DIAN DIAGNOSTICS(300244)：TEMPORARY PRESSURE ON EARNINGS VISIBLE RECOVERY AND STEADY GROWTH

　　In 3Q23, Dian Diagnostics faced temporarily downward pressure on its earnings, mainly due to a sharp decline in Covid-19 testing business and stricter regulation on the healthcare sector. The Company's core business growth slowed down, but may embrace recovery in 2024. Dian has maintained a reasonable profit margin level and controlled its period expenses well. The Company's operating cash flow has been improving, while its accounts receivable are being collected in an orderly manner. Base on the relative valuation method, we apply 26x 2023E PE to arrive at a target price of Rmb32, and reiterate the "BUY" rating.
　　Temporarily downward pressure on 3Q23 earnings due to a sharp decline in Covid-19 testing business and stricter regulation on the healthcare sector.
　　For 1-3Q23, Dian announced revenue/attributable net profit (ANP)/recurring ANP of Rmb10,292mn/531mn/482mn (-34.15%/-78.13%/-80.01% YoY). In 3Q23 alone, the Company achieved revenue/ANP/recurring ANP of　Rmb3,450mn/78mn (incl Rmb-105mn of losses from disposal of non-current assets)/150mn (-29.25%/-85.84%/-71.88% YoY). The decline in revenue and profits was mainly caused by a sharp decline in Covid-19 testing business and stricter regulation on the healthcare sector.
　　Slowed growth of core business, but likely recovery in 2024.
　　According to Dian's results briefing, the Company's 1-3Q23 revenue from independent clinical laboratory (ICL) business totaled Rmb3,711mn (+21.16% YoY), including Rmb329mn (+30.56% YoY) from self-produced products and Rmb6,231mn (+6.07% YoY) from channel products. In 3Q23 alone, Dian's revenue from ICL business revenue totaled Rmb1,232mn (+10.01% YoY), including Rmb100mn (+9.89% YoY) from self-produced products and Rmb2,107mn (+4.14% YoY) from channel products. We believe that stricter regulation on the healthcare sector and decline in terminal business demand have slowed the Company's business revenue growth obviously in 3Q23, but expect to see the influence mitigate in 4Q23. As the high base of Covid-19 testing business is being digested and the stricter regulation gradually returns to normal, we expect Dian's business to return to a steady and high-quality growth trajectory in 2024.
　　A reasonable profit margin level and well controlled period expenses. For 1-3Q23, Dian announced gross profit margin (GPM)/net profit margin (NPM) of 32.81%/7.69% (-8.32ppts/-10.66ppts YoY). We judge that the decline in profit margins was mainly caused by a sharp drop of Covid-19 testing business. In fact, the Company's GPM is stable compared with that before the Covid-19 outbreak, and its NPM level improved significantly (vs 32.28%/8.51% of GPM/NPM in 1-3Q19). In 1-3Q23, Company's selling/administrative/financial expense ratios came in at 8.62%/6.33%/1.65% (+1.46ppts/+0.01ppt/+0.22ppts YoY). Considering the relatively low expense ratios caused by the high base of Covid-19 testing business in 2022, we　believe the Company has a well control over its period expenses.
　　Improving operating cash flow, and orderly collection of accounts receivable.
　　According to Dian's announcement, the Company's net operating cash flow totaled Rmb339mn in 3Q23, showing a continuous improvement trend (vs Rmb-229mn/257mn in 1Q23/2Q23). In 1-3Q23, Dian strengthened the management of accounts receivable. By the end of 3Q23, the Company's balance of accounts receivable stood at Rmb9,390mn (vs Rmb10,349mn/9,665mn in 1Q23/2Q23), showing an orderly collection trend.
　　Potential risks:
　　Changes in industry policies; Third-party inspection medical diagnosis Intensifying competition in the ICL field; the Company's new business development falling short of expectations; delay in the Company's collection of payments.
　　Earnings forecast, valuation and rating:
　　Under the influence of multiple factors, Dian has maintained growth in its routine medical examination business, and gradually harvested fruits from the high-end business field. Considering 1) temporarily dampened terminal demand due to stricter industry regulation and 2) sluggish earnings growth caused by credit impairment loss resulting from the relatively long period of accounts receivable in the Covid-19 testing business, we lower our 2023E/24E/25E EPS forecast to Rmb1.24/1.82/2.36 (from Rmb1.76/2.24/2.68). With the average 32x 2023E PE (based on Wind consensus estimates) of comparable companies Kingmed Diagnostics (603882.SH)/Maccura Biotechnology (300463.SZ)/YHLO Biotech (688575.SH) as a reference, considering that the growth of Dian's routine medical examination business is slightly lower than the average level of comparable companies, we apply 26x 2023E PE to arrive at a target price of Rmb32 (down from Rmb35), and reiterate the "BUY" rating.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。