Key investment points:

The dental care industry is developing rapidly, and the market potential is huge. In recent years, the oral hygiene and care market has developed rapidly in China. Oral hygiene care refers to the act of cleaning and protecting parts such as teeth, tongue, palate, and cheeks. The products involved include toothpaste, toothbrushes, dental floss, mouthwash, electric toothbrushes, etc. With the rapid development of China's economy and the increase in residents' disposable income, people's awareness of oral health continues to rise, and consumers are shifting from simple oral care to deep care. According to the company's 23rd annual report, citing Euromonitor International data, the overall size of China's oral cleaning and care products market (in terms of retail sales) showed an upward trend year by year, from 38.8 billion yuan in 2017 to 52.2 billion yuan in 2021, with a compound annual growth rate of 7.7%. The impact of the epidemic dropped slightly to 48.2 billion yuan in 2022. The market is expected to rise close to 2021 levels in 2023 and continue to grow steadily in the future;? Revenue is growing steadily, and production capacity has yet to be released. In 2014-2023, the company's revenue grew from 0.447 billion yuan to 1.067 billion yuan, net profit increased from 0.049 billion yuan to a maximum of 0.109 billion yuan, then quickly rebounded after a brief decline in work stoppage losses due to the pandemic. Revenue volume expanded further after the expansion of production capacity in 2021, and we expect the company's performance to continue to grow rapidly with the release of new production capacity. In 2020 and 2021, the company increased the production capacity of wet wipes to 4 billion and 7 billion tons respectively. Since then, the company quickly digested production capacity, and production capacity is still insufficient.

In 2022, the company increased the annual production capacity of wet wipes to 18 billion tablets. However, due to a decrease in demand for disinfectant wipes, the sales volume of wipes did not rise but declined, resulting in a wipes production capacity utilization rate of only about 25% in '22 and '23. At the same time, although toothbrush sales have maintained an upward trend, the capacity utilization rate is still low, and production capacity has yet to be released;? Acquire Vimezi and Sunnykang to further enhance overall competitiveness. In '23, the company increased its capital to its wholly-owned subsidiary Meixing Dental by 42 million yuan. Meixing Dental established a subsidiary, Hangzhou Yibai, in Hangzhou, with an investment amount of 6 million yuan. Acquisition of Vimezi shares: In '23, the company acquired 16% of Vimezi's shares through a wholly-owned subsidiary and increased its shareholding ratio to 32% through Yunshu 1 and Yunshu 2. This acquisition changed the company's investment purpose in Vimezi from financial investment to industrial investment, and then increased its shareholding ratio to 34% through an auction in '24. Acquisition of part of Shanenkang's shares and capital increase: The company obtained 52% of Shanenkang's shares at a price of 0.213 billion yuan through share transfer and capital increase. These investments help the company further expand e-commerce sales channels, enhance the overall strength of the brand, achieve the company's sustainable development, and enhance the company's overall competitiveness by optimizing the capital structure.

Profit forecasting and investment ratings. We expect the company's net profit for 24-26 to be 0.09, 0.142, and 0.177 billion yuan, respectively, with year-on-year growth rates of -3.2%, 59.0%, and 24.5%. The closing price on December 19 corresponds to the 24-25 PE of 27.0 and 16.9 times. Refer to the comparable company giving the company a 24-year PE valuation of 30 to 32 times, corresponding to a reasonable value range of 26.70 to 28.48 yuan, giving it a “superior to the market” rating.

Risk warning: The cost of raw materials fluctuates greatly, and downstream demand is weak.