Matters:

The company published its 24-year report, with operating income of 0.38 billion yuan (-29.70%), net profit of 0.079 billion yuan (-37.32%) to mother, deducting non-net profit of 0.066 billion yuan (-40.25%). 24Q2, operating income of 0.158 billion yuan (-46.23%), net profit due to mother 0.024 billion yuan (-66.07%), after deducting non-net profit of 0.017 billion yuan (-71.95%).

Commentary:

First-half results were disrupted by procurement. 24H1's revenue fell 29.70% year on year, mainly due to the impact of the implementation of the country's high-value consumables procurement and implementation, and the sales price of the company's related products fell. The state-organized centralized procurement of artificial crystals and sports medicine consumables was opened in Tianjin in November 2023, and the company won the bid for all sports medicine products. In May 2024, the centralized procurement of artificial joints continued to open a bid in Tianjin and announced the selection results. The company won the bid for the three hip joint product systems and the full knee joint system. After the collection results were announced, the decline in the sales price of the company's products had an impact on 24H1's performance.

Gross margin remained stable, and investment in R&D continued to be high. 24H1's gross margin was 71.52% (-0.87pct), which remained relatively stable under the influence of sports medicine collection and joint contract renewals. 24H1 has a sales expense ratio of 29.33% (-1.54pct), a management expense ratio of 5.61% (+2.10pct), a R&D expense ratio of 17.80% (+4.01pct), financial expenses ratio -2.37% (-1.45pct), and a net profit margin of 20.79% (-2.53pct). The company still maintains a high investment in R&D.

Continue to improve the product line. 2024H1, the company's femoral head reconstruction bars and tantalum metal fillers in the joint field have obtained NMPA certification, and the knee prosthesis system has obtained FDA 510 (K) registration certification; products such as porous tantalum metal intervertebral fusion devices, pillow, neck and chest internal fixation systems in the field of spine have been approved; products such as 3D printed titanium alloy wire anchors and tantalum-coated wire anchors in the field of sports medicine have been approved. In addition, the acquisition of registration certificates for arthroscope and endoscopic surgical instruments marks the entry of the company's sports medicine products into the minimally invasive era; knee replacement surgery navigation systems, hip replacement surgery navigation systems, etc. system Approved. With continuous high-intensity R&D investment, product lines for joints, spine, sports medicine, trauma, and dentistry continue to be rich.

Overseas revenue is impressive. 24H1's overseas revenue reached 0.155 billion yuan, accounting for 78.3% of the company's annual overseas revenue in '23, and 24H1's overseas revenue share reached 40.7%, an increase of 24.3 pcts compared to the company's share of overseas revenue in 2023.

We expect that the impact of sports medicine collection and joint contract renewal on the company's channel returns and exchanges will end in 24Q3. The company is expected to return to high growth as collection accelerates domestic replacement, the number of orthopedic surgeries continues to grow rapidly as the aging population continues to grow rapidly, and overseas business expands rapidly.

Investment advice: Since the company's 24H1 performance is still disrupted by procurement, we expect the company's net profit to be 0.27, 0.33, and 0.39 billion yuan (the original forecast values for 24-26 were 0.33, 0.4, 0.5 billion yuan), -2.6%, +20.5%, and +18.8%, EPS of 0.71, 0.85, and 1.01 yuan, respectively. The corresponding PE is 15, 13 and 11 times, respectively. The company was given a valuation of 25 times in 2024, and the corresponding target price was about 18 yuan, maintaining the “recommended” rating.

Risk warning: 1. Risk of falling prices and declining market share after collection; 2. New business volume falls short of expectations; 3. Overseas business growth falls short of expectations.