Incident: The company released its 20224 mid-year report. In the first half of 2024, it achieved operating income of 6.218 billion yuan (yoy -9.12%), realized net profit of 0.072 billion yuan (yoy -84.17%), net non-return profit of 0.075 billion yuan (yoy -77.34%), and net cash flow from operating activities was -0.279 billion yuan (yoy -1101.44%), of which it achieved operating income of 3.245 billion yuan (yoy -1101.44%) in the first half of 2024 billion yuan (yoy -10.11%), net profit attributable to mother 0.049 billion yuan (yoy -83.42%), net profit not attributable to mother 0.052 billion yuan (yoy -73.28%).

Comment:

The ICL business grew steadily, and the share of revenue from the special inspection business continued to rise. In 2024, the company anchored the strategic position of “integrated medical diagnosis solution provider”, and continued to enrich solutions and expand efforts for key diseases and business models. 2024H1 launched 176 new testing projects, and the diagnostic service business achieved revenue of 2.362 billion yuan, of which ICL business revenue was 2.188 billion yuan (yoy +6.32%), maintaining steady growth. Looking at the development of the key disease business, infectious diseases increased by 93%, hematological diseases increased by 84%, and neurological and immune diseases increased by 53%, driving the continuous increase in the company's special examination business revenue. The 2024H1 company's special examination business achieved revenue of 0.961 billion yuan, accounting for 40.69% of the diagnostic service business revenue, an increase of 1.19 percentage points over the end of 2023. Looking at the business model, ① the cooperative joint construction business is developing smoothly. 2024H1 added 41 new co-construction laboratories, totaling more than 700, and business revenue increased 11% year on year; ② the development quality of precision centers continued to improve, and 2024H1 added 10 precision centers, with a cumulative total of 80, of which 38 achieved profits, and business revenue increased 35% year over year; ③ the O2O model is emerging, and 2024H1 “Xiaofei Test” joined hands with public hospital medical examination departments to pioneer a new “national joint inspection” model, with a total of over 700 cooperative customers. We believe that with the implementation of policies such as DRGS, the demand for medical institutions to improve medical efficiency and reduce costs and increase efficiency is expected to continue to be released. With a large-scale supply chain, complete testing programs, and leading technical platforms, the company's testing service business revenue is expected to continue to rise.

The digital intelligence layout is accelerated, operational efficiency is improved, and AI-driven inspection is more efficient and accurate. In 2024, the company will increase digital intelligence construction, comprehensively improve the lean, automated and intelligent laboratory, and optimize the innovative application of big data and AI technology in diagnosis, treatment and health management. On the one hand, the company consolidated the underlying digital technology, deepened the digital transaction system, and helped the company reduce costs and increase efficiency. The digital transaction system increased business process efficiency by 25% and supply chain operation efficiency by 90%. On the other hand, the company is extending digitalization to the business side, making testing more efficient and accurate through AI, such as the launch of IriSLIMS fourth-generation products. Through the integration of artificial intelligence algorithms and multi-modal biological data basic models, the efficiency of pathogen metagene reporting was increased by 10 times, and the automatic chromosome recognition rate was as high as 99%. We believe that the company's digital intelligence layout can not only improve operational efficiency, but also enable the development of accurate diagnosis and treatment. The company is expected to continuously strengthen its competitive advantage with its strong digital and informatization capabilities.

Profit forecast: We expect the company's revenue for 2024-2026 to be 13.275, 14.444 and 15.779 billion yuan, respectively, with year-on-year growth rates of -1.0%, 8.8%, and 9.2% respectively, and realized net profit to mother of 0.439, 0.701, and 0.926 billion yuan, with year-on-year increases of 42.9%, 59.7%, and 32.0%, respectively, corresponding to the current stock price PE, respectively.

Risk factors: quality control risk; channel business collection risk; risk of increasing the share of special inspection services in the diagnostic service business falling short of expectations.