1H24 results are basically in line with market expectations
The company announced 1H24 results: revenue of 6.218 billion yuan, down 9.1% year on year; net profit to mother of 71.75 million yuan, down 84.17% year on year. Operating business growth is basically in line with market expectations.
Development trends
ICL testing service revenue in the second quarter of the single quarter was basically the same year on year. By business type, 1H24's diagnostic service revenue was 2.362 billion yuan (YoY -13.4%), of which ICL service revenue was 2.188 billion yuan (YoY +6.3%). We estimate that ICL service revenue was 1.117 billion yuan (YoY +2.7%) in the second quarter, and the DRGs remained relatively stable under strict fee control environment. 1H24's diagnostic product revenue is 4.085 billion yuan (YoY -5.9%), including channel product revenue of 3.919 billion yuan (YoY -4.8%), revenue of own products 0.166 billion yuan (YoY -27.5%), and 1H24's own products added 5 Class II registration certificates and 18 Class I registration certificates.
Quality and efficiency improvements continued, and profitability continued to recover month-on-month. According to the announcement, 2Q24's gross profit margin was 29.7%, up 4.1ppt from 1Q24, and the company expects the annual supply chain cost reduction to exceed 0.1 billion yuan; 2Q24's sales expense ratio is 9.2% (YOY+0.2ppt), management expense ratio 6.8% (YOY+0.3ppt), R&D expense ratio 2.5% (YOY-0.7ppt), 2Q24's net profit to mother is 48.58 million yuan, corresponding to a net profit margin of 1.5%, improving 0.7ppt, 1Q/2Q Credit impairment losses of 92.78 million yuan/0.162 billion yuan were calculated separately. We estimate that after addition, 1Q/2Q profits were 0.116 billion yuan/0.21 billion yuan, respectively, corresponding to a net interest rate of 3.9%/6.5%, and operating profitability recovered month-on-month.
Focusing on strategic customer breakthroughs, the revenue share of tertiary hospitals has steadily increased. According to the announcement, the company focused on the high-quality development needs of provincial and ministerial hospitals, municipal general hospitals, and tertiary specialist hospitals, and promoted secondary development of business contacts through testing projects for infectious diseases, solid tumor diseases, and hematological diseases with competitive advantages. The share of 1H24's tertiary hospital revenue increased to 41% (33% for the full year of 2023), of which the special examination business revenue was 0.961 billion yuan, accounting for 40.7% of the diagnostic business.
Profit forecasting and valuation
Considering that there is still a high level of uncertainty about the settlement of COVID-related accounts receivable, we lowered 2024/2025 net profit by 29%/24% to 0.568 billion yuan/0.758 billion yuan out of prudence. The current stock price corresponds to the 2024/2025 price-earnings ratio of 11.6x/8.7x. Maintaining an outperforming industry rating, the target price was lowered by 29% to 13.42 yuan at the same time, corresponding to 14.8 times the 2024 price-earnings ratio and 11.1 times the 2025 price-earnings ratio. There is 27% room for improvement compared to the current stock price.
risks
Competition has intensified; the inspection department's fee control has exceeded expectations; credit impairment calculations have exceeded expectations.