Key points of investment:

Event: On April 27, 2024, Jiahe Meikang released its 2023 earnings report and 2024 quarterly report. In 2023, the company achieved revenue of 695 million yuan, a year-on-year decrease of 3.04%, and achieved net profit of 42 million yuan to mother, a year-on-year decrease of 37.53%.

2024Q1 achieved revenue of 123 million yuan, a year-on-year increase of 14.00%, achieved net profit to mother of -12 million yuan, and reduced losses by 47.70%. Profitability was slightly lower than market expectations.

Downstream demand is slowing due to industry factors, and the company's performance is under pressure in the short term. In 2023, due to objective factors, the pace of hospital recruitment slowed down, and new orders declined year-on-year. The sales cost side added a specialist product sales team to improve overall quality; the management cost side company successfully participated in the bankruptcy and restructuring of Beijing Ande Medical Intelligence Technology Co., Ltd., which mainly focuses on imaging AI, causing management expenses to rise, thus causing the profit side to drop more compared to 2022.

R&D investment increased, and Jiahe Medical Big Model completed development training. During the reporting period, the company continued to increase R&D investment. The number of R&D personnel increased to 705, up 2.62% year on year. Cost-based R&D expenditure plus capitalized R&D expenditure totaled 227 million yuan, an increase of 28.38% year on year. The increase in R&D investment is mainly used to: 1) accelerate the R&D pace of fund-raising projects and improve product layout; 2) complete the development and training of Jiahe Medical's big model.

Electronic medical records and big data centers rank first in the two core business segments: 1) The electronic medical records business has stable sales and revenue of 208 million yuan, which is basically the same as in 2022. Specialist electronic medical records have developed significantly. During the reporting period, the Jiahe Integrated Emergency Care Platform was launched, and revenue increased threefold over the same period last year. 2) The construction of data centers has been expanded to county medical communities, helping 60+ medical institutions pass high-level connectivity assessments.

2024Q1 performance showed a recovery, and a number of policies catalyzed medical IT construction. In 2024, a number of initiatives will promote the construction of healthcare IT:

1) The State Council's trade-in action plan indicates that the medical sector will promote the iterative upgrading of equipment and information technology facilities in medical and health institutions; 2) The Health Insurance Administration held a DRG/DIP symposium to clarify the implementation of the DRG/DIP reform plan.

Maintain a “buy” rating. Considering that the company's 2023 is greatly affected by objective factors, the 2024-2025 revenue forecast was lowered to 856 million yuan and 1,082 billion yuan, compared to the original forecast of 1,023 billion yuan and 1,360 billion yuan. The company increased R&D investment in broadening the product matrix and emerging medical models, and lowered the 2024-2025 net profit forecast to 104 million yuan and 151 million yuan, compared to the original forecast of 153 and 250 million yuan. The additional 2026 revenue forecast was $1,334 million, and the net profit forecast was $212 million. 2025 was selected as the valuation year, corresponding to 27 times the average PE of a comparable company in 2025. There is still room for 23% increase, maintaining a “buy” rating. See main text for details.

Risk warning: New product sales fall short of expectations, industry competition intensifies, and the risk that the macro environment will affect the revenue of hospital customers.