Key points of investment:

Dengkang Dental: Deeply involved in oral health, the Cold Acid Spirit brand has a long history. High customer demand for dental care is driving up the willingness to pay for daily oral care. Effective selling points and form innovations (such as the replacement of compression versus compression) drive prices to rise quietly. The toothpaste industry is expected to continue to expand. Now is the right time for domestic brands to increase. The company has accumulated deep brand assets, the national brand image is deeply rooted in the hearts of the people, and its anti-allergic effects have successfully occupied consumers' minds. Based on dental health, the company is actively expanding categories and rapidly expanding new business; the offline distribution system has deep barriers, actively invigorates e-commerce channels, and innovates marketing to create new momentum for domestic products. I am optimistic that the company will continue to grow steadily. The net profit CAGR for 2019-2023 was 22.3%.

Industry: The willingness to pay and the selling point of efficacy drive the upgrading of consumption, and the rise of domestic goods is just right. According to Euromonitor statistics, the market size of China's oral care industry in 2023 was 49.2 billion yuan, an increase of 2.0% over the previous year. Increased willingness to pay, consumption upgrades, and category expansion drive the expansion of the industry. 1) Toothpaste industry review: the rise and fall evolution of foreign brands vs. domestic brands. China's toothpaste industry experienced three stages of development before 1990: three major domestic brands occupied the market, 1990-2000: foreign brands swept the Chinese toothpaste market, and after 2000: local brands broke through differentiation. 2) Toothpaste market: Effective selling points drive prices to rise quietly, and the industry is expected to continue to expand. Volume: The rate of adults brushing their teeth twice a day is expected to rise to 45% in 2025, driving an increase in toothpaste consumption. Price: The CAGR for daily-use industrial consumer toothpaste in 36 cities from 2013-2023 was 3.5%, and toothpaste brands raised the price range with enhanced efficacy selling points. 3) Toothpaste competition pattern: Currently, the share of domestic brands is steadily increasing. Driven by the demand for diversified efficacy selling points driving product iterative upgrading, channel diversification trends, and the rise of young consumer groups in the Z era, the share of domestic toothpaste brands is expected to gradually increase. 4) Oral care: The essence of frequent new categories is an increase in the willingness to pay for daily oral care.

Company: Actively expand products based on oral health, strengthen marketing to boost brand potential. 1) Toothpaste and toothbrush are still the dominant category, and new businesses are rapidly expanding. In 2023, the company's adult toothpaste and adult toothbrush revenue accounted for 78.1% and 11.3% respectively. In addition to the basic series, toothpaste launched medical research series, specialized research series, and pre-care series with stronger efficacy and higher prices; toothbrushes created explosions to promote product renewal. The company's children's series products have successfully built the “Bellerol” and “Sprout” brands. Children's toothpaste and toothbrushes are sold at a higher price, and the profitability is significantly higher than that of the adult series. In addition, the company actively lays out the electric toothbrush, dental care and beauty care products business, with revenue CAGR of 54.3% and 213.3% respectively in 2019-2023. 2) Actively promote brand renewal and innovate marketing to create new momentum for domestic products. The company targets Gen Z consumers, uses e-commerce interests as the main channel, uses the underlying logic of creating explosives, hires new ambassadors, and continues to strengthen its brand power.

Channel: The extensive offline layout is deeply rooted, and e-commerce multiple platforms are active. In 2023, the company's distribution, direct supply, and e-commerce channel revenue accounted for 72.3%, 3.9%, and 23.0% respectively. 1) Offline: Through the distribution system, there are deep barriers and a wide layout of terminal outlets. The company has built an in-depth marketing/distribution system, covering 100,000 retail terminals, and the offline channel is growing steadily. 2) Online: With multi-platform collaboration, e-commerce growth is expected to accelerate. E-commerce revenue CAGR in 2019-2023 was 53.2%. Thanks to multi-platform collaboration, Douyin sales rose rapidly. 22H1 Douyin sales accounted for 33.2%. According to Jiuqian statistics, 2023 Cold Acid toothpaste ranked 6th on Douyin and 8th on the Tmall platform respectively.

Profit forecasting and valuation. We expect the company's net profit to be 0.166, 0.191, and 0.216 billion yuan respectively in 2024-2026, with year-on-year growth rates of 17.8%, 14.6%, and 13.5%, respectively. The corresponding PE is 26, 23, and 20 times. Under the comparable company valuation method, if PE is given 31 times in 24 years, then Dengkang Dental's market value will be 5.1 billion yuan (18% market capitalization space), giving a “gain” rating.

Risk warning: The recovery of offline toothpaste consumption falls short of expectations, and e-commerce competition intensifies.