Core views

The company announced 2024H1 results, and the revenue and number of overseas cases exceeded expectations. In the short term, the company's main revenue and profit are contributed by the domestic market. It is expected that the growth rate of the invisible orthodontic industry in 2024 will still be affected by the domestic consumption environment, and the number of new domestic cases will maintain single-digit growth. International business has become an important driving force for the company. The company has set up a local business team with rich experience in the orthodontic market in Europe, Australia, New Zealand, North America, etc., and it is expected that the number of the company's international business cases will continue to grow rapidly in 2024.

occurrences

The company announced 2024 interim results

24H1 achieved revenue of 0.862 billion yuan (+39.8%), net profit of 0.1 billion yuan (-49.7%), and adjusted profit of 0.072 billion yuan (+95.8%). EPS 0.13 yuan. The Board did not pay any interim dividends.

Brief review

24H1 Revenue and Overseas Case Numbers Exceed Expectations

The company's 24H1 revenue and number of overseas cases exceeded expectations. The company's revenue in the first half of the year was about 0.861 billion yuan (+39.8%), and the growth rate exceeded market expectations. The main reason was that the number of overseas cases of the company's invisible support exceeded expectations. By region, the revenue from the Chinese market is about 0.633 billion yuan (+10.1%), and the revenue from the international market is about 0.228 billion yuan (+452.5%). The total number of cases completed by 24H1 was about 0.1529 million (+60.3%), of which the number of cases reached in the Chinese market was about 0.0953 million (+10.8%), and the number of cases reached in the international market was about 0.0576 million (9400 cases in the same period last year, +512.8% compared to the same period last year).

The company's net profit for the first half of the year was 14.726 million yuan (-49.7% YoY). The adjustment items mainly included share payments of 36.08 million yuan, amortization of 3.63 million yuan related to acquisitions, fair value profit and loss of 9.37 million yuan in confirmed profit and loss related to equity investments in unlisted companies, and 7.84 million yuan in foreign exchange profit and loss. The total amount of adjustments was about 56.92 million yuan.

24H1's adjusted net profit was approximately $71.65 million (+95.8%). Judging from the operating caliber, the adjusted segment operating profit of the Chinese market was 0.112 billion yuan. The adjusted segment operating loss in the international market was approximately $0.114 billion, mainly due to the company's continued expansion in the international market.

By business, 24H1 achieved revenue of 0.6 billion yuan of invisible correction solutions (mainly referring to domestic invisible correction solutions), with a year-on-year revenue of +8.5%, and a gross profit margin of 65.0%, an increase of 3.3 percentage points over the previous year. The reason why the revenue growth rate of invisible correction solutions (+8.5%) is lower than the growth rate in the number of cases (+10.8%) is expected to be mainly due to changes in the company's product structure, and the average domestic sales price of each product line remains stable; the year-on-year increase in gross margin is mainly due to a decrease in unit costs due to R&D.

Product sales business revenue of 0.252 billion yuan (mainly including mouth scanners sales, Brazilian Adite k revenue, the company's overseas sales of bracket braces, etc.), +363.1% year-on-year, mainly due to the rapid increase in the number of cases of invisible orthodontics sold by the company overseas, achieving a total of 0.0576 million cases in the first half of the year; gross margin was 57%, an increase of 14.9 percentage points over the previous year, mainly due to the scale effect brought about by international business expansion.

Business revenue from other services (mainly referring to dental services provided by the company's dental clinics) was 9 million yuan, +4.9% year-on-year, with a gross profit margin of 39.8%, an increase of 23.6 percentage points over the previous year.

As the company's business expanded in the first half of the year, sales expenses and management expenses increased a lot. Among them, sales expenses were 0.341 billion yuan, +68.1% year on year, management expenses were 0.158 billion yuan, +30.9% year on year, and sales expenses ratio for the first half of the year were 39.8% (+6.72 pct year over year) and 18.4% (-1.25 pct year on year), respectively.

China's leaders in invisible orthodontics are entering the international market. The logic company, which is optimistic about the long-term growth of overseas business, has now built a complete and differentiated product matrix, continuously refined and upgraded products, upgraded and innovated overall digital orthodontic solutions, and continued to deepen the moat. In the short term, the company's main revenue and profit are contributed by the domestic market, and the number of new domestic cases will maintain a steady growth rate in 2024.

According to Insight Consulting data, the number of domestic angel cases in the 2021-2023 era had a market share of over 41%, ranking first in the country.

The international market space is larger. The company accelerates the layout of overseas markets and opens a second growth curve. The invisible orthodontics industry started earlier in the European, American and Australian markets, and the consumer power is stronger. The penetration rate of invisible orthodontics is higher than at home, and there is more market space. The company is the manufacturer with the second largest number of invisible orthodontic cases in the world. Currently, Invisalign has a high market share in Europe, America, and Australia, and the overall competitive pattern is good. Times Angel products are expected to become the second-choice brand for some clinics.

In 2022, the company launched a global strategy, began team building and product localization development, and acquired 51% of the shares of Aditek, a leading manufacturer of orthodontic products in Brazil; in 2023, the number of cases in the company's international market was 0.033 million, accounting for 13.5%, and the number of 24H1 international cases was 0.0576 million, which further increased to 37.7%. In the next few years, the number of the company's overseas cases is expected to surpass domestic cases, gradually reversing losses and contributing to increased profits. In the future, the company may build production, R&D, and design bases overseas to improve the efficiency and stability of overseas business operations. In the short term, it may increase the operating costs of overseas business; in the long run, the company's overseas business will contribute the main revenue and profit sources, and enhance the certainty that the company will grow into a leading global orthodontic enterprise.

More and more orthodontists from around the world choose Times Angel. The company has efficient and high-quality invisible correction solution design, perfect and high-quality logistics services, an excellent product portfolio, and a dedicated and professional localized service team. Compared to Europeans and Americans, East Asians have more complex cavities and smaller bodies, resulting in smaller dental arches and more difficult orthodontics. The company has accumulated experience with a large number of complex cases in China, which gives the company a certain advantage in going overseas. Combining rich experience and digital processes, the company has accumulated the ability to design efficient and high-quality invisible correction solutions, which can improve the efficiency of doctors' entire invisible correction process. China's labor costs are low, and the company has cost advantages in production, case design, etc. At the same time, it is expected that the overseas delivery cycle of products will not be weaker than Invisalign. At present, the company has set up localized direct sales business teams in the US, Europe and Australia to strengthen localization services.

The number of domestic cases is expected to maintain a steady growth rate in 2024. In the short term, the company's main revenue and profit are contributed by the domestic market. The company has established a stable market position in Tier 1 and 2 cities. It is expected that the growth rate of the invisible orthodontic industry in 2024 will still be affected by the consumer environment, and the number of new domestic cases will maintain single-digit growth. International business has become an important driving force for the company. The company has set up a local business team with rich experience in the orthodontic market in Europe, Australia, New Zealand, North America, etc., and it is expected that the number of the company's international business cases will grow rapidly in 2004.

Profit forecasting and investment advice

We predict that in 2024-2026, the company's revenue will be 1.781 billion yuan, 2.081 billion yuan, and 2.441 billion yuan, respectively, up 20.64%, 16.89%, and 17.27% year on year; net profit to mother will be 0.068 billion yuan, 0.104 billion yuan, and 0.155 billion yuan, respectively, up 26.81%, 53.71%, and 48.24% year on year, respectively.

Based on the closing price on September 20, 2024 (HK$59.15 per share), the 2024-2026 PE was 134, 87, and 59 times, respectively. Maintain a “buy” rating.

Risk analysis

1) Risk of overseas deployment falling short of expectations: Overseas doctors' approval and trust in the company's digital orthodontic solutions takes a certain amount of time and case accumulation, causing progress to fall short of expectations.

2) Risk of slow recovery in demand for orthodontics: Orthodontic terminals are more expensive, and may rank relatively low in consumer choices. Domestic orthodontic demand is recovering slowly, which may put some pressure on the company's short-term performance growth.

3) Risk of loss of talent related to orthodontic program design: The company's orthodontic solution design team includes talents from various fields such as medical treatment, engineering, and informatization. If related talents are lost, it may have a negative impact on the company's operations.

4) Industry risks: the risk of increased competition in the invisible orthodontic market at home and abroad, policy risks such as domestic orthodontic consumables collection, industry compliance risks, etc.