Key points of investment

The company released its 2024 three-quarter report. 2024Q1-3 revenue was 0.32 billion yuan, down 15.3% year on year; net profit to mother was 0.097 billion yuan, down 17.6% year on year. Among them, Q3 revenue was 0.098 billion yuan, down 9.4% year on year; net profit to mother was 0.027 billion yuan, down 7.0% year on year. Revenue continued to decline in the third quarter due to inventory clearance from major US customers. We believe that positive growth is expected to resume in the fourth quarter and 2025 as shipments gradually resume after inventory is cleared.

Growth: Major customer stickiness continues to strengthen & new product expansion. Long-term growth certainty remains (1) Stryker's stickiness continues to strengthen, and the resumption of shipments in the fourth quarter is expected to drive revenue growth. Splitting the company's revenue, we found that the company's revenue in 2016, 2019, and 2022 all achieved high year-on-year growth, corresponding to the release of Stryker's next-generation products; in September 2023, Stryker 1788 was listed, but customer inventories were relatively high, and the company's revenue growth rate in the first three quarters of 2024 was still slightly pressured. We believe that as Stryker's inventory is gradually cleared, shipments are expected to resume one after another in the fourth quarter and 2025. At the same time, in response to the risk of changes in international policies, the company's US subsidiary Omec has passed the certification of US customers and can manufacture and sell finished endoscopic products at the US subsidiary; the company's Thai factory was registered on August 9, 2023, and the Thai subsidiary's production capacity building and related certification progress will be accelerated in the second half of the year; the company is expected to mass-produce 4mm hysteroscopes for Stryker. We believe that the company has accumulated over a long period of time on the production side of endoscopic light sources and lenses. It has high technical barriers and continues to strengthen its adhesion with core customers. Continued growth, long-term revenue growth certainty can still be expected. (2) Expand horizontally and vertically to open up the growth ceiling. Expanding vertically to complete machines, the acceleration in volume is expected to contribute to revenue in 2024. In February 2023, the 4K fluorescence endoscope system N700-F was launched; in October 2023, the company launched the 4K defogging endoscope TS88 for Stryker; in November 2023, the company launched the 4K endoscopic camera system N760; mass production and sales of second-generation 4K endoscopic systems began after the Spring Festival, and more than 100 sets have been shipped. Endoscopy products for key departments are expected to be registered and sold one after another in the second half of the year. We believe that with the launch of the company's products and the gradual increase in market acceptance, machine revenue growth can be expected in 2024; expanding horizontally into the optical sector, continued deepening cooperation is expected to drive continued high revenue growth. The company continues to deepen microscope cooperation projects with Danaher, etc., and we believe that with the expansion of major customers in the optical sector, it is expected to drive new growth.

Profitability: Gross margin remains high, and net profit margin is expected to rise again (1) Gross margin is expected to remain high in 2024. 2024Q3's gross profit margin was 69.4%, up 5.4 pcts year over year. We believe that the company's gross margin is expected to increase in 2024, driven by changes in supply volume, further cost reduction due to improved technology, and increased sales volume of complete machines. (2) Net interest rates are expected to pick up.

2024Q3's net profit margin was 27.1%, up 1.2 pct year over year. We believe that as the company's shipments resume steadily, the various cost rates of 2024Q4 are expected to decline due to the scale effect, and the net interest rate is expected to continue to rise year over year.

Profit forecasting and valuation

We expect total revenue for 2024-2026 to be 0.439/0.581/0.73 billion yuan, respectively, up -6.78%, 32.50%, and 25.63% year-on-year, respectively; net profit to mother will be 0.139/0.192/0.248 billion yuan, respectively, up -4.63%, 37.82%, and 29.51% year-on-year respectively, corresponding EPS of 1.15/1.59/2.06 yuan, corresponding 23 times PE in 2025, maintaining the “increase” rating.

Risk warning

Risk of fluctuations in Stryker's revenue; risk of commercialization of new products falling short of expectations; risk of fluctuations in the international environment and exchange rates; risk of policy changes.