4Q23 Policy Factors Influence Performance Growth

The company's 2023 operating revenue/net profit attributable to mothers/net profit deducted from non-net profit of $1,254 million, +0.6%/-9.7%/-7.3% year-on-year, in line with the performance report; 4Q23 operating income/net profit to mother/net profit of 4.16/0.97/0.92 billion yuan, -5.7%/-0.2% year-on-year. The 23 year performance growth rate was mainly pressured by external policy factors affecting the company's product sales in the third and fourth quarters. We expect the 24-26 EPS to be 0.90/1.14/1.45 yuan. We gave the company a 24-year 25x A-share PE valuation (A-share comparable 24-year Wind average of 25x), corresponding to a target price of 22.51 yuan; we gave the company a 24-year 20x H-share PE valuation (H-share comparable company's 24-year consistent expected average of Wind 20x), corresponding to a target price of HK$19.86, maintaining a “buy” rating.

4Q23 operating cash flow improved significantly, and the overseas revenue growth rate in 2023 was 31.70%/3.68%/13.03%/-1.37%, -1.37%, -0.88/+0.45/-0.48/+0.31pct; 4Q23 sales/management/ R&D/ finance expense ratio 35.88%/3.74%/10.26%/-1.94%, year-on-year, -0.64/+0.53/-2.72/-1.12pct. The company's gross profit margin for 2023/4Q23 was 72.48%/75.92%, -3.55/-3.79pct year on year, mainly due to the year-on-year decline in gross margin of collected products. In 2023, the company's operating cash flow was 512 million yuan, up 1148% year on year. The company strengthened repayment management, and operating cash flow improved significantly year on year. In 2023, the company's overseas revenue was 198 million yuan, +81.7% year-on-year. The company actively developed international market business, and overseas revenue growth was impressive in 23 years. We are optimistic that overseas revenue will continue to grow rapidly in the future.

External environmental factors will affect performance in 2023. We are optimistic that the 24-year performance will recover in 23 due to factors external to the industry. We are optimistic about the 24-year performance: 1) Joint: Considering that the impact of harvesting on factory prices has been digested, and additional rules for joint collection renewal have been added, and emphasis is placed on companies that have performed well in the first round of collection in terms of bidding, which favors domestic leaders that won the first round of bids and have good supply capacity. We expect the company's joint business revenue to recover 17% year-on-year in '24; 2) Sports Medicine: National Harvesting is expected to land in '24, and the company is expected to land in '24; Use the collection Surveillance opportunities enter empty hospitals to drive rapid sales volume. We expect sports medicine revenue to be +30% year-on-year in '24; 3) Spine: The impact of collection, returns, and exchanges will gradually be digested. We expect revenue of spine products to reach 90 million yuan in '24.

A fully developed domestic orthopedic leader, maintaining a “buy” rating

We expect net profit from 24-26 to mother of $3.45/4.39/556 million, year-on-year, +24.3%/+27.1%/+26.7%. The current stock price of A shares corresponds to PE 20x/16x/13x in 24-26, and the current stock price of H shares corresponds to PE 9x/7x/6x in 24-26, and adjust the target price to 22.51 yuan for A shares/HK$19.86 for H shares (previously HK$33.35 for A-shares and HK$22.21 for H shares), maintaining the “buy” rating.

Risk warning: Sales of new products fell short of expectations; sales of collected products fell short of expectations.