Event: The Company releases its 2023 Annual Report and its 2024 Quarterly Report. In 2023, operating income was 6.076 billion yuan (-4.45%), net profit attributable to parent company was 0.593 billion yuan (-38.97%), non-net profit was 0.49 billion yuan (-42.44%), and operating cash flow was 0.7 billion yuan (-10.15%). 2023Q4 realized operating income of 1.854 billion yuan (-9.04%), net profit of 0.078 billion yuan (-73.37%) and non-net profit of 0.058 billion yuan (-77.07%). 2024Q1 realized operating income of 1.361 billion yuan (-4.24%), net profit of 0.243 billion yuan (-21.39%), non-net profit of 0.231 billion yuan (-53.30%), operating cash flow of 0.035 billion yuan.

profitability tends to repair, Q1 profit end exceeded expectations. 1)2023: The company's revenue and profit side have declined, which is expected to be mainly affected by active business adjustment and fierce competition in the terminal market. The annual gross profit margin is 73.32 (-3.67pct), the sales expense rate is 46.78 (-1.17pct)/the management expense rate is 8.10 (+1.92pct)/the research and development expense rate is 7.35 (+1.24pct);2)2024Q1: Profit Side Resumes to Higher Growth, overall profitability improved significantly, gross margin increased (75.73, +1.95pct), is expected to benefit mainly from the high gross margin of medical terminals and raw materials business proportion increased, from the cost side, the company's cost control effect is significant, sales expense rate decreased significantly (36.04,-10.35pct). We believe that as the cost-effective strategy continues to advance, the company's cost level is expected to be further reduced during the period, which in turn will drive the overall profitability to continue to repair.

raw materials: domestic and foreign business steady growth, accelerated penetration of pharmaceutical grade raw materials. In 2023, revenue was 1.129 billion yuan (+15.22%), accounting for 18.59 of the company's main business revenue (+3.18pct) and gross margin of 64.71 (-6.83pct), of which export raw material sales revenue was 0.517 billion yuan (+21.47%), accounting for 45.81%. Non-hyaluronic acid raw materials sales types and revenue have achieved rapid growth, hyaluronic acid raw materials in high gross profit and stable pharmaceutical grade hyaluronic acid raw materials to achieve sales revenue of 0.401 billion yuan (+18.96), mainly benefiting from the internationalization strategy of the steady progress of local operations, Europe and Southeast Asia markets have achieved rapid growth.

medical terminal: medical beauty control fee improvement effect appears, collection to promote the penetration of related products. In 2023, the operating income will be 1.09 billion yuan (+58.95%), accounting for 17.95 (+7.16pct) of the main business income and 82.10 (+1.24pct) of the gross profit margin. Among them, the income of dermatological medical products will be 0.747 billion yuan (+60.29%), the income of differentiated advantage category micro-crosslinked moisturizing doll needle will increase by more than 200 year on year, and the income of moisturizing filler will increase by more than 250 year on year. Based on the improvement of team operation ability and efficiency, the company's medical and beauty sector cost rate further decreased, the domestic new coverage of more than 3,500 institutions, the international market has been sold to Europe, the Russian-speaking region, the Middle East, the Americas and other 15 countries/regions. In addition, with the implementation of the series of volume procurement, the company's orthopaedic injection product "Hailida" to achieve revenue of 0.205 billion yuan (35.34%), covering more than 8,000 hospitals nationwide, other products to achieve a total revenue of 0.138 billion yuan (102.49%).

functional skin care products: performance phase pressure, waiting for adjustment to stabilize repair. 2023 revenue of 3.757 billion yuan (-18.45), accounting for 61.84 of the main business revenue (-10.61pct), the decline in sector revenue and share is mainly due to the company's major brands to make phased adjustments, and strive to optimize the large single product as the core of the category system, deepen brand value. In 2023, the company's large single-product product strategy and channel structure optimization are quite effective, the proportion of Runbaiyan large single-product series barrier repair series has exceeded 40% of the overall sales revenue of Runbaiyan, muscle live, Mibel self-operated channel accounted for more than 50% of the overall sales revenue of their respective brands. With the improvement of operational management efficiency, sales channel optimization, cost reduction and efficiency enhancement, the future functional skin care business segment is expected to gradually resume high-speed growth, and drive the company's overall cost level decline.

investment advice: the company is the world's leading bioactive materials technology enterprises, deep-cultivated synthetic biology technology, open up the whole industry chain layout, "raw materials, functional skin care, medical terminals, functional food" four-wheel drive, brand matrix rich, long-term growth is good. Considering the lower-than-expected recovery in terminal consumption and the company's initiative to slow down the growth pace of functional skin care business, we lowered the company's net profit to 8.07/10.25/1.286 billion yuan in 2024-2026, up 36.22/27.02/25.47 year on year, EPS to 1.68/2.13/2.67 yuan, and the current stock price corresponding to PE to 37/29/23 times, maintaining the "recommend" rating.

risk tips: the risk of channel cost increase, the risk of research and development progress is not as expected, the risk of new product marketing effect is not as expected, the risk of increased market competition.