Revenue growth was steady in the first quarter of 2024, and net profit to mother increased 21%. The company's 2023 revenue was 6.076 billion yuan, -4.45% year on year, net profit to mother of 593 million yuan, or -38.97% year-on-year, after deducting non-net profit of -42.44% year on year, which is basically consistent with previous performance report data. Looking at the first quarter of 2024, the company's revenue was +4.24% YoY, net profit to mother +21.39% YoY, and +53.3% YoY after deducting non-net profit. The overall profit level improved significantly from month to month, benefiting from the growth of the medical terminal and raw materials business and the optimization of cost control.

The medical terminal business led the growth, and the raw materials business performed steadily. By business, the company's medical terminal business recorded +58.95% year-on-year revenue in 2023, accounting for +7.16pct to 17.95% year-on-year revenue, and continued to achieve good growth performance in the first quarter of 2024. Among them, the revenue of Microcrosslinked Runzhi Doll Acupuncture products increased by more than 200% in 2023, and revenue from Runzhi fillers increased by more than 250% year-on-year. The breadth and depth of medical and aesthetic business product matrices and channel coverage will also be further improved in the future. The raw materials business revenue in 2023 was +15.22%, and the revenue share was +3.17pct to 18.58% year over year. The performance was relatively steady. The functional skincare business revenue in 2023 was -18.45%, accounting for -10.61 pct to 61.83% of revenue year over year, mainly affected by the company's active reorganization and organizational restructuring of major skincare brands.

The gross margin increased in the first quarter of 2024, and the cost ratio was optimized. The company's gross margin in 2023 was -3.67pct year-on-year to 73.32%, mainly due to the decline in the gross margin of the raw materials business and the decline in the gross margin of skincare products due to rising raw material production costs. The sales expense ratio in 2023 was -1.17pct year on year, benefiting from the gradual optimization of brand resource allocation and marketing channel structure; the management expense ratio was +1.92pct year on year, respectively, mainly due to increased employee remuneration, property fees and institutional service fees. The gross margin for the first quarter of 2024 was +1.95pct year-on-year to 75.73%, benefiting from the increase in the share of high-margin products and the optimization of cost control. Sales/management/R&D expense ratios were -10.35pct/+1.95pct/+0.67pct year-on-year, respectively, and the overall cost ratio was optimized. Net operating cash flow of $35 million was achieved in the first quarter of 2024, which is a correction from last year's net outflow.

Risk warning: E-commerce growth falls short of expectations; marketing expenses fall short of expectations; new product promotion falls short of expectations Investment suggestions: In the medium to long term, the company's functional skincare brands still have room to grow in the future by actively optimizing the channel structure and developing new categories and products, and are expected to achieve a steady recovery in profitability as channel operation efficiency improves. The medical terminal business continues to focus on core superior products, and continues to expand the breadth and depth of institutional coverage to achieve continuous growth. The raw materials business continues to advance the internationalization strategy and expansion of the scope of application, and is expected to continue its steady growth performance. Considering that the functional skincare business is still in a period of brand sorting and organizational adjustment in the short term, which affects revenue and gross margin performance, we lowered the company's 2024-2025 net profit forecast to $9.12/1,122 million yuan (previous values were 1.27/1,508 billion yuan, respectively) and added the 2026 forecast to $1,354 billion. The corresponding PE was 32/26/ 21.5 times, respectively, to maintain a “gain” rating.