2023 and 1Q24 results are in line with our expectations

Dengkang Dental announced its 2023 and 1Q24 results: 2023 revenue of 1,376 million yuan, net profit to mother of 141 million yuan, +5.0% year on year; 1Q24 revenue of 361 million yuan, +5.2% year on year, net profit of 37 million yuan, +15.6% year on year.

Development trends

1. Toothpaste revenue is growing steadily, toothbrush growth is impressive, and product structure optimization boosts gross margin. In 2023, the company's revenue was +4.8% year over year, and gross margin was +3.6ppt to 44.1% year over year. By product, ① Adult oral care: revenue +3.4% to 1.229 billion yuan, of which adult toothpaste/adult toothbrush revenue was +2.0%/+14.7% to 10.74/155 billion yuan, gross margin +4.0/+3.6ppt to 45.0%/34.0% year over year; ② Children's oral care: revenue +6.0% YoY to 105 million yuan, of which children's toothpaste/children's toothbrush revenue was +0.6%/+20.8% YoY, gross margin -0.5/+ 1.0ppt to 54.1%/42.5%; ③ Electric toothbrush/dental care and beauty care: revenue +129.5%/+47.6% YoY to 0.12/0.28 billion yuan. By channel, ① e-commerce maintained relatively rapid growth, with revenue +14.5% to 316 million yuan, and the revenue share rose to 23%. Benefiting from product structure optimization, gross margin increased 10.4ppt to 45.9% year over year; ② distribution/direct supply channel revenue +2.1% YoY.

2. Marketing expenses have increased, and net interest rates have increased steadily. The gross margin of the 1Q24 company was +7.2ppt to 48.4% year on year; the period expense ratio was +8.4ppt, of which the sales expenses ratio was +8.7ppt to 31.7% year over year, mainly due to increased e-commerce expenses; management/financial expenses ratio was -0.3/-0.5ppt to 3.8%/-1.0% year over year, respectively, and R&D expenses ratio +0.5ppt to 3.6% year over year. In addition, benefiting from the preferential policy of adding and deducting the value-added tax input tax amount and the increase in maturing income generated by the company's capital protected cash management business, other income and investment income increased year-on-year. Under the combined influence, the 1Q24 company's net interest rate was +0.9ppt to 10.3% year-on-year.

3. Optimistic about the online and offline omni-channel collaborative development space for oral anti-allergy leaders. ① Product side: The company promotes industry-university-research and medical cooperation, strengthens basic research, new product development and patent applications; while consolidating the core advantages of basic oral care categories, develops electric oral care and oral beauty care categories, and upgrades 4 new children's sonic electric toothbrushes throughout the year. ② Brand side: The company used the National Dental Day and Asian Games to boost the brand's professional value, and also released the Blue Book “The Oral Health Status of the Elderly” with authorities to shape a professional brand image. ③ Channel side: The company is deeply involved in distribution and KA channels, and the offline market share of cold sour toothpaste and toothbrushes is steadily ranked fourth in the industry; e-commerce channels promote quality, efficiency and high-quality development, and the profitability of e-commerce centers such as Tmall and Jingdong continues to increase, and the share of e-commerce interests such as Douyin continues to increase.

Profit forecasting and valuation

We maintain our 2024/2025 earnings forecast. The current stock price corresponds to 25x/22x 2024/2025 price-earnings ratio. Maintaining an industry rating and target price of 34 yuan, corresponding to 36 times/33 times the 2024/2025 price-earnings ratio, there is 46% upside compared to the current stock price.

risks

Increased market competition; product quality problems; fluctuations in raw material prices.