Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 471 million yuan, a year-on-year decrease of 1.31%, and realized net profit of 146 million yuan, a year-on-year decrease of 20.19%, after deducting non-net profit of 136 million yuan, a year-on-year decrease of 19.20%. In the first quarter of 2024, the company achieved operating income of 118 million yuan, a year-on-year decrease of 20.74%, realized net profit of 38 million yuan, a year-on-year decrease of 20.68%, and realized deducted non-net profit of 36 million yuan, a year-on-year decrease of 21.40%.

On a quarterly basis, in the fourth quarter of 2023, the company achieved operating income of 94 million yuan, a year-on-year decrease of 31.21%, and net profit to mother of 0.28 million yuan, a year-on-year decrease of 35.54%, after deducting non-net profit of 0.25 million yuan, a year-on-year decrease of 35.62%. The company's performance growth rate in a single quarter has slowed, mainly due to the digestion of fluorescence laparoscopy inventory from major customers and delays in the launch of new systems.

In the first quarter of 2024, the company achieved operating income of 118 million yuan, a year-on-year decrease of 20.74%, a year-on-month increase of 24.68%, achieved net profit of 38 million yuan, a year-on-year decrease of 20.68%, a year-on-year increase of 39.68%, and realized deducted non-net profit of 36 million yuan, a year-on-year decrease of 21.40% and a year-on-month increase of 43.71%, showing a good recovery trend.

Increased share payments, loss of investment, and depreciation of plant and equipment affect short-term profit margins. In 2023, the company's sales expense ratio was 3.85%, up 0.59 pp year on year, management expense ratio 11.32%, 2.43 pp year on year, R&D expense ratio 14.00%, 1.44 pp year on year, financial expenses ratio -1.03%, up 1.73 pp year on year. As the company continued to expand its market expansion and new product development, the cost ratio increased during the period. In 2023, the company's gross profit margin was 63.72%, down 0.63pp year on year. The net profit margin was 30.21%, down 7.90 pp year on year. The company's net interest rate decreased due to factors such as increased equity incentive fees, loss of investment in joint ventures, and increased depreciation of plant equipment.

Under the influence of a high base, the endoscopy business has performed steadily, and domestic machine breakthrough+overseas new product release is expected to accelerate performance in 2024. In 2023, the company's medical endoscopic equipment revenue was 371 million yuan, up 1.42% year-on-year, and maintained steady growth under the high base formed by customer stocking during the same period. In September 2023, a new generation camera system for major overseas customers was officially launched. The original inventory of laparoscopes was quickly digested, and it is expected that a new round of purchase orders will be signed in the future. At the same time, cooperation on new products such as hysteroscopes and urethroscopes is progressing rapidly, which is expected to further contribute to incremental performance. In the domestic market, the company has achieved breakthroughs in the three channels of independent machines, Stryker cooperation, and Sinopharm Xinguang. Related products have been registered and certified one after another, and commercial sales are expected to begin in 2024. Driven by domestic machine breakthroughs and the release of new products from major overseas customers, we expect the company to break out of the inflection point of performance in 2024 and usher in accelerated growth.

Fluctuations in demand affect the growth rate of optical products, and more innovative products are expected to gradually mature. In 2023, the company's optical product revenue was 97 million yuan, down 11.63% year on year. The optical business fluctuated in the short term due to changes in downstream demand. Based on technical capabilities such as optical design, processing, coating, and inspection, the company develops various optical products and optical devices in medical optics, industrial lasers, and biometrics. Continuously expanding downstream application scenarios, it has begun to explore applications in various fields such as finance, medical care, military, education, etc., and is expected to gradually achieve large-scale production and sales in the future to achieve rapid growth.

Profit forecast and investment suggestions: According to the announcement data, we have adjusted the profit forecast. It is expected that overseas business is expected to advance smoothly, domestic business is expected to continue to accelerate, and the company's performance is expected to continue to grow rapidly. The company's revenue is expected to continue to grow rapidly in 2024-2026. (6.52 billion yuan and 852 million yuan before 24-25 years), up 38%, 31%, 30% year-on-year, and 2024-2026 net profit of 2.42, 3.14, and 404 million yuan (adjusted 2.55 and 4.04 billion yuan for the previous 24-25 years) $332 million), up 66%, 30%, and 29% year-on-year. The company's current stock price corresponds to about 23, 17, and 14 times PE from 2024-2026. Considering that the company is a leading enterprise in the domestic hard mirror industry, the company's performance is expected to continue to be realized in the future as more overseas orders continue to be harvested and the domestic machine business grows rapidly, maintaining a “buy” rating.

Risk warning: Market competition risk, risk of ODM cooperation model with Stryker, risk that public data used in research reports may be delayed or not updated in a timely manner.