Incident: The company recently released its 2023 annual report and 2024 quarterly report. The revenue for 2023 was 1.07 billion yuan/+1.6%, net profit to mother was 93 million yuan/-4.9%, and net profit not returned to mother was 36 million yuan/-44.5% year. Single 23Q4 revenue was 300 million yuan/year +2.32%, net profit attributable to mother was 0.3 million yuan/year -38.4%, net profit after deducting non-return to mother - 0.2 billion yuan/-166.7% year. Single 24Q1 revenue was 290 million yuan/year +28.3%, net profit attributable to mother was 19 million yuan/year +164.5%, and net profit not returned to mother was 0.18 million yuan/year +253.1%.

Toothbrush Q4 orders are speeding up, and changes in gross profit margin, fair value, and asset impairment losses affect the net interest rate level. 1) Product split: Revenue from wet wipes/toothbrushes/other dental products was -9.9%/+6.2%/+11.1%, respectively, to 3.4/4.6/260 million yuan, and single Q4 revenue was +13%/-9%/+3%, respectively; 2) Volume price split: sales volume of toothbrush/wet wipes in 23 years were -4.4%/-6.1%, respectively, and ASP was +11%/-4.1%, respectively. Toothbrush was mainly driven by price and the wet wipe business was still affected by overseas disinfectant wipes. Revenue growth in '23 was mainly affected by the disinfectant wipes and mouthspray business, and it is expected that this gap will close in '24. 3) Gross profit margin: The gross margin for 23 years was 23.2% /-0.8 pct. Among them, the gross margin of wet wipes/oral care products was -3/0pct to 21.3%/23.7%, respectively. The decline in gross margin for wet wipes was mainly due to the impact of disinfectant wipes; 23Q4 gross profit margin was 23.1% /4.7 pct year over year. 4) Period expenses: 23-year sales/management/R&D/finance expense ratios were -3/+1/-0.7/+0.6pct to 7%/4.9%/2.7%/0.7%, respectively. The sharp decline in sales expenses was mainly due to controlled investment in private brand operations and promotion expenses, and the increase in financial expense ratios was mainly due to increased bank loans under extrapolated mergers and acquisitions; 5) Other: Other income accounted for a year-on-year decrease of about 7.5 million yuan, mainly due to government subsidies; the share of return on investment was -0.8 pct year over year; the share of fair value changes accounted for a year-on-year ratio of + 2.8 pct, mainly due to the change of 15.8% of the company's original shares from financial instrument accounting to equity method accounting for long-term stock investment; asset impairment losses accounted for +4.9pct year over year, mainly due to impairment of about 50 million yuan for Vimezi Long Stock Investment; income tax rate -2.2 pct year on year, mainly due to a decrease of 15.42 million yuan in deferred income tax expenses. 6) Net interest rate: Net interest rate to mother -0.6pct to 8.7% year-on-year. The share of non-net accounts was +2.3 pct year over year, mainly due to changes in the fair value of financial assets/liabilities affecting income of 17.07 million yuan, after deducting non-net interest rate of -2.8 pct to 3.4% year on year.

All businesses achieved rapid growth in 24Q1, and profitability improved markedly. 1) By product: 24Q1 wet wipes/toothbrush/other oral care product revenue was +38%/+16%/+41%, respectively. Among them, toothbrushes adopted an active sales strategy (sales +22% YoY); the impact of disinfectant wipes and mouth spray was eliminated, and orders for wipes resumed (sales volume +43% YoY); in addition, expanding the toothpaste product line, and order settlement led to the growth of other oral care products. 2) Gross profit margin 25.4% /year over year +3.7 pct, net profit margin 6.6% /year over year +3.4pct.

Epitaxial mergers and acquisitions open the ceiling for growth. 1) The acquisition of Vimezi's shares was implemented, changing from financial instrument accounting to long-term equity investment and equity accounting. Currently, the total holding of shares is 32.2712%, and the net profit in 2023 is 165 million yuan; 2) The acquisition of Shennkang lays out the probiotic industry chain, promising to achieve no less than 1200/18/30 million yuan in deducted net profit by 2024/25/30 million yuan, respectively, to expand the company's business scope and increase revenue and profit levels.

Profit forecast and investment suggestions: As a leading enterprise in the field of oral care, the company grasps the basic market of toothbrush and wet wipes with supply chain, R&D and customer advantages, and continues to expand other oral care categories to bring business growth. The trend is positive after adjustments by the independent brand team; at the same time, epitaxial mergers and acquisitions enhance competitiveness and continue to increase the field of oral health. We expect net profit to be 1.39/16/196 million yuan for 2024/25/26, respectively (profit forecast lowered), corresponding PE 17/14/12 times, respectively, to maintain the “buy” rating.

Risk warning: risk of raw material price fluctuations, increased market competition, insufficient incubation of independent brands, etc.