1H24 results fall short of our expectations

The company announced results: revenue of 0.079 billion US dollars, -3.1% year on year; net profit to mother 0.019 billion US dollars, -25.2% year over year. Due to pressure on business in markets such as China and the US, 1H24's performance fell short of our expectations.

Development trends

Performance in many regions is under pressure; mergers and acquisitions have led to increased costs. According to the announcement, looking at 1H24 by region, 1) China's revenue was 10.18 million US dollars, -23.3% year-on-year, mainly affected by factors such as medical industry restructuring; 2) US revenue of 6.7 million US dollars, which was -40.9% year-on-year, mainly due to Abbott's business integration operations after acquiring CSI in 2023, and local reimbursement policy adjustments for rotary grinding equipment affected sales; 3) Japan's revenue was 18.91 million US dollars, -3.6% year over year after excluding exchange rate effects; 4) Revenue from Europe, the Middle East and Africa was 19.17 million US dollars, +1.3% year over year; 5) Asia Pacific (excluding China/Japan) revenue was 23.96 million US dollars, +31% year over year, and the endogenous growth rate was +8.6% year over year after excluding the impact of mergers and acquisitions. 1H24's net profit was 18.83 million US dollars, -25.2% year over year. The company announced that the main reason was the increase in operating expenses due to the acquisition of Eucatech AG, etc.

Keep an eye on subsequent marginal improvements. 1) In the Chinese market, according to the announcement, the company's Scoreflex notched balloon won the bid at the highest price in the same category in the Beijing-Tianjin-Hebei 3+N collection. The collection has been carried out one after another since May 2024. We expect Scoreflex sales and admissions to grow at an accelerated pace starting in 2H24. Furthermore, in May 2024, the National Health Insurance Administration announced that it would be procuring the coronary amputation balloon alliance led by Henan Province. We recommend watching the follow-up progress of this incident. 2) In the US market, according to the announcement, the company has maintained active communication with Abbott. Sales of notched balloons and peripheral balloons in the US market are expected to rebound month-on-month after 2H24, but US revenue may still decline year-on-year in 2024. 3) The company acquired German Eucatech AG at the end of 2023. According to the announcement, the company is expected to resume production and shipping from 3Q24, and we think it may have a significant revenue contribution starting in 2025.

The R&D pipeline is progressing smoothly. 1H24, the company's Teleport Neuro neural microcatheter was approved in China, and Teleprot XT and JADE PLUS 14/18/35 OTW were approved in the US. The company expects Scoreflex TRIO to submit a marketing application to the China Drug Administration on 3Q24, and the tricuspid valve interventional product TricValve will begin clinical patient enrollment in China in April 2024.

Profit forecasting and valuation

Considering factors such as increased costs due to mergers and acquisitions and business pressure in some regions, we lowered the company's 2024/25 net profit forecast by 9%/9% to 0.046/0.054 billion US dollars. The current stock price corresponds to 7.5/6.3 times the 2024/25 price-earnings ratio. Considering the overall pressure on the pharmaceutical sector of Hong Kong stocks, we lowered our target price by 19% to HK$4.7, corresponding to the 2024/25 price-earnings ratio of 11.0/9.2 times, with 47% upside compared to the current stock price. Based on optimism about the company's global sales channels, we maintain an outperforming industry rating.

risks

Overseas business risks, exchange rate fluctuations, R&D failure, and deterioration of the competitive landscape.