Incidents:

On March 19, 2024, the company released its 2023 annual report. In 2023, it achieved operating income of 1,476 billion yuan, a year-on-year increase of 16.24%; realized net profit of 53.475 million yuan, a year-on-year decrease of 74.99%; realized adjusted net profit of 179 million yuan, a year-on-year decrease of 16.00%; and realized net profit without deduction of 39.16 million yuan, a year-on-year decrease of 79.05%.

Comment:

The number of completed cases increased rapidly, with a year-on-year increase of more than 30%

In 2023, the company achieved revenue of 1,476 billion yuan, an increase of 16.24% over the previous year. Among them, invisible correction solutions achieved sales revenue of 1,282 billion yuan, an increase of 5.99% over the previous year, and 245,000 cases, an increase of 33.22% over the previous year. The mainland China market achieved revenue of 1,331 billion yuan, an increase of 5.49% over the previous year; 21.2 million cases were reached, and the number of cases increased 15.28% year over year, making it the brand with the largest share of the invisible correction market for three consecutive years. The continued growth in the company's performance in mainland China is mainly due to the company's active sinking into the third- and fourth-tier markets, which has led to an increase in the number of cases.

The domestic market grew steadily, and the penetration rate of the third- and fourth-tier markets continued to increase, achieving a gross profit margin of 62.38% in 2023, which was basically the same; achieving a net profit margin of 3.30%, a year-on-year decrease of 13.45 pcts. In 2023, the company's sales expenses ratio was 33.41%, up 9.93pct year-on-year. The management expense ratio was 18.94%, up 4.37pct year-on-year. The R&D cost rate was 11.76%, which was basically the same as the previous year. The domestic market is in line with the decline in channels and early childhood correction strategies, and the product line ASP declined slightly, which is beneficial to a steady increase in the share of cases in third- and fourth-tier cities in 2023. It is expected that the downward trend will continue in 2024.

In 2023, the company launched a new generation of KiD front traction solutions, and the children's version of the product grew strongly. As demand for orthodontic treatment in children and adolescents increases, we expect this product line to continue to grow well in 2024.

Digital tools cover cost reduction and efficiency, and continuously optimize product competitiveness. In 2023, the company upgraded digital tools such as iOrtho cloud service, dental CBCT scanning process, and dental digital remote solution (MOOELI). In 2023, the company launched the ANFelLink Era Angel Interface System; provided an A-Treat digital correction solution design platform for Aditek in Brazil; launched a clean-free process for light-curing 3D printing resin; and optimized the generation process of digital models for the production and processing of braces. We infer that the increase in gross margin is due to the company's investment in technological transformation and digitalization to reduce costs and increase efficiency. As of December 31, 2023, the company has registered 185 patents and 16 software copyrights, and its core competitive advantage is obvious. During the 2023 Hangzhou Asian Games, a number of organizations within the company's UN set up a “Cloud Communication Support Camp” to further expand the influence of the product.

The international business is advancing rapidly and the market scope is continuously expanding

2023 was the first year of the company's official commercialization in the international market, and the international business achieved rapid development. Overseas markets achieved revenue of 145 million yuan in 2023, achieving 33,000 cases, accounting for 13.45% of cases. Since the company acquired Brazilian orthodontic manufacturer Aditek, it has continued to accelerate overseas market expansion, and has now set up local business teams in Europe, Australia, New Zealand, North America and other markets. The company's products and services cover more than 30 countries and regions around the world, and Europe has become one of the fastest growing markets. Currently, the company's overseas business expansion is still in its infancy, and it is expected that the size of the company's overseas market will increase dramatically in the future.

Profit forecast: We expect the company's revenue for 2024-2026 to be RMB 17.76/21.84 billion yuan (RMB 18.38/2.09 billion yuan before 2024/2025, respectively). The reason for the reduction was due to sales growth being affected by demand. The estimated net profit to mother was RMB 0.70/1.56/257 million yuan (the previous value of 2024/2025 was RMB 286/370 million yuan, respectively). The adjusted net profit is 1.83/2.06/3.07, respectively 100 million yuan (pre-2024/2025 values were 316.400 million yuan, respectively). The reason for the reduction was high investment in overseas markets, maintaining the “buy” rating.

Risk warning: industry price competition intensifies; policy risks; overseas market promotion falls short of expectations; product channel promotion falls short of expectations