The year-on-year decline in 2Q24 performance narrowed month-on-month, and I am optimistic about subsequent recovery

The company's 1H24 operating income/net profit attributable to mother was 0.198/0.086/0.076 billion yuan, -11.8%/-21.7%/-30.8% YoY; 2Q24 operating revenue/net profit attributable to mother/ net profit after deduction of 0.108/0.046/0.041 billion yuan, -6.1%/-27.9% YoY. We believe that 2Q24 consumer medical demand has not fully recovered, and the performance growth rate is still under pressure due to the decline in the number of surgeries, but the year-on-year decline in 2Q24 performance narrowed month-on-month. We expect the 24-26 EPS to be 1.11/1.37/1.65 yuan. We gave the company a PE valuation of 29x in 2024 (comparable to the company's 24-year average expectation of 29x), corresponding to a target price of 32.23 yuan, maintaining a “buy” rating.

2Q24's sales expense ratio increased year-on-year, and gross margin decreased 1H24 sales/management/R&D/finance expense ratios were 25.88%/6.51%/9.87%/-0.18%, respectively, +2.13/-0.28/-0.12/+0.07pct; 2Q24 sales/management/R&D/finance expense ratios were 27.51%/6.20%/10.44%/-0.09%, respectively, +3.34/ -1.56/+0.11pct.

The gross margin of 1H24/2Q24 was 86.73%/86.25%, respectively, -3.57/4.54pct. We believe that the decline in gross margin was mainly due to the impact of collection.

The dental business is expected to benefit from the recovery in demand for diagnosis and treatment. 1H24's oral repair film revenue is expected to increase steadily in 24 years by 0.096 billion yuan, -9.8% year on year; gross margin is 87.6`%, -2.73 pct year on year. 1H24 Consumer medical demand has not fully recovered, the number of surgeries has declined, and the growth rate of dental business revenue is slowing down. We expect that with the further recovery of 2H24 consumer medical demand, the number of surgeries is expected to gradually improve. The company's revenue growth rate for oral repair membranes and bone powder is expected to return to 5% year-on-year in '24.

Active biological bone is expected to be released in 24 years. The revenue growth rate of meningeal products is affected by collection. Clinically, the company's new active biological bone product has proven to be superior to traditional bone repair materials. Compared with foreign competitors, it is expected to reduce side effects, has high R&D barriers, and is a promising variety. The company completed the conversion verification of active biological bone in '23 to meet product marketing and sales needs. We expect to gradually release active biological bone starting in '24. 1H24's meningeal supplement revenue was 0.07 billion yuan, -23.3% year on year; gross profit margin was 92.20%, -0.53 pct year on year. The growth rate of meningeal revenue has declined due to collection. We expect meningeal revenue to drop 12% year over year in '24.

It is expected to benefit from the recovery of diagnosis and treatment and maintain a “buy” rating

We expect the company's net profit to be 0.2/0.246/0.296 billion yuan in 24-26 years, +4.8%/+22.9%/+20.6% year-on-year. The current stock price corresponds to PE 19x/16x/13x, adjust the target price to 32.23 yuan (previous value 37.15 yuan), and maintain the “buy” rating.

Risk warning: The progress of new products is not as good as expected; the volume of collected products is lower than expected.