1H24 mining affects performance growth

The company's 1H24 operating income/net profit attributable to mother was 0.38/0.079/0.066 billion yuan, -29.7%/-37.3%/-40.3% YoY; 2Q24 operating income/net profit to mother was 0.158/0.024/0.017 billion yuan, -46.2%/-66.1%/-72.0% YoY. We believe the performance growth rate was mainly pressured by the decline in product prices after collection and the impact of sports medicine product returns and exchanges. We expect the 24-26 EPS to be 0.72/0.86/1.04 yuan. We gave the company an A-share PE valuation of 33x in 24 years (an A-share comparable 24-year Wind average of 33x), corresponding to a target price of 23.90 yuan; we gave the company a 24-year 20x H-share PE valuation (H-share comparable company's 24-year consistent expected average expectation average of 20x), corresponding to a target price of HK$15.88, maintaining a “buy” rating.

2Q24 management and R&D expense ratio increased year on year, gross margin decreased year on year, the company's 1H24 sales/management/R&D/finance expense ratio 29.33%/5.61%/17.80%/-2.37%, y-1.54/+2.10/+4.01/-1.45pct, 2Q24 sales/management/ R&D/ finance ratio 30.54%/8.71%/20.64%/-5.01%, -4.09/+4.67/+6.61-3.72pct. The company's 1H24/2Q24 gross profit margin was 72.51%/68.28%, -0.86/-7.47pct year on year. The decline in 2Q24 gross margin was mainly due to lower prices of related products after collection.

External environmental factors affect short-term performance. Waiting for subsequent performance to recover, 1H24's domestic revenue was 0.226 billion yuan, accounting for 59.3%; overseas revenue was 0.155 billion yuan, accounting for 40.7%. 1H24's share of overseas revenue increased by 24.3 pcts compared to 23, and overseas business has become an important source of revenue. 1H24's domestic business gross profit margin was 74.7%, and the overseas gross profit margin was 66.9%. 1H24's sales activities for orthopedic consumables and other products in hospitals were affected by external policies, compounded by price cuts and channel returns and exchanges after sports medicine collection. The year-on-year growth rate of performance was under pressure. We are waiting for the company's subsequent performance to recover.

A fully developed domestic orthopedic leader, maintaining a “buy” rating

According to the 1H24 interim report performance, we lowered the revenue and gross margin forecast for the company's joint, spine, and sports medicine products, and adjusted the cost rate forecast according to the mid-report situation. The estimated net profit for 24-26 was 0.28/0.33/0.4 billion yuan, +0%/+19%/+20% year-on-year. The current stock price of A shares corresponds to PE17x/14x/12x in 24-26, and adjusted the target price to PE 9x/8x/6x for 24-26 shares, and adjusted the target price to 23.90 yuan/H shares for A-shares HK$15.88 (previously $28.13 for A shares/HK$22.98 for H shares), maintaining a “buy” rating.

Risk warning: Sales of new products fell short of expectations; sales of collected products fell short of expectations.