1H2024 profit is in line with expectations

The company announced 1H2024 results: revenue of 0.861 billion yuan, +39.8% year over year; net profit to mother of 22.47 million yuan, corresponding to earnings per share of 0.13 yuan, or -30.4% year on year; adjusted net profit of 71.65 million yuan, +95.8% year over year.

Development trends

The number of domestic cases achieved has maintained a good year-on-year increase. In the first half of 2024, the number of domestic cases completed by the company increased 10.8% year-on-year to 95,300. Revenue in the Chinese market increased 10.1% year-on-year to 0.633 billion yuan. According to the company's announcement, the average sales price of each product line remained stable. The adjusted operating profit of the Chinese market increased 67.1% year on year to 0.112 billion yuan, and the adjusted operating profit margin was 17.7%, up 6 percentage points year on year.

Increase the layout of international business. In the first half of 2024, the number of cases completed by the company overseas increased by 512.8% year-on-year to 57,600, accounting for about 37.7% of the total number of cases. As of June 30, the company has successfully reached thousands of dentists in more than 50 countries and regions around the world. International market revenue increased by 452.5% year-on-year to 0.228 billion yuan, accounting for about 26.5% of total revenue. The adjusted segment operating loss in the international market was approximately $0.114 billion, mainly due to increased sales expenses due to the company's continued expansion in the international market.

The gross margin increased year over year, and the sales expense ratio increased. In the first half of 2024, gross margin was about 62.4%, an increase of 3.1 percentage points over the previous year, mainly due to lower unit costs of invisible orthoses brought about by R&D and economies of scale brought about by international business expansion. In the first half of the year, the sales expense ratio was 39.8%, up 6.7 percentage points from the previous year. The increase was mainly due to the further layout of international business. In the first half of the year, the management expense ratio was 18.3%, down 1.2 percentage points from the previous year.

Profit forecasting and valuation

We kept our 2024 and 2025 revenue forecasts unchanged at 1.75 billion yuan and 2.12 billion yuan respectively, but considering the increase in sales expenses that may result from the company's international expansion, we lowered our 2024 adjusted net profit forecast by 9.3% to 0.19 billion yuan, leaving the adjusted net profit forecast unchanged at 0.22 billion yuan for 2025. Considering that the current global penetration rate of invisible orthodontics still has high room for development and the company's leading position, we still maintain a “outperforming industry” rating. Considering that the company's overseas expansion exceeds expectations, future overseas space can be expected. According to the DCF model, we maintain a target price of HK$85.0, which is 38.4% upward compared to the current stock price.

risks

The international business fell short of expectations, the cost of international expansion exceeded expectations, there was a risk of exchange losses, and domestic consumption was weak.