Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, we achieved revenue of 471 million yuan (-1.31%), net profit attributable to mother of 146 million yuan (-20.19%), deducted non-net profit of 136 million yuan (-19.20%), and operating cash flow of 329 million yuan (-80.46%). 2023Q4 achieved operating income of 94 million yuan (-31.20%), net profit attributable to mother of 0.28 million yuan (-35.54%), and deducted non-net profit of 0.25 million yuan (-35.62%). In 2024Q1, we achieved operating income of 118 million yuan (-20.74%), net profit attributable to mother of 0.38 million yuan (-20.68%), deducted non-net profit of 0.36 million yuan (-21.40%), and operating cash flow of 40 million yuan (+119.94%).

High base and customer system delays affected apparent performance, putting pressure on full-year 2023 and 2024Q1 results. The company's performance declined year-on-year in 2023, mainly affected by the iteration and delay of the new system from US customers, and short-term demand for the company's endoscopic products shipped abroad declined. Looking at the revenue structure, the endoscopic equipment industry's revenue was 371 million yuan (+1.42%), accounting for 79.26% (+2.36pct) of the main business, while the optical industry's revenue was 97 million yuan (-11.63%), accounting for 20.74% (-2.36pct) of the main business. At the same time, the company's 2024Q1 performance was also affected by the high base due to continuous centralized stocking of the new system released by major US customers in 2023Q1.

In addition, due to the company's active development of the domestic market and improvement of the marketing network system, expenses increased slightly during the period. The 2024Q1 sales expenses rate was 3.70% (+0.74pct), and the management expenses were 9.65% (+1.03pct). In the future, as the number of endoscopic products shipped by the company gradually recovers, domestic and foreign sales revenue is expected to continue to grow rapidly.

Gross profit margins have remained stable, and domestic business growth is expected to continue. The company's overall gross profit margin in 2023 was 63.72% (-0.63pct). Among them, medical endoscopic equipment products were affected by a combination of export exchange rates, sales product structure changes and production costs. The gross margin increased slightly year-on-year (71.26%, +1.08pct), and the gross margin of optical products declined due to product structure (36.47%, -8.87pct). The overall gross margin of the 2024Q1 company was 64.50% (-0.04pct), which remained stable. Based on the company's active efforts to develop the domestic market, the marketing system and brand influence continued to strengthen, domestic sales revenue increased significantly year-on-year, reaching 141 million yuan (+26.46%), accounting for 30.13% (+6.68pct), gross profit margin of 50.25% (-3.22pct, mainly affected by specific product restructuring), based on the gradual opening up of domestic market business, the strong growth trend of the company's domestic business is expected to continue, and continue to contribute to a certain increase in performance.

Maintaining a high level of R&D investment is expected to usher in an intensive marketing period for new products. In 2023, the company invested 66 million yuan (+10.01%) in R&D, accounting for 14.00% of revenue (+1.44pct), 2024Q1 R&D expenses of 0.15 million yuan (-12.82%), accounting for 12.70% of revenue (+1.15pct), to ensure that the company successfully made a series of progress in medical endoscope research and development: ① The new generation of endoscopic systems for US customers was officially launched in September 2023; ② The new 4mm hysteroscope developed for the US market has completed product finalization and mass production preparations have begun (expected) (Officially launched on the market in June 2024); ③ Product registration for arthroscopy, 3D laparoscopy, and thoracic endoscopy for the domestic market has been completed; ④ Laparoscopes with dozens of specifications such as whitelight/fluorescent/defog/3D fluorescence/standard length/ultra-thin are being registered and evidenced one after another, and registration is expected to be completed in 2024; ⑤ endoscopes such as hysteroscopy/cystoscope/sinusoscopy have been developed and are expected to be registered in mid-2024; ⑥ The second-generation endoscopic camera system is expected to complete registration in mid-2024 Since then, evidence has been collected one after another, and it has already been launched The market also forms sales.

Investment advice: As a leading domestic manufacturer of medical endoscopic equipment and optical products, the company has a complete industrial chain from system design, opto-mechanical design to optical processing, optical coating, precision mechanical packaging to component assembly and system integration, and is expected to continue to benefit from the trend of domestic replacement of high-end medical equipment. We are optimistic about the development prospects of the company's domestic business in the context of new medical infrastructure. We expect the company's net profit to be 2.02/2.54/319 million yuan in 2024-2026, up 38.62%/25.89%/25.41% year on year, corresponding EPS of 1.66/2.09/2.62 yuan. The current stock price corresponds to 2024-2026 PE 26/21/17 times, maintaining a “careful recommendation” rating.

Risk warning: Risk of business progress in overseas markets falling short of expectations, risk of domestic product release falling short of expectations, risk of R&D progress falling short of expectations.