Introduction to this report:

Due to inventory removal from US customers, the pace of sales slowed down. In the second half of the year, with mass production of hysteroscopes and further expansion of complete machines, performance is expected to improve, and the rating of increasing holdings is maintained.

Key points of investment:

Maintain an increase in holdings rating. With 2024H1, the company achieved revenue of 0.22 billion yuan (-17.7%), net profit due to mother of 70.55 million yuan (-21.0%), net profit of 64.68 million yuan (-24.55%); of these, 2024Q2 achieved revenue of 0.103 billion yuan (-13.91%), net profit of 32.11 million yuan (-21.43%) to mother, net profit of 28.22 million yuan (-28.25%) ), the performance was basically in line with expectations. Considering the rigid cost investment, the 2024-2026 EPS forecast was lowered to 1.57/1.97/2.38 yuan (previously 1.82/2.35/2.96 yuan), the 2024 PE25X was given, and the target price was lowered to 39.25 yuan to maintain the increase rating.

The sales pace has slowed due to customer inventory, and is expected to improve month-on-month in the second half of the year. (1) The 2024H1 endoscopy business achieved revenue of 0.176 billion yuan (-16.74%). The main reason was that Stryker was able to reduce inventory volume and the pace of delivery slowed down, but it increased 10% from month to month, and there has been an improvement. According to Stryker's announcement, the 2024Q1/2 endoscope revenue growth rate was 11%/9%, respectively, achieving steady growth. It is expected that with the gradual elimination of inventory, the company's lens and light source shipments are expected to increase. At the same time, the subsidiary Omec of the United States has passed customer certification, and the streamlined delivery process is expected to avoid international trade risks; in the second half of the year, the Thai subsidiary's production capacity building and related certification progress will be further accelerated, which is expected to further reduce the potential impact of tariffs and other policies. In the first half of the year, mass production and sales of the second-generation complete machine system began, and more than 100 sets were shipped. The layout revolved around gynecology, head and neck surgery, and clinical feedback was good. In addition to the complete machine, the company will continue to develop epitaxial products such as rotary cutting, electric cutting, and instruments, and is committed to providing comprehensive clinical solutions. (2) Optical products achieved revenue of 42.68 million yuan (-23.1%), which was basically flat compared to 2023H2. It is expected to maintain relatively steady growth as orders from downstream customers resume.

Cost investment is stable. The 2024H1 gross profit margin was 64.09%, which was basically the same as the previous year. Expense investment is stable. In addition to sales expenses due to an increase of +21.5% of the total machine promotion, management/R&D/financial expenses were -2.8%/-10.6%/-39.5%, respectively, and the cost ratio increased due to a decrease in revenue scale. Expense rates are expected to decline in the second half of the year as revenue improves month-on-month.

Continued development of new products is expected to bring incremental contributions. 2024H2, for Stryker, is expected to be mass-produced; 2.9 mm cystoscopy, 3 mm pediatric laparoscopy, and open surgical endoscopes are also expected to continue to be developed. For the domestic market, brand building and marketing work will be carried out comprehensively for key specialties; registration of various lenses and development of 3D endoscopes will be completed.

Risk warning: R&D progress falls short of expectations, commercialization of the whole machine falls short of expectations, etc.