Core views

The company released its 2023 annual report. The number of overseas cases in 2023 exceeded expectations, and the profit side was slightly lower than expected, mainly due to the large initial investment in international business. In the short term, the company's main revenue and profit are contributed by the domestic market. It is expected that the growth rate of the invisible orthodontic industry in 2024 will still be affected by the domestic consumer environment, but as the company's products continue to sink to third- and fourth-tier cities, it is expected that the number of new domestic cases will maintain double-digit growth in 2024. International business has become an important driving force for the company. The company has set up a local business team with rich experience in the orthodontic market in Europe, Australia, New Zealand, North America, etc., and the number of the company's international business cases is expected to grow rapidly in 2024.

occurrences

The company released its 2023 annual report

In 2023, the company achieved operating income of 1,476 billion yuan, +16.24% year on year; net profit to mother of 53.475 million yuan, -75.01% year on year; adjusted net profit of 179 million yuan, -16.0% year on year. Basic earnings per share were $0.32 per share. Dividend of HK$1.11 per share for 2023.

Brief review

The number of overseas cases in 2023 exceeded expectations, and the profit side was slightly lower than expected. The company achieved revenue of 1,476 billion yuan, +16.2% year over year; gross profit margin of 62.4%, up 0.5 percentage points year on year; net profit to mother of 53.475 million yuan, -75.01% year on year; adjusted net profit of 179 million yuan, -16.0% year on year. The number of cases completed by the company in 2023 was 245,000, an increase of 33.2% over the previous year, and its international business contributed about 33,000 cases; the number of domestic cases was about 212,000, an increase of about 15.3% over the previous year. The number of the company's overseas cases in 2023 exceeded expectations, and increased investment in international business led to slightly lower profits than expected.

By region, the company's domestic market revenue in 2023 was 1,331 billion yuan, up 5.5% year on year, and adjusted profit of the domestic market was 256 million yuan, up 29.9% year on year, mainly because the gross margin of the invisible correction solution business (which accounts for the main domestic market revenue) increased 1.9 percentage points to 65.7% year on year. In 2023, international market revenue was approximately $145 million, and adjusted profit was -211 million yuan.

By business, in 2023, the company achieved revenue of invisible correction solutions (mainly referring to domestic invisible correction solutions) of 1,282 billion yuan, +6.0% year-on-year, and a gross profit margin of 65.7%, an increase of 1.9 percentage points over the previous year. The reason why the revenue growth rate of domestic invisible correction solutions in 2023 (6.0%) was lower than the growth rate in the number of cases (15.3%) was mainly due to a decrease in revenue recognition due to the delivery of invisible orthodontic devices in previous cases. On the other hand, average sales prices declined due to expansion to third- and fourth-tier cities in China. The year-on-year increase in gross margin was mainly due to a decrease in unit costs due to improvements in production technology.

In 2023, the company's sales product business revenue was 176 million yuan (mainly referring to domestic scanners sales, Brazilian Aditek revenue, the company's overseas sales of bracket braces, etc.), +296.4% compared to the same period. The main reason was that the company's international business began to generate revenue and consolidated Aditek's revenue; the gross margin was 42.6%, an increase of 15.5 percentage points over the previous year. The main reason is that last year's revenue was mainly domestic sales of mouth scanners, and the gross margin of products sold in the international market this year was higher than that of mouth scanners sold domestically. In 2023, the company's other services (mainly referring to the company's dental clinics providing dental services) business revenue was 18 million yuan, +14.1% year over year, and gross profit margin was 16.2%, up 22.3 percentage points year on year, mainly when the company's dental clinics resumed operations.

The company's expense ratio increased during the 2023 period. Among them, the sales expense ratio increased 9.93 percentage points to 33.4% year on year, the management expense ratio increased 4.37 percentage points year on year to 18.94%, and the R&D expense ratio increased 0.13 percentage points year on year to 11.76% year on year. It is expected that various expenses will increase mainly due to the expansion of international business.

China's leaders in invisible orthodontics are entering the international market. The logic company, which is optimistic about the long-term growth of overseas business, has now built a complete and differentiated product matrix, continuously refined and upgraded products, upgraded and innovated overall digital orthodontic solutions, and continued to deepen the moat. In the short term, the company's main revenue and profit are contributed by the domestic market, and the number of new domestic cases will maintain a steady growth rate in 2024.

According to Insight Consulting data, the number of domestic angel cases in the 2021-2023 era had a market share of over 41%, ranking first in the country.

The international market space is larger. The company accelerates the layout of overseas markets and opens a second growth curve. The invisible orthodontics industry started earlier in the European, American and Australian markets, and the consumer power is stronger. The penetration rate of invisible orthodontics is higher than at home, and there is more market space. The company is the manufacturer with the second largest number of invisible orthodontic cases in the world. Currently, Invisalign has a high market share in Europe, America, and Australia, and the overall competitive pattern is good. Times Angel products are expected to become the second-choice brand for some clinics.

In 2022, Time Angel launched a global strategy, began team formation and product localization development, and acquired 51% of Aditek, a leading Brazilian manufacturer of orthodontic products; in 2023, the company had 33,000 international market cases, accounting for 13.5% of the company's cases. In the next few years, the number of the company's overseas cases is expected to surpass domestic cases, gradually reversing losses and contributing to increased profits.

More and more orthodontists from around the world choose Times Angel. The company has efficient and high-quality invisible correction solution design, perfect and high-quality logistics services, an excellent product portfolio, and a dedicated and professional localized service team. Compared to Europeans and Americans, East Asians have more complex cavities and smaller bodies, resulting in smaller dental arches and more difficult orthodontics. The company has accumulated experience with a large number of complex cases in China, which gives the company a certain advantage in going overseas. Combining rich experience and digital processes, the company has accumulated the ability to design efficient and high-quality invisible correction solutions, which can improve the efficiency of doctors' entire invisible correction process. China's labor costs are low, and the company has cost advantages in production, case design, etc. At the same time, it is expected that the overseas delivery cycle of products will not be weaker than Invisalign. At present, the company has set up localized direct sales business teams in the US, Europe and Australia to strengthen localization services.

The number of domestic cases is expected to maintain a steady growth rate in 2024. In the short term, the company's main revenue and profit are contributed by the domestic market. The company has established a stable market position in Tier 1 and 2 cities. It is expected that the growth rate of the invisible orthodontic industry will still be affected by the domestic consumer environment in 2024, but as the company's products continue to sink to Tier 3 and 4 cities, it is expected that the number of new domestic cases will maintain double-digit growth in 2024. International business has become an important driving force for the company. The company has set up a local business team with rich experience in the orthodontic market in Europe, Australia, New Zealand, North America, etc., and the number of the company's international business cases is expected to grow rapidly in 2024.

Profit forecasting and investment advice

We forecast that in 2024-2026, the company's revenue will be 1,729 billion yuan, 2,033 billion yuan, and 2.4 billion yuan, respectively, up 17.15%, 17.58%, and 18.03% year-on-year; net profit to mother will be 66 million yuan, 120 million yuan, and 175 million yuan, respectively, up 23.50%, 81.79%, and 45.49% year-on-year respectively. Based on the closing price on May 13, 2024 (HK$76.30 per share), the 2024-2026 PE was 181, 99, and 68 times, respectively. Maintain a “buy” rating.

Risk analysis

1) Risk of overseas deployment falling short of expectations: Overseas doctors' approval and trust in the company's digital orthodontic solutions takes a certain amount of time and case accumulation, causing progress to fall short of expectations.

2) Risk of slow recovery in demand for orthodontics: Orthodontic terminals are more expensive, and may rank relatively low in consumer choices. Domestic orthodontic demand is recovering slowly, which may put some pressure on the company's short-term performance growth.

3) Risk of loss of talent related to orthodontic program design: The company's orthodontic solution design team includes talents from various fields such as medical treatment, engineering, and informatization. If related talents are lost, it may have a negative impact on the company's operations.

4) Industry risks: the risk of increased competition in the invisible orthodontic market at home and abroad, policy risks such as domestic orthodontic consumables collection, industry compliance risks, etc.