Core views

The company's annual report and quarterly results are in line with expectations. The impact of increased industry compliance requirements on equipment bidding is expected to gradually weaken, and the medical equipment renewal policy is expected to bring in some incremental demand; the company also stated that Huitai Healthcare is expected to start bringing incremental revenue contributions in the second quarter; and the launch of ultra-high-end ultrasound products in the medical imaging field is expected to further consolidate the company's position in the ultrasound industry. Overseas business is expected to continue the good momentum of rapid growth in the first quarter. Under the catalyst of continuous breakthroughs from high-end customers and continuous improvement of the IVD supply chain, overseas revenue growth is expected to increase further. Considering that the company's revenue base was relatively low in the second half of last year, the revenue growth rate for the full year of this year is expected to be at a high pace before and after, and profits are expected to maintain steady growth.

occurrences

The company released its 2023 annual report and 2024 quarterly report

In 2023, the company achieved operating income of 34.93 billion yuan, a year-on-year increase of 15%; net profit to mother was 11.58 billion yuan, an increase of 20.6% over the previous year; net profit after deducting non-return to mother was 11.43 billion yuan, an increase of 20% over the previous year. Basic earnings per share were 9.56 yuan/share. The 2023 profit distribution plan is to distribute a cash dividend of 15 yuan (tax included) for every 10 shares to all shareholders. In the first quarter of 2024, the company achieved operating income of 9.37 billion yuan, an increase of 12.1% year on year; net profit due to mother of 3.16 billion yuan, up 22.9% year on year; net profit after deducting non-return to mother was 3.04 billion yuan, an increase of 20.1% year on year. Basic earnings per share were 2.61 yuan/share.

Brief review

The results of the annual report and the first quarterly report were in line with expectations. In 2023, the company achieved a steady increase of 34.93 billion yuan in operating income; net profit to mother was 11.58 billion yuan, an increase of 20.6% year on year; net profit after deducting non-return to mother was 11.43 billion yuan, an increase of 20% year on year. Based on this calculation, the fourth quarter of 2024 achieved revenue of 7.628 billion yuan, up 7.9% year on year; net profit to mother of 1,748 billion yuan, up 16.2% year on year; net profit after deducting non-return to mother was 1,748 billion yuan, up 14.9% year on year. The performance was in line with expectations, and various business lines at home and abroad maintained steady growth. Increased compliance requirements in the medical industry in the second half of last year led to delays in the bidding process for some medical devices, which had a certain impact on the company's domestic revenue. The profit growth rate was higher than the revenue growth rate due to factors such as the increase in gross margin brought about by continuous optimization of the product structure.

In the first quarter of 2024, the company achieved operating income of 9.37 billion yuan, an increase of 12.1% year on year; net profit due to mother of 3.16 billion yuan, up 22.9% year on year; net profit without return to mother was 3.04 billion yuan, an increase of 20.1% year on year. The performance was in line with expectations. Emergency domestic purchase orders in 23Q1 led to a high revenue base for domestic life information support production lines, which led to a slowdown in the overall growth rate of the 24Q1 domestic market, but domestic IVD, medical imaging and overseas businesses all maintained rapid growth in the first quarter.

New medical infrastructure is driving the growth of the life information support business. The IVD sector is growing rapidly, and the share of high-end ultrasound revenue continues to rise by product line: 1) Life information support business achieved revenue of 15.252 billion yuan in 2023, up 13.81% year on year, of which minimally invasive surgery grew by more than 30%, and the market share of hard endoscopic systems increased to third in China. New domestic medical infrastructure activities clearly drove the growth rate of this sector in the first half of '23. The growth rate of the sector slowed down in the second half of the year. 2) In vitro diagnosis achieved revenue of 12.421 billion yuan in 2023, an increase of 21.12% over the previous year. The compound growth rate of the international IVD business in 21-23 was over 30%. 3) Medical imaging achieved revenue of 7.034 billion yuan in 2023, an increase of 8.82% over the previous year, with revenue growth of more than 20% for high-end ultrasound models.

Both domestic and international businesses have maintained steady growth. Overseas high-end customers continued to exceed the company's domestic market revenue of 21.382 billion yuan in 2023, an increase of 14.5% over the previous year, with an increase of 27% in the first half of the year. The domestic IVD sector achieved rapid growth of 20%, with reagent revenue increasing by more than 25%. The impact of increased industry compliance requirements on medical equipment bidding led to a slowdown in the domestic life information support and medical imaging sector in the second half of the year. The international market achieved revenue of 13.550 billion yuan in 2023, an increase of 15.8% year-on-year, with an increase of 22% in the second half of the year. The annual growth rate of developing countries exceeded 20%, and the compound growth rate of the North American market reached 18% in 21-23. The company continued to break through high-end overseas customers in 2023, breaking through about 300, 450, and 200 new high-end customers in the fields of life information and support, IVD, and medical imaging respectively. In addition, about 500, 110, and 120 existing high-end customers in the above three fields have achieved horizontal breakthroughs in more products. The company has covered more than 80% of the IDN medical consortium in the US, and successfully won an order of nearly 30 million US dollars for monitoring equipment from a US group hospital in 2023, which is the company's largest single monitoring order in the US market so far.

Excellent targets for epitaxial mergers and acquisitions, continuously improving the layout of the industrial chain

On January 28, the company announced that it intends to acquire control of Huitai Healthcare through an “agreement transfer+voting rights”. On April 29, the company announced that the restructuring of Huitai Medical's board of directors and supervisory board has been completed, and that the company has obtained control of Huitai Medical. Huitai Medical is a leading domestic enterprise in the field of electrophysiology and a leading domestic enterprise in the cardiovascular field in China. It has been deeply involved in the cardiovascular circuit for many years, and has deep technical reserves and a rich product matrix. Through this merger and acquisition, the company is expected to achieve rapid entry into the cardiovascular field, greatly increasing the market space available for the company's products, and is expected to add new growth impetus to the company's long-term development.

Looking ahead to the second quarter and the whole year, new products and businesses are expected to drive steady growth in domestic business, and overseas business is expected to accelerate growth. The impact of increased industry compliance requirements on equipment bidding is expected to gradually weaken, and medical equipment renewal policies are expected to bring about some incremental demand; the company also stated that after Huitai Healthcare, it is expected that the second quarter will begin to bring incremental revenue contributions; the launch of ultra-high-end ultrasound products in the medical imaging field is expected to further strengthen the company's position in the ultrasound industry. Overseas business is expected to continue the good momentum of rapid growth in the first quarter. Under the catalyst of continuous breakthroughs from high-end customers and continuous improvement of the IVD supply chain, overseas revenue growth is expected to increase further. Considering that the company's revenue base was relatively low in the second half of last year, the revenue growth rate for the full year of this year is expected to be at a high pace before and after, and profits are expected to maintain steady growth.

The gross margin of all sectors increased in 2023, and the cash flow fluctuated due to urgent purchase orders. In 2023, the company's gross sales margin was 66.16% (+2.01pp). Benefiting from product structure optimization and production efficiency improvements, the company's gross margin of all sectors increased; the company's annual sales expense ratio was 16.33% (+0.52pp), management expense ratio 4.36% (+0.01pp), R&D expense ratio 9.83% (+0.21pp), financial expense ratio -2.45% (-0.96pp), and all expenses rates were basically maintained stable. Net operating cash flow was 11.062 billion yuan (-8.89%). The year-on-year decline was mainly due to the large volume of domestic ICU emergency purchase orders in 2022/Q4 and the inability to deliver in a timely manner due to tight production capacity. This led to a sharp increase in contract debt at the end of '22, which boosted the net operating cash flow base for '22. The number of accounts receivable turnover days was 30.68 days, an increase of 5.09 days over the previous year.

The rest of the financial indicators are generally normal.

In the first quarter of 2024, the company's gross sales margin was 65.96% (-0.44pp), sales expenses ratio 15.85% (-0.57pp), management expenses ratio 5.05% (-0.41pp), financial expenses ratio -1.32% (-1.25pp); R&D expenses ratio 10.11% (-0.08pp). The total cost rate for the three items was 19.58% (-2.23pp), and the net profit margin on sales was 33.73% (+2.98pp). Net operating cash flow was 2.86 billion yuan, up 114.8% year on year. The sharp increase was mainly due to the company's increased procurement and preparation of key components and raw materials in 23Q1 in response to a large number of urgent purchase orders. The number of inventory turnover days was 111.95 days, a year-on-year decrease of 30.46 days. The rest of the financial indicators are generally normal.

It is expected to benefit from domestic equipment renewal policies and overseas market expansion in the short term. In the medium to long term, it is expected that mergers and acquisitions, innovation, and internationalization will continue to bring growth momentum. In the short term, the domestic medical equipment renewal policy is expected to drive domestic demand. The company's high-end overseas customer base will continue to expand, and enter the cardiovascular field through mergers and acquisitions of Huitai Medical to promote steady growth in the next three years. In the medium to long term, the company has an efficient R&D system and excellent channel management capabilities, and epitaxial mergers and acquisitions are expected to further expand its layout. With the improvement of IVD's overseas supply chain, the pace of the company's internationalization is expected to further accelerate.

We expect the company's revenue in 2024-2026 to be 419.74, 501.12, and 59.417 billion yuan, respectively, with growth rates of 20.2%, 19.4%, and 18.6% respectively. Net profit attributable to mother was 138.99 billion yuan, 167.19 billion yuan, and 20.73 billion yuan respectively, with growth rates of 20.0%, 20.3%, and 20.1%, respectively. Based on the closing price on April 30, 2024 (304.59 yuan), 2024-2026 PE was 27, 22, and 18 times, respectively, maintaining the buying rating.

Risk warning

1) Risk of changes in collection policy: If the collection policy exceeds expectations, it may cause the price of IVD reagent terminals to drop; if the price hits the factory price, it may adversely affect the company's profit margin; 2) Risk of increased industry competition: some of the company's products have a high share share in the domestic market, and if competition among domestic enterprises intensifies in the future, it may fall short of expectations; 3) Overseas market risk: Changes in overseas economic situation may affect the growth rate of overseas performance, and exchange rate fluctuations may affect the company's performance; 4) New product development and promotion risks: the company's new product development and promotion risk If the progress of new business development falls short of expectations, it may adversely affect the company's future growth; 5) There is a risk that the bidding process will be delayed due to policies such as increased compliance requirements in the medical industry.