As a leading enterprise in the field of molecular diagnostics, the company has solid reserves in terms of technology platforms and product pipelines, and has shown outstanding response speed, especially in dealing with public health events. Since 2024, the company's previous disruptive factors such as high base and depreciation have been clarified, and regular business has gradually returned to the right track. At the same time, the international strategic layout has achieved initial results, and there is great potential for future growth. We continue to be optimistic about the company's long-term development space.

Stock price and performance review: Disturbances have been cleared, stock price at the beginning of the repair cycle: Since 2020, stock prices have been driven by a sharp increase in COVID-19 testing business. During this period, the stock price once rose by more than 650%, and PE-TTM reached a maximum of 147 times. Since 2023, with the gradual liquidation of the COVID-19 testing business, the company's revenue has declined sharply. At the same time, asset and credit impairment dragged down the profit side, and the company's stock price fell rapidly. By 2024, disruptive factors such as high base and depreciation were cleared, and the company's business gradually returned to the right track, and the stock price then entered a steady recovery period. As of October 21, 2024, the company's stock price had risen by more than 35% since 2024.

Revenue and net profit: In 2020-2022, the company experienced significant growth in revenue and profit, driven by the COVID-19 testing business. Without considering the impact of this factor, in 2018-2023, the company's revenue CAGR was 11.8%; it is worth noting that disruptive factors such as COVID-19 testing for 2024H1 companies have gradually been cleared, and revenue and profit have gradually returned to the right track: excluding the impact of COVID-19 business during the same period, the company's regular business revenue YOY 1.96% and net profit to mother YOY 142.82%. We expect steady growth throughout the year.

Operating capacity and profitability: In terms of profitability, the company's gross margin level bottomed out in 2022, and has gradually stabilized with the completion of the COVID-19 testing business. Furthermore, 2024H1 has significantly improved compared to the same period last year in terms of period cost rates and operational efficiency. We believe that in 2024, the company's business development and operating quality have entered a new stage of development, and while turning profits into profits, it is expected that the stock price will hit Davis in a double whammy along with valuation restoration.

Molecular diagnostics market: IVD's second-largest segment, large-scale and fast-growing market size: The global molecular diagnostics market grew from $7.1 billion in 2019 to $11.1 billion in 2023. The CAGR is 11.8%, and is expected to reach $12.2 billion in 2024. In 2023, China's molecular diagnostics market reached RMB 22.4 billion, with a CAGR of 27.8%. It is expected to grow to RMB 27.7 billion in 2024. The year-on-year growth rate (23.7%) is higher than the global average (9.9%).

Competitive landscape: In China's molecular diagnostics industry, foreign-funded companies such as Roche, Abbott, and Siemens are still in a leading position, while domestic companies such as BGI, Kehua Biotech, and Daan Gene are also rapidly rising. Although the domestic molecular diagnosis industry is currently still in the early stages of development and the market concentration is not high, domestic small and medium-sized enterprises are also actively expanding their market share. Since molecular diagnostic technology involves a wide range of clinical needs, each enterprise has its own advantages in specific fields, so the market has not yet formed a clear monopoly pattern.

Development trend: Public health events since 2020 have driven domestic alternatives in the molecular diagnostics industry and accelerated the industry's overseas expansion.

Shuoshi Biotech: We believe that the company's competitive advantage and marginal changes are mainly reflected in the following three aspects:

① The company has five core technology platforms and a rich product pipeline. The company has five major technology platforms: multiple quantitative fluorescence PCR technology platforms, NGS technology platforms, POCT technology platforms, mass spectrometry technology platforms, automated control and testing platforms, all of which are used in the company's own products and industrialized. The company currently has more than 600 products, covering infectious disease testing, tumor screening, female genital microecology testing, respiratory pathogen testing, tropical insecticide and kidney damage testing, etc., which are widely used in infectious disease prevention and control, clinical testing, tumor screening In fields such as investigation, eugenics and chronic disease management, the company's products have a strong competitive advantage in corresponding market segments.

② Keep up with current events and lead the market response quickly: Based on a solid R&D system, the company responds quite quickly to public health events, and has relatively many mature cases. However, timeliness not only reflects the company's excellent competitiveness in the entire process from product establishment, R&D, execution to registration, but also allows the company to seize market opportunities in emergency procurement for public health events, so it has strong potential for a performance explosion.

③ Accelerated overseas expansion: In 2024, the company will further focus on key countries and key markets for deep cultivation to enhance the company's business influence and global competitiveness. It is worth noting that the overseas revenue of 2024H1 companies increased by 34.41% compared to the same period (the share of revenue increased to 3.0%). Excluding the impact of COVID-19 business during the same period, overseas regular business revenue increased by more than 150% compared to the same period. We believe that the company's continued deepening of its international strategic layout has achieved initial results, and the rapid development of overseas business is expected to play an important supporting role in the company's overall business development.

Profit forecasting and valuation

We expect the company's revenue for 2024-2026 to be 0.41, 0.48, and 0.56 billion yuan, respectively, with year-on-year growth rates of 1.1%, 17.6%, and 17.0%, respectively, and net profit to mother of 0.06, 0.09, and 0.13 billion yuan respectively. The year-on-year growth rates are turning a loss into profit, 49.4%, and 44.4%, respectively. The corresponding PE is 80.3, 53.7, and 37.2 times, respectively. Considering that as a leading molecular diagnostic company, the company's net profit returned to mother is in an upward recovery cycle. The 2024-2026 CAGR is faster than the average of comparable companies. At the same time, the company's overseas expansion is in a period of rapid development, and the company has greater potential for future growth. Referring to the relative valuation of comparable companies, the first coverage gave it an “increase in weight” rating.

Risk warning

Risk of policy changes; risk of uncertainty in international trade; increased risk of market competition, etc.