Core views

The 2023 results were in line with expectations, and both revenue and profit declined, mainly due to the slowdown in the promotion of the new Stryker 1788 product, which had a certain impact on the company's order delivery.

Looking ahead to the second quarter, the company's revenue and profit base declined compared to Q1, and the year-on-year growth rate in Q2 is expected to increase compared to Q1. Looking ahead to the whole year, along with the launch and sale of Stryker 1788, the company's orders for fluorescence lenses and light source modules are expected to continue to be delivered. At the same time, the product range of cooperation between the two parties continues to be rich. The new 4mm hysteroscope is expected to be officially launched on the market in June this year, and cystoscopy, pediatric laparoscopy, and open surgical exoscopes are also under development. In terms of the complete machine business, the company's second-generation complete machine system has been promoted clinically and sales have been formed; at the same time, the company's channel layout is diversified. While building its own brands and channels, it has also reached in-depth cooperation with companies with brands and channels such as Sinopharm Devices and China Stryker, etc., and the whole machine products are expected to be rapidly released.

occurrences

On April 24, 2024, the company released its 2023 annual report and 2024 quarterly report. The company's 2023 revenue, net profit to mother, and net profit after deduction were RMB 4.71, 1.46, and 136 million yuan respectively, down 1%, 20%, and 19% year-on-year respectively. Basic earnings per share were 1.20 yuan/share. The 2023 profit distribution plan is: cash dividend of RMB 5.50 (tax included) for every 10 shares. In the first quarter of 2024, the company's revenue, net profit attributable to mother, and net profit not attributable to mother were $1.17, 0.38, and 0.36 million, respectively, down 21%, and 21% year-on-year, respectively. Basic earnings per share were 0.32 yuan/share.

Brief review

The performance was in line with expectations. Short-term order delivery was affected by the slowdown in the promotion of new Stryker products. The company's 2023 revenue, net profit to mother, and net profit after deducting non-return to mother were 4.71, 1.46, and 136 million yuan, respectively, down 1%, 20%, and 19% year-on-year, respectively, and the results were in line with expectations. The decline in net profit exceeded the decline in revenue, mainly due to the year-on-year increase in the company's share payment expenses, depreciation expenses for plant and equipment, and investment losses in joint ventures.

2024Q1 revenue, net profit attributable to mother, and net profit not attributable to mother were $117 million (-21%), $38 million (-21%), and $36 million (-21%), respectively. Both 2023Q4 and 2024Q1 saw a year-on-year decline in revenue and profit, mainly due to Stryker's launch and preparation of the 1788 next-generation endoscopic system in the second half of 2022, and the company's fluorescence laparoscope shipments increased dramatically. Revenue in 2022 increased 54% year over year, and also caused a sharp rise in fluorescence laparoscopy inventory for US customers. However, 1788 was actually delayed until September 2023. After listing, customers mainly consumed inventory for a long period of time, causing the company's fluoroscopic shipments to decline in the second half of 2023.

By product, medical endoscopic equipment revenue was 371 million yuan (+1%), accounting for 79% of main business revenue; optical business revenue was 97 million yuan (-12%), accounting for 21% of main business revenue. It is estimated that downstream demand for biometrics, industrial lasers, etc. will be greatly affected by the economic environment. By region, domestic business revenue was 141 million yuan, up 26% year on year, accounting for 30% of main business revenue. Among them, the domestic market for endoscopic products grew strongly, and revenue increased by about 83% year on year, mainly due to the company actively exploring the domestic market, improving the marketing network system, and enhancing brand influence. Foreign business revenue was 327 million yuan, down 10% year on year, accounting for 70% of main business revenue.

Looking ahead to the second quarter and the whole year, ODM orders are expected to continue to be delivered, and the complete machine products are expected to be rapidly released. The company's revenue and profit base for the same period of the previous year declined compared to the first quarter, and the growth rate is expected to improve marginally in the second quarter. Looking ahead to the whole year, along with the launch and sale of Stryker's new product 1788, the company's orders for fluorescence lenses and light source modules are expected to continue to be delivered; at the same time, the product categories of cooperation between the two parties will continue to be rich. The new 4mm hysteroscope is expected to be officially launched on the market in June 2024, and cystoscopy, pediatric laparoscopy, and open surgical endoscopes are also being developed. In terms of the complete machine business, the company's second-generation complete machine system has now been promoted clinically and sales have been formed; at the same time, the company's channel layout is diversified. While building its own brands and channels, it has also reached in-depth cooperation with companies with brands and channels such as Sinopharm Devices and China Stryker, etc., and the whole machine products are expected to be rapidly rolled out. Furthermore, in 2024, the company will complete the construction of production lines for the US subsidiary and the Thai subsidiary to achieve overseas production of endoscopes, which is expected to reduce the uncertainty of the external policy environment after commissioning.

Gross margin is maintained at a high level, and cost control is good

The company's gross margin in 2023 was 63.72%, which was basically the same as the previous year. The sales expense ratio is 3.85% (+0.59pct), mainly due to the company's continuous increase in product promotion and sales channel construction, and the increase in sales staff remuneration expenses, share payment expenses, etc.; the management expense ratio is 11.32% (+2.43pct), which is mainly affected by a combination of factors such as management remuneration expenses, share payment expenses, second-phase plants and increased depreciation of fixed assets used for management; the financial expense ratio is -1.03% (+1.73pct), which is mainly affected by the reduction in exchange income from year-end reconciliation; the R&D expense ratio is 14.00% (+1.44pct), mainly due to the increase in R&D investment due to a combination of the number of R&D personnel and remuneration expenses, increase in share payments, and the development of new projects. Net operating cash flow was $158 million (+51%), mainly due to increased sales repayments. The number of inventory turnover days was 325.82 days, an increase of 109.67 days over the previous year. It is expected to be mainly due to the company's increase in material reserves to cope with the long supply chain cycle, supply-side risks, and the complex and changing external environment. Other financial indicators are generally normal.

In the first quarter of 2024, the company's gross margin was 64.50%, which was basically the same as the previous year. The sales expense ratio is 3.70% (+1.44pct), the R&D expense ratio is 12.70% (+1.16pct), the management expense ratio is 9.65% (+1.03pct), and the financial expense ratio is -1.77% (-3.32pct). R&D expenses and sales expenses increased slightly year-on-year, mainly due to the company's increased investment in developing new products, developing the domestic market, and improving the marketing network system. Net operating cash flow was 40 million yuan (+120%), mainly due to the gradual digestion of reserves in the previous period, demand for material procurement declined in the current period, material purchase payments decreased year-on-year, and the company's overall repayment efficiency improved. Other financial indicators are generally normal.

Deeply involved in medical optics for 20 years, the company is a leading domestic upstream manufacturer of fluorescent hard lenses. In the short to medium term, the company continues to supply new fluorescent lenses and upgraded light source modules to Stryker. In the future, the ODM business is expected to maintain steady growth as the variety of cooperative lenses continues to expand. Furthermore, the company's independent machine brands are gradually gaining strength, and the optical business launches new products such as contactless palm veins, all of which are expected to increase the company's performance. In the long run, the company has significant advantages in optical technology and strong business scalability. In the future, by continuing to expand new customers and new application fields, it is expected to open up a ceiling of growth. We expect the company's revenue growth rates to be 30%, 23%, and 22% respectively in 2024-2026, and the net profit growth rates to mother of 35%, 27%, and 27%, respectively. Maintain a “buy” rating.

Risk warning

The risk that the progress of signing new orders falls short of expectations; the risk that the company's new product promotion falls short of expectations; the risk that the company's R&D investment is large and future R&D results are uncertain; the risk that changes in the international trade environment may have a large impact on the company's overseas sales (the company's products account for a relatively high share of foreign exports. The international political and economic situation is complex and varied in recent years, and changes in the overall trade environment and policy are uncertain, which may adversely affect the company's business development); the risk of exchange rate fluctuations: the whole machine business is affected by domestic Risks affected by industry policy factors such as increased compliance requirements in the medical industry and risks that marketing and sales fall short of expectations; management risks brought about by the expansion of the company's business scale.