Core views

The company is a leader in the domestic orthopedic industry and has a comprehensive product line layout. The first half results were in line with expectations. Since 2022, the company's various product lines have been affected by price reductions; at present, the three major fields of joint, trauma, and spine have all been collected for more than a year, and 24Q3 is expected to reach an inflection point in performance. In the short term, the company is expected to further increase its market share and maintain its leading position in the industry with its comprehensive product line layout and brand and channel advantages; in the medium to long term, the company will continue to strengthen its layout in the fields of new orthopedic materials, minimally invasive therapy, sports medicine, etc., and rely on Weigao Group's advantages to strengthen its overseas layout, and is expected to maintain steady growth.

occurrences

The company released its 2024 semi-annual report

In 2024H1, the company achieved operating income of 0.751 billion yuan (-6.81%), net profit attributable to mother 0.093 billion yuan (-16.67%), and net profit of non-return to mother 0.089 billion yuan (-16.70%).

Basic earnings per share were 0.23 yuan/share.

Brief review

Performance is in line with expectations, and a high base affects revenue and profit growth

In the first half of the year, the company achieved operating income of 0.751 billion yuan (-6.81%), net profit attributable to mother of 0.9.3 billion yuan (-16.67%), and net profit not attributable to mother of 0.089 billion yuan (-16.70%). According to calculations, in 2024Q2, the company achieved operating income of 0.403 billion yuan (-3.12%), net profit attributable to mother 0.058 billion yuan (+230.47%), after deducting non-attributable net profit of 0.055 billion yuan (+237.38%).

The performance was in line with expectations. The main reason for the decline in revenue and profit in the first half of the year was that spine products still carried out pre-collection prices in the same period last year, and the revenue base was high; gross margin declined after collection prices were reduced, resulting in a higher decline in profit than revenue.

The number of surgeries increased steadily, improving month-on-month in the second quarter

The spine business achieved revenue of 0.22 billion yuan in the first half of the year, with a 12% increase in the second quarter compared to the first quarter. In the first half of the year, the number of surgeries increased 15% year over year, and sales increased 36% year over year. The trauma production line achieved sales revenue of 0.12 billion yuan, with a 33% increase in the second quarter compared to the first quarter.

In the first half of the year, the number of surgeries increased 28% year over year, and sales increased 25% year over year. The joint production line achieved sales revenue of 0.23 billion yuan, the number of surgeries increased 21% year on year, and sales increased 22% year on year. The number of hospitals covered by sports medicine increased by more than 300. The number of surgeries and sales increased 3 times over the same period last year, achieving sales revenue of 18.8 million yuan, of which the second quarter increased 4 times compared to the first quarter.

Spine collection won the bid in full, ranking first in the industry in terms of share

The company has been deeply involved in the spine field for many years and is a leading domestic brand. In the Spine Country Collection, the company's products won the bid for all products, with the highest share in reporting. Among them, the reported share of spinal fusion products was about 16%, and the reported share of vertebroplasty and bone cement products was about 9%. The overall reporting share is about 11.7%, ranking first among all brands (the reported share is calculated on a quantitative scale, not including bone cement measured in grams). There is a certain difference in pricing between the three brands of Weigao Orthopedics, Weigao Ahua, and Weigao Haixing, which is beneficial to leveraging the advantages of multiple brands. As spine harvesting continues to advance, industry concentration and localization rate are expected to further increase, and the company is expected to maintain its leading position in the industry.

After the orthopedic collection, the company actively carried out strategic adjustments to promote marketing transformation and productivity improvement. The company actively adjusted its marketing strategy and gradually improved the sales organization structure based on the sales marketing service concept of direct service terminals. Set up a technical service support team with R&D technicians as the main focus to cooperate with sales to increase customer stickiness. The Starfish Joint Business fully implements the distribution service sales model, improves the surgical support system, and obtains timely market terminal data feedback. Production-side companies focus on the long-term strategy of “digital factory” and the main line of “fixed production by sales and rapid delivery” to build two major platforms for lean production and rapid delivery, which can quickly respond to customer needs and improve production efficiency.

Looking ahead to the second half of the year and next year, the spine business is expected to reach an inflection point in performance. The company's performance is expected to resume steady growth. As the first year of collection implementation is completed, 24Q3 is expected to usher in an inflection point in performance, maintain steady revenue growth, and profit margins will gradually return to normal levels. The profit growth rate is expected to be higher than the revenue growth rate. National procurement of sports medicine has gradually been implemented, and the company is expected to speed up hospital admission and product release through collection. The company continues to strengthen its overseas layout, and is expected to rely on Weigao Group's overseas platforms to achieve continuous steady growth in overseas business.

Gross margin declined due to collection. The sales expense ratio optimization showed that the gross sales margin for the first half of 2024 was 64.07% (-7.22pp), mainly due to the drop in sales prices after collection. The sales expense ratio is 37.12% (-4.59pp), mainly due to measures such as optimizing the marketing organization structure and personnel structure, integrating channels to reduce service fees, adjusting the marketing model and refined cost management according to market needs, focusing on improving clinical service capabilities and the professional ability and flexibility of the sales team. The management expense ratio is 5.37% (+2.04pp), mainly due to the increase in employee remuneration. The R&D cost rate was 8.48% (+0.82pp), mainly due to increased employee remuneration and material investment.

The financial expense ratio is -1.31% (+0.48pp), mainly due to a decrease in interest income generated from monetary funds. Net cash flow from operating activities was $0.145 billion, up 148.45% year on year, mainly due to the year-on-year decrease in various taxes paid during the reporting period. The number of accounts receivable turnover days was 70.4 days, a year-on-year decrease of 26.4 days, mainly due to the company's enhanced repayment management.

Optimistic about the spine business in the short term. Optimistic about orthopedic platform companies maintaining leading positions in the industry in the short term, the impact of spine collection has gradually been clarified. The company's Q3 is expected to usher in an inflection point in performance, and it is expected to achieve steady growth in performance in the future. In the medium to long term, the company is growing well in the orthopedic industry. The company's product line layout is comprehensive, and it is expected to maintain its leading position in the industry by relying on advantages such as brand, channel, and R&D. We expect the company to achieve revenue of 1.501, 1.771, and 2.087 billion yuan in 2024-2026, an increase of 17.0%, 17.9%, and 17.9% year-on-year; net profit to mother of 0.24, 0.322, and 0.409 billion yuan, an increase of 113.6%, 34.0%, and 27.1% year-on-year. Based on the closing price of September 13, 2024 (21.66 yuan), the corresponding 2024-2026 PE is 36, 27, and 21X, respectively. First coverage, giving a “buy” rating.

Risk warning

1) Risk of changes in industry policy: At present, orthopedic spine collection has been fully implemented. The execution cycle is three years. Subsequent collection varieties will be renewed. Changes in renewal policies may affect the profit margin level of manufacturer products; due to industry policy factors such as enhanced compliance in the medical industry, bidding requirements in some regions have been delayed and new product promotion activities have been blocked, and there is a risk that our performance forecast will not be met.

2) Market competition increases risk: There are many manufacturers in the domestic orthopedic industry. It is not ruled out that some small and medium-sized manufacturers use collection to gain market share, leading to further intensification of market competition.

3) R&D progress falls short of expectations Risk: The company continues to increase research and development of new products, lay out upgrades to new orthopedic materials, minimally invasive procedures, etc. There is uncertainty about the development of new products. If the R&D progress falls short of expectations, it may affect the company's future growth ceiling to a certain extent.