Incident: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 471 million yuan (yoy -1%), net profit attributable to mother of 146 million yuan (yoy -20%), net profit after deducting 136 million yuan (yoy -19%), and net cash flow from operating activities of 158 million yuan (yoy +51%). The first quarter of 2024 achieved operating income of 118 million yuan (yoy -21%), net profit of 38 million yuan (yoy -21%), and net profit of non-return to mother of 36 million yuan (yoy -21%).

Comment:

Revenue growth is under pressure in the short term, and product sales are expected to resume after the end of storage. In 2023, the company achieved operating revenue of 471 million yuan (yoy -1%). The main reasons were: ① the launch and preparation of next-generation endoscopic systems for US customers led to a high revenue base in 2022; ② the launch of next-generation endoscopes by US customers in 2023 was delayed a lot from the original plan, and the preparation inventory was slowly digested, which led to a slowdown in delivery of the company's endoscopes in the second half of 2023. By business production line, the company's medical endoscopic equipment industry revenue in 2023 was 371 million yuan (yoy +1%), of which sales to US customers were 279 million yuan (yoy -6%). Demand was slightly sluggish, but thanks to the company's active development of the domestic market, the domestic market for endoscopic products grew strongly, with a year-on-year increase of about 83%, and the optical industry revenue was 97 million yuan (yoy -12%). By region, the company achieved revenue of 141 million yuan (yoy +26%) in the domestic market and 327 million yuan (yoy -10%) in the foreign market in 2023.

Revenue of 118 million yuan (yoy -21%) was achieved in the first quarter of 2024, mainly due to major US customers continuing to concentrate on preparing goods for the launch of the new system in the first quarter of 2023. In particular, the February delivery scale nearly doubled compared to a normal year, and the high base for the same period. By the end of 2023, the company and US customers had outstanding orders totaling 173 million yuan. We believe that with the full launch of the new system for US customers and the acceleration of sales, the company's product sales are expected to resume growth.

Continuous investment in research and development, endoscopy capabilities are constantly being strengthened, and the volume of the whole machine can be expected. The company's R&D investment in 2023 was 65.89 million yuan (yoy +10%), accounting for 14% of revenue (yoy+1.44pp). With continuous R&D investment, the company's new products are emerging. On the one hand, cooperation with American customers continues to deepen. The 4mm hysteroscope company developed for American customers is expected to be launched and promoted in June 2024. The 2.9mm cystoscope, 3mm pediatric laparoscopy, and open surgical exoscopes are also under development, extending from the original laparoscopes to the fields of urinary, gynecology, and open surgery; in addition, the company's second-generation endoscopic endoscopes statue The system has been certified and sold one after another. The supporting laparoscope with dozens of specifications, such as white light, fluorescence, defogging, 3D fluorescence, standard length, extended type, and ultra-fine type, is expected to be registered in 2024, fully covering the needs of abdominal surgery. Endoscopic capabilities are constantly being strengthened, and the entire machine can be expected to be released.

Profit forecast: We expect the company's revenue for 2024-2026 to be 621, 7.83, and 985 million yuan, respectively, with year-on-year growth rates of 31.9%, 26.0%, and 25.8%, respectively, and realized net profit to mother of 2.23, 2.87, and 361 million yuan, up 52.8%, 28.9%, and 25.6% year-on-year respectively, corresponding to the current stock price PE of 23, 18, and 14 times, respectively.

Risk factors: risk of failure in new product development; increased cost of sales team formation; risk of exchange rate fluctuations; risk of dependence on major customers.