Incident: On October 26, the company released its report for the third quarter of 2024: operating income of 6.028 billion yuan in the first three quarters of 2024, a year-on-year decrease of 9.53%; net profit to mother was 1.532 billion yuan, down 30.09% year on year, mainly due to a combination of reduced operating income, increased sales investment, and a sharp decline in asset disposal income for the first three quarters of 2024 compared to the same period in 2023; net profit without return to mother was 1.274 billion yuan, a year-on-year decrease of 23.74%.

Among them, revenue for the third quarter of 2024 was 1.72 billion yuan, up 2.21% year on year; net profit to mother was 0.411 billion yuan, down 40.95% year on year; net profit after deducting non-return to mother was 0.31 billion yuan, down 25.38% year on year.

The year-on-year revenue growth rate in the third quarter recovered, and new product marketing efforts increased in the first and second quarters of 2024. Affected by the high performance base for the same period in 2023, the year-on-year revenue growth rates were -17.44% and -8.82%, respectively. In the third quarter, the company's revenue growth rate was 2.21% year on year, and the business gradually returned to a normalized sustainable development path.

In the first three quarters of 2024, the company's sales expenses increased by 8.84% compared to the same period in 2023. The company continues to increase marketing investment, actively promote the marketing of new products in various business lines, and enhance the brand influence and market share of the company's products. With the release of the company's new products and the increase in the market share of various business segments, we are optimistic that the company's performance will improve further.

Domestic sales of the new generation of CGM expanded rapidly, and in the first three quarters of 2024, the company's diabetes care solution business once again achieved breakthrough progress under the two-wheel drive of product innovation and channel expansion. The domestic market share of BGM (traditional portable blood sugar monitor) related products continues to rise, and the customer base is further expanding. The sales trend of CGM products (continuous blood sugar monitors) and customer feedback are good. Both hospital side and C-side businesses are working at the same time, and sales of the next-generation CGM Anytime CT3/CT15 have expanded rapidly.

In addition, the next-generation CGM dynamic blood sugar detector is already applying for CE MDR certification, and the promotion of related registration matters is expected to promote the expansion of the company's blood sugar product export business. The company's diabetes care products have great potential for development in Latin America, Africa, the Middle East, Southeast Asia, etc., and CGM series products also have certain opportunities in the Western European market. By the end of the third quarter of 2024, the main market for the company's CGM products was still in China. With the gradual implementation of overseas registration certificates for related products, the overseas market is expected to become another driving force for the company's diabetes monitoring business.

Gross margin remained stable. Net margin fluctuations were affected by changes in asset disposal income and increased sales promotion. In the first three quarters of 2024, the company's comprehensive gross margin decreased by 1.44 pct to 50.13% year over year.

The sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were 15.44%, 5.15%, 6.72%, and -2.18%, respectively. The year-on-year changes were +2.61 pct, +0.80 pct, +0.76 pct, and -0.95 pct, respectively. Among them, the sales expense ratio increased significantly, mainly because the company increased product promotion expenses in 2024. Furthermore, the company generated 0.255 billion and 0.287 billion asset disposal revenue in the second and third quarters of 2023, respectively. Under the combined impact, the company's overall net interest rate decreased by 7.23pct year-on-year to 25.44%.

Among them, the comprehensive gross profit margin, sales expense ratio, management expense ratio, financial expense ratio, and overall net profit margin for the third quarter of 2024 were 50.32%, 18.41%, 5.96%, 7.87%, -1.75%, and 23.87%, respectively, with changes of -0.92pct, +3.99pct, +0.62pct, +0.53pct, +0.86pct, and -17.44pct, respectively.

Profit forecast and investment rating: We expect the company's 2024-2026 revenue to be 8.129 billion/ 9.265 billion/ 10.632 billion yuan, with year-on-year growth rates of 2%/14%/15%, respectively; net profit to mother of 2.018 billion/ 2.277 billion/ 2.743 billion yuan, respectively; growth of -16%/13%/20%, respectively; EPS of 2.01/2.27/ 2.74, corresponding to 17 times PE in 2024 according to the closing price on November 4, 2024. Maintain a “buy” rating.

Risk warning: the risk of consumer demand falling short of expectations under the influence of the macroeconomic environment, the risk of increased market competition, the risk that overseas promotion falls short of expectations, and the risk that overseas product registration progress falls short of expectations.