Core views

The company's performance for the first half of 2024 was in line with expectations. The Q2 revenue growth rate was slower than in Q1, mainly affected by factors such as increased industry compliance requirements and the suspension of medical equipment procurement in some hospitals due to unimplemented medical equipment upgrading policies. With the gradual implementation of medical equipment upgrading policies and the gradual disbursement of supporting funds, industry bidding is expected to gradually resume. Looking ahead to Q4 and next year, if equipment updates are implemented in a wider range and intensity, the industry's demand for equipment procurement is expected to improve, and the company's performance is expected to grow well.

Since the launch of the company's new product, the AQ-300, has continued to be refined and clinical acceptance has continued to improve, and the number of breakthroughs in tertiary hospitals is expected to continue to grow.

occurrences

On August 22, 2024, the company released its 2024 semi-annual report

According to the company's announcement, in the first half of 2024, the company achieved revenue of 0.354 billion yuan, a year-on-year increase of 22%; realized net profit to mother of 5.66 million yuan, a year-on-year decrease of 85%; and realized net profit deducted from non-mother - 1.35 million yuan, a year-on-year decrease of 105%. Net cash flow from operating activities was -0.129 billion yuan (-29.79 million yuan in the same period last year), and basic earnings per share were 0.04 yuan/share.

Brief review

Short-term tenders are under pressure, and performance is in line with expectations

The company's revenue for the first half of 2024, net profit to mother, and net profit after deduction were 0.354 billion yuan (+22%), 5.66 million yuan (-85%), and -1.35 million yuan (-105%), respectively, within the performance forecast range, in line with expectations. 24Q2's single quarter revenue, net profit attributable to mother, and net profit after deducting non-return to mother were 0.184 billion yuan (+13%), 2.9 million yuan (-87%), and -1.1 million yuan (-106%), respectively. Profit declined sharply in the first half of the year, mainly affected by equity incentive expenses. Net profit to mother after excluding share payments was 47.74 million yuan (+7%).

The Q2 revenue growth rate declined compared to Q1. It is expected to be mainly affected by factors such as increased compliance requirements in the medical industry and the suspension of medical equipment procurement in some hospitals due to unimplemented medical equipment upgrading policies.

By business, revenue from endoscopy equipment in the first half of 2024 was 0.342 billion yuan, up 23% year on year; revenue from endoscopic diagnosis and treatment consumables was 0.069 billion yuan, down 9% year on year; revenue from endoscopy maintenance services was 0.042 billion yuan, down 3% year on year. Currently, revenue is small. In terms of regions, domestic sales revenue in the first half of the year was 0.286 billion yuan (+22%); export revenue was 0.068 billion yuan (+22%), accounting for 19% of main business revenue.

Driven by the gradual implementation of equipment renewal policies and the release of AQ-300, performance in the second half of the year is expected to improve compared to the first half of the year. As medical equipment upgrading policies are gradually implemented and supporting funds are gradually put in place, industry bidding is expected to gradually resume. Looking ahead to Q4 and next year, if equipment upgrades are implemented in a wider range and intensity, the industry's demand for equipment procurement is expected to improve, and the company's performance is expected to grow relatively well. Since the launch of the company's new product, the AQ-300, has continued to be refined and clinical acceptance has continued to improve, and the number of breakthroughs made by tertiary hospitals is expected to continue to grow. The company's many new lenses, such as fine lenses, split upper gastrointestinal endoscopes, and bifocal endoscopes, were approved in 2023. New products launched in 2024 include hyperspectral intelligent imaging platforms, 140x optical magnification endoscopes, and 4K bifocal endoscope series (65X close-focus amplification). The product portfolio is further enriched and product performance is continuously optimized, which is expected to further enhance the company's core competitiveness in the middle and high-end markets. In addition, the company continues to expand overseas markets, and has obtained approval for a series of products in Russia, Brazil, South Korea, etc. AQ-300 has been approved in the European Union, which is expected to drive high growth in overseas markets in the second half of the year.

Gross margin declined due to adjustments in accounting standards. Investment in R&D and marketing continued to increase in the first half of 2024. The company's gross margin was 71.46%, down 4.82 percentage points from the previous year. It is expected to be mainly due to the adjustment of accounting standards. According to the new accounting standards issued by the Ministry of Finance in March 2004, maintenance costs and withholding expenses related to the company's warranty are included in operating costs from the original sales expenses.

The sales expense ratio was 34.69%, up 0.51 percentage points from the previous year; the management expense ratio was 16.60%, up 2.68 percentage points from the previous year, mainly due to the increase in employee remuneration, share payments and travel expenses; the financial expenses ratio was -0.11%, up 0.61 percentage points from the previous year; and the R&D expense ratio was 24.7 0%, up 0.63 percentage points from the previous year. Net operating cash flow for the first half of 2024 was -0.129 billion yuan (-29.79 million yuan in the same period last year), mainly due to slowing repayments and increased investment. The number of inventory turnover days in the first half of the year was 388.27 days, a year-on-year decrease of 111.18 days, and turnover efficiency improved; the number of accounts receivable turnover days was 121.16 days, an increase of 33.27 days over the previous year, mainly due to the continuous expansion of the company's sales scale. At the same time, the first half of the year was affected by the overall market environment and caused by a slowdown in repayment speed. The rest of the financial indicators are generally normal.

The performance of the AQ-300 product continues to be optimized, and the variety of lenses continues to be enhanced. The company officially launched the next generation 4K flexible endoscope system A Q-300 in November 2022, achieving breakthroughs in key performance such as optical amplification and mirror control. In terms of product performance, the company continuously iterated the AQ-300 series based on clinical feedback, and met clinical operation requirements in various aspects such as handling performance, operation feel, and stability. The company launched several new lens types in 2023, including various fine mirror products such as the new UHD series duodenoscope and ultra-fine endoscope, UHD series bifocal endoscopes, split upper gastrointestinal endoscopes, etc., further enriching the company's range of lenses. In addition, the company continues to promote the construction of a marketing system, continuously deepening the market coverage and breadth of the company's products. At the same time, using a combination of online and offline methods, a series of special activities including endoscopy training courses, case sharing, and standardized diagnosis and treatment lectures have been carried out around the AQ-300 series, which have received good feedback from experts, customers and dealers. Taken together, driven by improved product performance, continued diversification of lenses, and continuous strengthening of academic promotion and channel construction, the company's AQ-300 is expected to achieve rapid deployment in tertiary hospitals with policy support encouraging domestic substitution and stricter import verification.

In the short term, we are optimistic about the company's flagship product, the AQ-300, to accelerate domestic replacement. In the short term, the company's flagship product, the AQ-300, has improved significantly in performance and continues to be rich in lens types. With the gradual implementation of medical equipment upgrading policies, it is expected that rapid deployment will be achieved in tertiary hospitals. In the medium term, the company continues to deploy new products such as 3D digestive endoscopes, endoscopic robotic systems, and disposable endoscopes, which is expected to contribute new profit growth points. Looking at the long term, on the one hand, there is strong demand for gastrointestinal cancer screening. Currently, the domestic penetration rate is still low, and there is plenty of room for the company to increase its domestic market share; on the other hand, the company is actively exploring overseas markets, and there is plenty of room for long-term growth. Considering the increase in industry compliance requirements, the uncertainty of the pace of implementation of medical equipment trade-in policies, and the impact of equity incentive fees on apparent net profit, we lowered our profit forecast for 2024-2026. The company's revenue for 2024-2026 is expected to be 0.906 billion yuan, 1.28 billion yuan, and 1,802 billion yuan, respectively, up 34%, 41% year-on-year, and 41% year-on-year, respectively. The net profit for 2024-2026 is expected to be 0.029 billion yuan and 0.119 billion yuan, respectively billion yuan and 260 million yuan, year-on-year growth rates were -50%, 313%, and 118%, respectively. Maintain a “buy” rating.

Risk warning

Risk of increased compliance requirements in the medical industry; there is some uncertainty about the pace of implementation of equipment upgrading policies, and there is a possibility that performance will fall short of expectations; risk of high inventory; risk of technological innovation and R&D failure: risk of loss of core technology; risk of loss of R&D personnel; risk of market expansion and market competition (competitive risk caused by the subsequent domestic launch of competitor Olympus's next-generation X1 lens); risk of restrictions on procurement of some imported raw materials (the company's main suppliers of lenses, light sources, and other raw materials for endoscopic equipment are from the US and Japanese original manufacturers Agents or traders, if relevant foreign suppliers stop exporting these raw materials to domestic enterprises in the future due to special trade reasons, may adversely affect the company's production and operation in the short term); quality control risks; tax preferential policy changes; accounts receivable recovery risk (if the company's customer's future business conditions or cooperative relationships with the company change adversely, accounts receivable recovery risk will increase, thereby adversely affecting the company's business performance); risk of exchange rate fluctuations; risk of asset restructuring and impairment of goodwill; risk of product certification; and geopolitical risk.