Key points of investment

The company released its 2024 semi-annual report. 2024H1 revenue was 0.22 billion yuan, down 17.7% year on year; net profit to mother was 0.071 billion yuan, down 21.02% year on year. Among them, Q2 revenue was 0.103 billion yuan, down 13.9% year on year; net profit to mother was 0.032 billion yuan, down 21.4% year on year. Major US customers stocked goods in the first half of 2023 led to a high base, and customer inventories were gradually cleared in the second half of 2023. We believe that the low base combined shipment gradually recovered in the second half of the year, revenue growth is expected to recover in the second half of 2024, the stickiness of major customers continues to strengthen, and long-term growth is still certain.

Growth: The stickiness of major customers continues to strengthen & new products are being expanded. The certainty of long-term growth remains (1) Stryker's stickiness continues to strengthen, and the low base and return in delivery in the second half of the year are expected to drive revenue growth. Splitting the company's revenue, we found that the company achieved high year-on-year revenue growth in 2016, 2019, and 2022, respectively; in September 2023, Stryker went public 1788, but with relatively high customer inventories, the company's 2023H2 revenue declined month-on-month. 2024H1 revenue was 0.22 billion yuan, up 8.7% month-on-month, delivery gradually resumed, and the company's revenue increased month-on-month. We believe that the company's revenue growth is expected to resume in the second half of 2024, driven by a low base and the resumption of shipments. At the same time, in response to the risk of changes in international policies, the company's US subsidiary Omec has passed the certification of US customers and can manufacture and sell finished endoscopic products at the US subsidiary; the company's Thai factory was registered on August 9, 2023, and the Thai subsidiary's production capacity building and related certification progress will be accelerated in the second half of the year; the company is expected to mass-produce 4mm hysteroscopes for Stryker. We believe that the company has accumulated over a long period of time on the production side of endoscopic light sources and lenses, has high technical barriers, and continues to strengthen its adhesion with core customers. Growth continues, and long-term revenue growth certainty can still be expected. (2) Expand horizontally and vertically to open up the growth ceiling. Expanding vertically to complete machines, the acceleration of volume is expected to lead to high revenue growth in 2024. In February 2023, the 4K fluorescence endoscope system N700-F was launched; in October 2023, the company launched the 4K defogging endoscope TS88 for Stryker; in November 2023, the company launched the 4K endoscopic camera system N760; mass production and sales of second-generation 4K endoscopic systems began after the Spring Festival, and more than 100 sets have been shipped. Endoscopy products for key departments are expected to be registered and sold one after another in the second half of the year. We believe that with the launch of the company's products and the gradual increase in market acceptance, machine revenue growth can be expected in 2024; expanding horizontally into the optical sector, continued deepening cooperation is expected to drive continued high revenue growth. The company continues to deepen microscope cooperation projects with Danaher, etc., and we believe that with the expansion of major customers in the optical sector, it is expected to drive new growth.

Profitability: Revenue and investment continue to decline, net interest rate declines, and is expected to pick up with revenue growth in the second half of the year (1) Gross margin is expected to remain high in 2024. 2024H1's gross profit margin was 64.1%, down 0.03pct year on year; of these, 2024Q2 gross profit margin was 63.6%, up 0.05pct year on year. We believe that the company's gross margin is expected to increase in 2024, driven by changes in supply volume, further cost reduction due to improved technology, and increased sales volume of complete machines. (2) Revenue declined, sales and R&D investment continued, net interest rates declined, and product supply resumed in the second half of the year, and is expected to pick up. 2024H1's net interest rate was 31.66%, down 1.1 pct year on year. Among them, Q2 net interest rate was 30.95%, down 2.5 pct year on year. The main reason was the year-on-year decline in revenue, but under the promotion of new products and overseas factory construction, various expenses increased. We believe that in the second half of 2024, as the company's shipments resume steadily, various expense rates are expected to decline due to the scale effect, and net interest rates are expected to pick up.

Profit forecasting and valuation

Taking into account the continued inventory clearance of 2024H1 and the pace of production at the Thai factory falling short of expectations, we lowered our 2024 profit forecast. We expect total revenue for 2024-2026 to be 0.51/0.648/0.816 billion yuan, respectively, up 8.33%, 27.13%, and 25.93% year-on-year; net profit to mother was 0.17/0.224/0.29 billion yuan, respectively, up 16.99%, 31.13%, and 29.73%, respectively, corresponding to EPS, respectively It is 1.41/1.85/2.40 yuan, corresponding to 22 times PE in 2024, maintaining the “gain” rating.

Risk warning

Risk of fluctuations in Stryker's revenue; risk of commercialization of new products falling short of expectations; risk of fluctuations in the international environment and exchange rates; risk of policy changes.