1%, 23.5% year-on-year; net profit to mother will be 5.63, 7.00, and 870 million yuan, respectively, up 24.0%, 24.3%, and 24.3% year-on-year. Based on the closing price on April 16, 2024 (37.77 yuan), the 2024-2026 PE was 29, 23, and 19 times, respectively. Maintain a buy rating.
Risk warning
1) Risk of increased competition in the industry: the current competitive pattern in the soft mirror field is good. If competition among domestic companies intensifies in the future, the company's market share may fall short of expectations; 2) Overseas market risk: changes in overseas economic situations may put pressure on demand, which may affect the growth rate of overseas performance, and exchange rate fluctuations may have an impact on the company's performance; 3) New product development risk: If the company's new product development progress falls short of expectations, it may adversely affect the company's future growth; 4) Product promotion progress falls short of expectations: the company has received many new products approved since this year, if the product is in hospital progress or clinical acceptance The extent falls short of expectations, which may adversely affect the company's performance; 5) There is a risk that the bidding process will be delayed due to policy factors such as increased compliance requirements in the medical equipment industry; 6) There are quarterly fluctuations in tendering and procurement in the medical equipment industry. In the short term, hospitals in some regions are waiting for the implementation of the upgrading policy and the equipment procurement process to slow down, and there is a possibility that quarterly results will fall short of expectations.