Event: On October 27, the company released its 2023 three-quarter report. In the first three quarters of 2023, the company achieved operating income of 608 million yuan (-27.61%), net profit of 15 million yuan (+70.05%), net profit of 15 million yuan (+70.05%), and net profit of 10 million yuan (+799.69%). Among them, Q3 achieved operating income of 223 million yuan (-25.27%), net profit of 0.7 billion yuan (+218.70%), net profit of net income of 0.07 billion yuan (+415.74%) after deducting non-return net profit of 0.2 billion yuan (+415.74%).

The profit side achieved a high increase, and gross margin increased by 7.49pct. The company achieved operating income of 608 million yuan (-27.61%) in the first three quarters of 2023. The short-term pressure on the revenue side was mainly due to insufficient momentum in the global economy and market consumption recovery. The company implemented strategic adjustments to some low-margin and asset-heavy investment projects. In the first three quarters of 2023, the company achieved net profit of 115 million yuan (+70.05%), net profit of 10 million yuan (+799.69%) after deduction of net profit of 0.1 million yuan (+799.69%), and comprehensive gross margin of 30.57% (+7.49pct), mainly due to the company's cost reduction and efficiency, building integrated full-link management of production, marketing and research, continuously improving the cost structure, effectively reducing procurement costs and increasing inventory turnover. The net cash flow from 2023Q3 operating activities was RMB 64,3068 million (+175.71%), mainly due to the company strengthening the recovery of accounts receivable and continuously optimizing the capital structure, thereby improving the efficiency of capital use.

Actively explore emerging markets and strengthen overseas brand building. In terms of overseas markets, the company has been deeply involved in the field of smart health for over 20 years and has established long-term and stable cooperative relationships with many well-known health IoT industry giants at home and abroad. Currently, in addition to continuing to dig deep into the deep needs of existing customers in the existing European and American markets, the company is also actively expanding into emerging markets such as the Middle East, Africa, and Southeast Asia. As of October 27, the company has reached cooperation with high-quality companies in the industry in Russia, the United Arab Emirates and other regions. In terms of brand operation, the company has now established a localized sales and service team to achieve accurate market research and judgment, while at the same time strengthening overseas brand operations and increasing the company's exposure in overseas markets. 2023H1 has participated in many professional medical device exhibitions at home and abroad, such as Arab Health (Arab Health) and China International Medical Equipment Fair (CMEF), etc., to accurately reach high-quality customers in the industry. 2023H1 exported 288 million yuan (-27.37%), gross margin was 30.81% (+4.49pct), accounting for 74.94% (+1.59pct); domestic sales were 94 million yuan (-34.15%), and gross margin was 20.39% (+7.6pct), accounting for 24.32% (-1.93pct).

Focus on medical-grade remote health management and continue to improve the medical product matrix. The company adheres to independent research and development, and is strategically positioned as a “medical grade remote health monitoring equipment and service provider”. In the future, it will mainly focus on medical-grade remote health management and digital chronic disease management. The company gradually changed from the traditional three categories in the past (scales+wearable products+blood pressure monitors) to medical remote health testing equipment. Benefiting from improvements in computer technology and the support of related policies, the market size of China's telemedicine industry continues to expand. According to China Research Network, the market size was about 13 billion yuan in 2019. It is expected to exceed 17 billion yuan by 2020, and is expected to exceed 70 billion yuan by 2025. 2023H1 has obtained overseas certification for 4G blood glucose meters and OTC hearing aids. As of October 27, these two new products have now been shipped one after another. We believe that the company continues to improve the medical product matrix and consolidate the brand moat. The new strategic positioning reflects the company's entry into a new stage of development and anchors long-term high-quality development.

Start a new round of equity incentives, demonstrating the company's long-term confidence. The company issued the “Notice on Granting Restricted Shares to Incentive Targets”. Using August 18 as the grant date, the company granted 3.5 million restricted shares of restricted shares to 49 incentive recipients, including company (including subsidiaries) directors, senior management, and core technical/business personnel. The assessment target is that the net profit for 2023/2024 will reach 30/50 million yuan respectively. This is the third time since 2018 and 2020 that equity incentives have been implemented. The company's current management is stabilizing. In the face of net profit loss in 2022, this equity incentive is expected to stimulate the cohesion and combat effectiveness of management and core employees. The assessment goals reflect the company's long-term confidence in future development.

Investment suggestion: As a senior manufacturer in the field of household health, the company has full chain capabilities of “hardware+sensor+algorithm+big data+AI+cloud computing+service”. Focusing on the health IoT+ digital health service business, the company explores the RPM business segment with high growth potential, and is expected to continue to benefit from the expansion of the chronic disease management market. The company is expected to achieve revenue of 1,022/12.86/1,528 billion yuan in 2023-2025, a year-on-year increase of -4%/26%/19% respectively; achieve net profit of 0.3/0.51/0.68 billion yuan, an increase of 193%/70%/33%, respectively; corresponding PE valuations are 83/49/37X, respectively, maintaining the “increased holdings” rating.

Risk warning: market competition risk, market demand recovery slowdown, foreign trade policy risk, exchange rate change risk, R&D falling short of expectations.