Dengkang Dental revealed Q1 results for 2023 and 2024:

In 2023, the company achieved revenue of 1,376 billion yuan, +4.76% year on year; realized net profit of 141 million yuan, +4.97% year over year; net profit after deduction of 106 million yuan, +1.56% year on year. Among them, Q4 2023 achieved revenue of 365 million yuan in a single quarter, +8.16% year over year, and realized net profit to mother of 34 million yuan, +16.82% year over year. In 2024, Q1 achieved revenue of 361 million yuan, +5.22% year-on-year; realized net profit of 37 million yuan, +15.60% year-on-year, after deducting net profit of 28 million yuan, or -0.38% year-on-year.

The share has increased steadily, and e-commerce has performed well

According to Nielsen data, the overall sales scale of China's toothpaste market in 2023 was 29.894 billion yuan, -4.56% year-on-year, mainly due to the shrinking of the offline toothpaste market. The online toothpaste market sales volume was 8.04 billion yuan, +4.85% over the same period last year. In 2023, the sales scale of China's toothbrush market was 8.857 billion yuan, -2.60% year-on-year, of which the offline toothbrush market was 7.162 billion yuan, and the decline narrowed. The size of the online toothbrush market was +1.33% YoY. In 2023, the company achieved sales revenue of 10.74/ 1.55/ 0.73/ 0.32/ 0.12/ 0.28 billion yuan for adult toothpaste/adult toothbrushes/electric toothbrushes/dental and beauty care products respectively, +2.00%/+14.75%/+0.62%/+20.79%/+129.48%/+47.59%. Against the backdrop of weak overall industry growth, the company's business bucked the trend and steadily increased the “cold acid” brand offline retail market in the anti-sensitive segment. The share rose to 64.10%, +2.35pct year over year, and occupied a leading position. Dengkang toothpaste products have an offline retail market share of 8.04%, ranking 4th in the industry and 2nd in the country. The “Cold Acid” toothbrush is the brand with the highest year-on-year sales increase among the top ten brands in the offline retail market in 2023. The growth rate was +7.47%, and the share of retail sales in the offline market increased to 5.29%, ranking 4th in the industry and 3rd among local brands.

By channel, in 2023, the company's distribution/direct supply/e-commerce model achieved revenue of 995/0.54/316 million yuan, respectively, +2.09%/+0.05%/+14.47% compared with the same period last year. The company's online channels have fully launched a high-quality development model to improve quality and efficiency. The profitability of central e-commerce continues to increase, and the share of interested e-commerce self-operated businesses continues to rise, helping the company's e-commerce channel to achieve far surpassing the industry's growth rate. At the same time, the company is vigorously expanding emerging channels, new retail channels and e-commerce business, and continues to deepen offline distribution, optimize the intensive cultivation of KA channels, and help the company achieve sustainable revenue growth.

Continuous optimization of the product structure boosts gross margin to increase significantly

Gross profit margin: In 2023, the company's gross margin was 44.11%, +3.60pct year-on-year. Looking at specific products, the gross margins of the company's adult toothpaste/adult toothbrush in 2023 were 44.99%/33.97%, respectively, compared with +3.95/ 3.56pct. The company's product structure optimization and upgrade results are excellent, and the gross margin of the dominant adult toothpaste and toothbrush categories has improved markedly. By channel, the gross margins of the company's distribution/e-commerce channels were 42.46%/45.92% respectively, +1.41/10.42pct, respectively. The optimization of e-commerce channel structure and improvement of quality and efficiency drove a significant increase in online gross margin. On a quarterly basis, the company's gross margin in Q4 2023 was 43.89%, +6.04pct year on year, and -2.99pct month-on-month. The company's gross margin in Q1 2024 was 48.43%, +7.17pct yoy and +4.54pct month-on-month. The company's product structure continues to be optimized and upgraded, and the gross margin for Q1 2024 was further increased.

Expense Ratio & Net Profit Ratio: The company's net interest rate in 2023 was 10.27%, +0.02pct year-on-year. In terms of the period cost ratio, the company's sales expense rate/management+R&D expense rate/financial expense ratio in 2023 were 28.08%/7.97%/-1.23%, respectively, +4.07/ +0.78/ -0.49pct, respectively. The sales expense ratio has increased a lot. The main reason is that the company continues to deepen brand building and enhance brand influence. For example, the company's global integrated marketing continues to gain strength. CNY marketing has been exposed more than 10 billion times across the network, using the power of ambassadors to maximize the exposure of national brands. The Q4 2023 quarterly net interest rate was 9.23%, +0.68pct year-on-year and -2.88pct month-on-month. In Q1 2024, the company's quarterly net interest rate was 10.35%, +0.93pct year over year, and +1.12pct month-on-month. Profitability has improved.

Cash flow & operating efficiency: In 2023, the company achieved net operating cash flow of 151 million yuan, +80.55% year-on-year.

In 2024, the company achieved a net operating cash flow of $48.1166 million, +1228.21% over the same period last year, mainly due to an increase in cash and interest income received from the company's sales of goods and provision of labor services, and a decrease in time deposit purchases. In terms of operating efficiency, the company's receivables turnover days in 2023 was +0.30 days to 9.68 days year on year, and inventory turnover days were +6.93 days to 90.42 days year on year. In 2024, the company's receivables turnover days in Q1 were -1.15 days to 9.35 days year-on-year, and the number of inventory turnover days was +5.72 days to 97.74 days year-on-year.

Profit forecasting and valuation

The company is an absolute leader in the field of anti-allergic toothpaste. Since then, through continuous high-end product upgrades and diversified category layout, the channel side has further improved its declining market layout and entered powerful online platforms such as Douyin, with plenty of potential for subsequent growth. We expect the company's revenue for 2024-2026 to be 1,484/17.53/ 2.051 billion yuan, respectively, up 7.85%/18.18%/16.98%; net profit to mother of 1.55/ 1.85/ 219 million yuan, up 9.87%/19.11%/18.42% year-on-year, corresponding to the current market capitalization of the company's PE is 26/ 22/ 19X, respectively, maintaining the “increase” rating.

Risk warning

Competition in the industry intensified, new product development fell short of expectations, raw material costs fluctuated greatly, sales volume and price increases fell short of expectations, and fund-raising projects fell short of expectations.