Huachuang Securities: There may be some short-term setbacks in the update of medical equipment, but the trend of market recovery remains unchanged.

Huachuang Securities released a research report stating that the market had previously expected that in the second half of 2024, funds from super-long-term national bonds would gradually be in place, with the direction and proportion of fund support becoming clearer, and the anti-corruption situation improving. Due to the backlog of medical equipment procurement demand for one year, the market expects a significant increase in performance in the second half of 2024. Although there have been some short-term setbacks in the renewal of medical equipment, the trend of market recovery remains unchanged. The overall demand for medical care is still growing steadily, and the demand for equipment increase and replacement from medical institutions is continuous and rigid. It is optimistic about medical equipment companies with competitive products. In addition, it is expected that the demand for imaging products will be higher than for therapeutic products, with a higher demand for ultrasound, and the entire equipment industry will benefit from the normalization of procurement. The background of medical equipment renewal and recent trends in the sector. In the second half of 2023, affected by anti-corruption measures, hospital equipment procurement was delayed. In the first half of 2024, with the implementation of equipment renewal policies and the non-complete landing of super-long-term special national bonds, there was a "procurement hesitation," which continued to suppress procurement demand. The funds from super-long-term national bonds were expected to gradually be in place in the second half of 2024. However, in the third quarter of 2024, some regions still faced high pressure from anti-corruption measures, and the implementation of equipment renewal varied, adding uncertainty to the growth of the medical equipment industry in the second half of 2024, leading to a weak trend in the sector. Is the medical equipment update lower than expected? 1) There have been some short-term setbacks: the start of medical equipment renewal bidding was later than expected; the progress of national bonds issuance was in line with expectations, but the amount of investment may be lower than expected; the time for concentrated anti-corruption efforts may be extended. 2) But the trend of market recovery remains unchanged: the overall demand for medical care is still growing steadily, and the demand for equipment increase and replacement from medical institutions is continuous and rigid. The internal growth of the medical industry remains strong, so it is reasonable that the support from national bonds in this equipment renewal is relatively low. The significance of the issuance of super-long-term national bonds lies in opening up the bidding for equipment renewal and breaking the "procurement hesitation" state. The equipment renewal and procurement times in various regions are difficult to unify, but have already begun. Huachuang Securities also expects that anti-corruption measures in hospitals will shift from high pressure to normalcy nationwide in the fourth quarter of 2024. Demand is only temporarily suppressed, not disappeared. There is still significant room for improvement in China's per capita medical resources compared to developed countries and the world average level, and with the accelerated aging population, the market demand in China will remain long-term. It is expected that the equipment renewal demand, which has been accumulated for a year and a half due to policy impacts, will be released in batches next year and in the future, driving the performance of the medical equipment sector. What kind of medical equipment companies can succeed? 1) Product competitiveness is paramount. As the localization rate of medical devices in grassroots hospitals increases, the market for domestic manufacturers in tertiary hospitals becomes more important, and higher requirements are placed on product competitiveness. The Chinese government continues to pay attention to equal treatment of domestic and foreign capital, so if domestic equipment manufacturers want to increase their localization rate, they need to have cost-effective advantages while also maintaining product competitiveness equal to or even higher than imported products. 2) It is expected that the demand for imaging products will be higher than therapeutic products, and there will be a higher demand for ultrasound, but the entire equipment industry will benefit from the normalization of procurement. Recommendations: Shenzhen Mindray Bio-Medical Electronics (300760.SZ), Shanghai Aohua Photoelectricity Endoscope (688212.SH), Sonoscape Medical Corp. (300633.SZ). Risk warnings: 1) National bond support may be less than expected; 2) Bidding and implementation time may be delayed; 3) Risks of equipment central procurement price reductions.