Revenue growth was high in 2023, and profitability recovered significantly

The company released its 2023 annual report: 2023 operating income of 10.894 billion yuan (+26.44%), net profit of 506 million yuan (+190.45%), net non-net profit of 463 million yuan (+181.61%), and net operating cash flow of 2,024 million yuan (+30.34%).

In 2023, medical examination service revenue was 10.561 billion yuan (+28.81%). In terms of split volume price, holding stores received 17.55 million visitors (+13.7%), shareholders+holding receptions received 28.34 million (+13.0%), comprehensive customer unit price (including entrance medical examinations and occupational disease tests, excluding nucleic acid testing) was 620.8 yuan (+11.2%); judging from the revenue structure, group examinations accounted for 80%: 20%, individual examinations accounted for 80%: 20%, individual examinations accounted for +2.8 pct year-on-year.

Profitability recovered significantly as the scale effect strengthened: gross margin in 2023 was 42.79% (+8.35pct), of which the gross margin for physical examination services was 42.06% (+9.51pct). In 2023, the sales expense ratio was 23.53% (-0.38pct), the management expense ratio was 7.64% (-1.68pct), the R&D expense ratio was 0.58% (-0.08pct), and the financial expense ratio was 2.74% (-0.61pct).

Due to a decline in 2024Q1 revenue due to a high base, etc., the cost-side is reasonable 2024Q1 operating income of 1,801 million yuan (-14.91%), net profit to mother of 287 million yuan (-66.67%), after deducting non-net profit of 302 million yuan (-71.58%), and net operating cash flow of -543 million yuan (-807.2%).

The year-on-year decline in the company's revenue is mainly due to: (1) the physical examination industry has obvious seasonal characteristics. Q1 is a low business season, and quarterly revenue is relatively low due to fewer people arriving; (2) 2023Q1 has a high base due to the lack of testing requirements at the end of 2022; (3) the 2024Q1 community has returned to normal operation, increased annual corporate meetings, and increased personal travel, all of which caused customers to sign up for delays in arriving for inspection.

In terms of profit, compared to 2023Q1, 2024Q1 revenue decreased by 316 million yuan, operating costs decreased by 128 million (gross margin decreased by 4.68 pct to 28.04%), period expenses decreased by 122 million (total rate +5.65 pct), operating profit decreased by 165 million, and there were no other large expenses. Coupled with income tax expenses reduced by 24 million yuan, minority shareholders' profit and loss decreased by 27 million yuan, and net profit to mother decreased 115 million yuan. The main reason for the year-on-year decline in profit was the decline in revenue scale and the dilution of fixed costs The reduction has led to a decline in gross margin. The overall cost ratio is reasonable. The profit side is still within the scope of normal operations, and improvements in quality and efficiency are still evident.

Innovative products have opened up room for incremental performance, and the company has created a series of innovative products. “Brain Ruijia” is the first in the industry to achieve early risk assessment of Alzheimer's disease, “pulmonary stress” optimizes the “medical examination+green” business model, and “American Mental Health Service” provides mental health science information and comprehensive mental health solutions; in addition, the company also extends post-examination services, focusing on specialized medical centers such as gastrointestinal centers, traditional Chinese medicine centers, and sleep centers to open up space for incremental performance.

The company set up a personal inspection development center to promote the normalization of individual inspection marketing throughout the year and increase user stickiness and repurchase rate. In 2023, the company improved rapidly in the personal inspection business. Short video channels such as Douyin Kuaishou have become one of the main players in the performance growth of individual inspection channels. In addition, the company also demonstrated the development of medical digital intelligence AI health management models with major domestic model technology companies such as Huawei, and is committed to launching the industry's first health management AI robot “Health Xiaomei” to provide users with professional intelligent “Digital Health Manager” services.

Organizational change, increase management, and cultivate talents to help subsequent development

In 2023, the company successively established two regions, South China and Central China, and located in 22 urban agglomerations.

At the same time, the company launched a management trainee program to select and train a group of young cadres with innovative management and refined management capabilities across fields. In 2024, the company plans to fully establish urban agglomerations across the country, gradually establish districts to accelerate organizational improvement, thereby promoting management efficiency, and will also strengthen cadre management, adjust and optimize the talent structure; launch the second phase of the Chinese Youth Class Program, continue to promote the management and trainee program, and reserve outstanding young talents.

Profit Forecasts and Investment Ratings

We forecast that the company's revenue for 2024-2026 will be 123.10/141.56/16.280 billion yuan, and net profit to mother will be 8.13/12.27/1,525 billion yuan respectively, and the corresponding PE will be 21.80/14.46/11.63 times, respectively, maintaining the “buy” rating.

Risk warning:

The improvement in refined management capabilities fell short of expectations.