Event: The company released its 2023 & 2024 Q1 results report. 1) In 2023, we achieved revenue of 6.08 billion yuan, -4.5% year-on-year; realized net profit of 590 million yuan, and realized net profit of 49.0% year-on-year, realized net profit of 42.4%, gross margin/net margin was 73.3%/9.6%, -3.7 pct/-5.5 pct year on year, and sales/management/R&D expense ratios were 46.8%/8.1%/7.4%, year-on-year, -1.2/+1.9/+1.3 pct. 2) Q1 in 2024 achieved revenue of 1.36 billion yuan, +4.2% year on year; realized net profit of 240 million yuan, +21.4% year on year, realized deducted non-net profit of 230 million yuan, +53.3% year on year, gross margin/net margin was 75.7%/17.9%, +2.0pct/+2.5pct year on year, sales/management/R&D expense ratios were 36.0%/8.5%/7.0%, year-on-year, -10.4/+1.9/+0.7pct.

The growth of raw materials & medical terminals has accelerated, and medical and aesthetic costs have been reduced and efficiency rates optimized. 1) Raw materials sector: 2023 revenue of 1.13 billion yuan/yoy +15.2%, gross margin of 64.7% /yoy-6.8pct. Mainly due to the growth of pharmaceutical-grade raw materials and cosmetic grade raw materials, the growth rate of raw materials accelerated. Among them, the sales revenue of pharmaceutical-grade hyaluronic acid raw materials with high and stable gross margins was 400 million yuan, an increase of 19.0% over the previous year. In terms of research products, the company's pharmaceutical-grade sterile grade HA production line has completed trial production, and the addition of medical device-grade sodium hyaluronate for repair and lubrication products is expected to further strengthen the company's leading position in the HA high-end market. 2) Medical terminal sector:

In 2023, revenue was 1.09 billion yuan/yoy +59.0%, and gross margin was 82.1% /yoy+1.2pct; of these, dermatological medical products achieved revenue of 750 million yuan, an increase of 60.3% over the previous year. Revenue from the company's differentiated advantage category Microcrosslinked Runzhi Doll Needle increased by more than 200% year on year; under the product portfolio application strategy, Runji filler revenue increased by more than 250% year on year, while medical and aesthetic cost rates declined further. The company is developing medical and aesthetic pipelines, including hydro light, filler, regeneration, repair, and active devices. It is expected to be launched one after another in the next 1-3 years. Among them, the sodium hyaluronate complex solution is in the registration and correction stage. It is expected to obtain a registration certificate in the second half of 2024; Device 3 water light products have entered the registration stage and are expected to become the first batch of water light adaptation products; self-developed collagen device 3 terminal products will soon enter the clinical stage.

Functional skincare products are under pressure, and strategic adjustments are expected to usher in an inflection point. In 2023, revenue was 3.76 billion yuan/yoy -18.5%, and gross margin was 73.9% /yoy-4.4pct. In terms of products, major brands have continued to build large single product lines, and the Runbaiyan barrier repair series accounts for more than 40%; Quadi has launched a large single product, Zhenjin Yunhuo Light-Age Eye Cream, which will continue to be introduced in 2024, including Runbaiyan Collagen Energy Bomb, Muscular Brown Rice Water 2.0, and Mibelle Blue Bandage Essence; in terms of channels, the proportion of high-rate channels has been optimized to stabilize and increase the proportion of self-operated channels. The proportion of Runbaiyan's own channels has further increased, and the proportion of self-operated channels of Runbaiyan has further increased.. The company made phased adjustments to its major brands, which had a certain impact on performance in the short term. With the gradual implementation of brand upgrades and organizational management, it is expected that improving quality and efficiency will drive a recovery in performance.

Investment advice: As a leading hyaluronic acid company, the company's raw material & product development capacity reserves support pipeline expansion in the long term. The skincare sector is expected to reach an inflection point after adjustment. We expect the company's 2024-2026 revenue to be 68.85/82.75/10.032 billion yuan, and net profit of 8.55/10.95/1,331 billion yuan. The corresponding PE was 36/28/23 times, respectively, maintaining the “buy” rating.

Risk warning: New product development and marketing fall short of expectations, industry regulatory risks, and increased industry competition.