Key points of investment

The company released its 2023 annual report and 2024 quarterly report. Revenue in 2023 fell 1.31% year on year; net profit to mother was 146 million yuan, down 20.19% year on year. Inventory clearance from US customers led to a decline in the company's fluorescence laparoscopy shipments and a decline in revenue in the second half of 2023; 2024Q1, the company's revenue was 118 million yuan, down 20.7% year on year, up 24.7% month on month; net profit to mother was 38 million yuan, down 20.7% year on year. Shipments were gradually normalized in the first quarter of 2024, and revenue increased month-on-month. We believe that with the gradual resumption of deliveries and the acceleration of machine promotion, 2024 revenue is expected to accelerate; due to the scale effect, the cost ratio will decline, and the net interest rate is expected to rise in 2024.

Growth: Shipments are gradually resumed & machine promotion is accelerated. 2024 revenue is expected to accelerate (1) Stryker's stickiness continues to strengthen, and 1788 listing volume is expected to lead to revenue growth in 2024. Splitting the company's revenue, we found that the company's revenue in 2016, 2019, and 2022 all achieved high year-on-year growth, corresponding to the release of Stryker's next-generation products; in September 2023, Stryker 1788 was listed, but with relatively high customer inventories, the company's 2023Q3-4 revenue declined month-on-month, 2024Q1 shipments gradually resumed, and the company's revenue increased month-on-month. We believe the resumption of shipments is expected to drive the company's revenue and profit growth in 2024. At the same time, in response to the risk of changes in international policies, the company has already initiated a factory construction plan in Thailand and completed registration on August 9, 2023, and is undergoing plant renovation, etc.; the company is expected to mass-produce Stryker's next-generation hysteroscopes in 2024. We believe that the company has accumulated over a long period of time in the production side of endoscopic light sources and lenses, has high technical barriers, and continues to strengthen its stickiness with core customers. As the company's domestic and overseas demand continues to grow, the certainty of long-term revenue growth can still be expected. (2) Expand horizontally and vertically to open up the growth ceiling. Expanding vertically to complete machines, and winning bids accelerated in the second half of 2023, which is expected to lead to continued high revenue growth in 2024. In February 2023, the 4K fluorescence endoscope system N700-F was launched; in October 2023, the TS88 4K defogging endoscope produced by the company for Stryker was launched; in November 2023, the company launched its 4K endoscopic camera system N760. Under the relatively tight conditions of in-hospital bidding, the company still achieved a good number of winning bids in 2023. According to data from the bidding network, the company won a total of 7 units in 2023 (including TS88). On a quarterly basis, the bid winning trend was accelerating in the second half of 2023. We believe that with the gradual increase in the company's product launch and market acceptance, the winning bid in 2024 is expected to accelerate, driving revenue growth; expanding horizontally into the optical sector, the continued deepening of cooperation is expected to drive continued high revenue growth. The company continues to deepen microscope cooperation projects with Danaher, etc. We believe that with the expansion of channels and the release of new products in the optical sector, revenue in this sector is expected to return to positive growth in 2024.

Profitability: Net interest rate declined in 2023 due to share payments, etc., and is expected to pick up in 2024 (1) Gross margin is expected to remain high in 2024. In 2023, the company's gross profit margin was 63.7%, down 0.6 pct year on year; 2024Q1 gross profit margin was 64.5%, down 0.04 pct year on year. We believe that the main reason for the change in gross margin is the gradient quotation of the company's endoscopic products, and the unit price decreases as supply volume increases; in 2024, the company's gross margin is expected to increase, driven by changes in supply volume and further cost reduction due to improved technology, and increased sales volume of complete machines. (2) Net interest rate declined in 2023 due to equity payment fees, depreciation, etc., and is expected to pick up in 2024. In 2023, the company's net interest rate was 30.2%, down 7.9pct from the previous year, mainly due to the effects of equity payment expenses, loss of investment in joint ventures, depreciation of second-phase plants and machinery, and year-on-year reduction in wealth management income and government subsidies. We believe that in 2024, as the company's equity incentive and amortization expenses fall, various expense rates are expected to decline due to scale effects, and the net interest rate is expected to rise again.

Profit forecasting and valuation

Based on the above assumptions, we believe that the company's total revenue for 2024-2026 was 6.00/7.51/938 million yuan, respectively, up 27.57%, 25.07%, and 24.91% year-on-year; net profit to mother was 2.11/2.70/346 million yuan respectively, up 44.58%, 28.36%, and 28.12% year-on-year respectively. The corresponding EPS was 1.73/2.22/2.85 yuan, corresponding to 24 times PE in 2024, maintaining the “increase in holdings” rating.

Risk warning

Risk of fluctuations in Stryker's revenue; risk of commercialization of new products falling short of expectations; risk of fluctuations in the international environment and exchange rates; risk of policy changes.