Key points of investment

The company disclosed the 2024 semi-annual report. 2024H1 revenue was 5.187 billion yuan, up 2.2% year on year, net profit to mother was 0.484 billion yuan, up 5.6% year on year, net profit after deducting 0.474 billion yuan, up 15.1% year on year; of these, Q2 revenue was 2.658 billion yuan, up 0.9% year on year, net profit to mother was 0.273 billion yuan, up 4.2% year on year, net profit from non-return to mother 0.265 billion yuan, same This is an increase of 16.2%. We believe that in 2024, as the company continues to focus on its main business and optimize management, gross margin and net margin are expected to increase further, and profits are expected to continue to grow at a high rate.

Growth: Focus on the increase in revenue and profit of the main business, new product & channel expansion and construction, and the steady increase in revenue curves, and the share of the main business. Since the company proposed to focus on the main business in 2017 and shift from scale growth to efficiency growth, in 2018-2023, the company's two core sectors, medical equipment (revenue share increased from 22% to 42%) and pharmaceutical equipment (revenue share increased from 8% to 19%), that is, the company's medical devices and pharmaceutical equipment revenue share increased from 30% to 61% in 2018-2023, and the revenue share continued to increase. We believe that the company's medical device & pharmaceutical equipment sector has more space and higher gross margin. As the share of main business steadily increases, the company's revenue and profit are expected to grow at a high rate.

The release of new products will drive revenue and profit growth in the core sector. 2024H1 added 51 new authorized patents, including 8 invention patents; a total of 3,590 authorized patents and 243 invention patents; added 7 Class II and 1 Class III medical device registration certificate, and obtained a total of 102 Class II and 19 Class III medical device registration certificates, focusing on medical devices, pharmaceutical equipment, etc., and the new products continued to develop. We believe that the market is not aware enough of the company's product capabilities. It is generally believed that the company's products are not high-end enough and that the moat is low, but when analyzing the number of the company's patents, Xinhua Medical invents a large number of patents and has a high patent barrier. Driven by the release of new products, in 2018-2023, the company's share of the medical device and pharmaceutical equipment sector increased. At the same time, the gross margin of the medical device sector increased from 36.0% to 40.8%, and the gross margin of the pharmaceutical equipment sector increased from 15.7% to 27.1%, driving higher profit growth. We believe that the company has high technical barriers, and innovative products are expected to be a long-term revenue driver under continuous growth in R&D investment, thereby driving the company's high gross margin medical device and pharmaceutical equipment sector's revenue growth higher than the company's overall revenue growth (share increase) and faster profit growth (increase in gross margin within the sector).

Overseas expansion has seen initial results, and a long-term growth curve has been built. In 2023, Xinhua Healthcare's overseas revenue was 0.24 billion yuan, up 55% year on year, and the share of overseas revenue increased to 2.41%. 2024H1's overseas revenue increased 4.2% year on year, higher than the overall revenue growth. Overseas cooperation continues to advance. The President of Angola visited, deepened the foundation of cooperation between the two sides, and reached cooperation to supply a full set of disinfection and sterilization equipment in the CSSD supply room; the first batch of pharmaceutical filling lines entered the US market and achieved a “0 to 1” breakthrough; an Indonesian assembly plant was launched, and new cooperation was reached with customers from Argentina, Congo Gold, Morocco and other countries. We believe that although the company accounts for a relatively low share of overseas revenue, there is a large overseas market space. With the gradual expansion of the company's overseas channels, overseas is expected to form a new growth curve, opening up room for long-term growth.

Profitability: gross margin & net interest rate are expected to continue to increase

2024Q2's gross margin and net profit margin both increased year-on-year, and profits are expected to continue to be released at an accelerated pace in 2024. 2024H1's gross profit margin was 26.7%, down 0.76pct year on year; net profit margin was 9.6%, up 0.19pct year on year. Among them, Q2 gross profit margin was 28.5%, up 0.02 pct year on year and 3.85 pct month on month; net profit margin was 10.6%, up 0.19 pct year on year, and 2.15 pct month on month. 2014Q2's gross margin and net profit margin have increased. We believe that, driven by the company's state-owned enterprise reform and equity incentives, the company's net interest rate is expected to continue to rise in 2024 by continuing to focus on its main business and improving efficiency.

Profit forecasting and investment advice

Based on the above analysis, we expect the company's 2024-2026 revenue to be 11.022/12.153/13.253 billion yuan, respectively, up 10.09%, 10.26%, and 9.05% year on year; net interest rate to mother of 0.805/0.956/1.137 billion yuan, up 23.04%, 18.85%, and 18.92% year on year; corresponding EPS will be 1.33/1.58/1.87 yuan (12 times PE in 2024), respectively, and maintained” “Gain” rating.

Risk warning

Risk of policy changes; risk of commercialization of new products or market acceptance falling short of expectations; risk of increased industry competition; risk of falling short of expectations in managing mergers and acquisitions