The Pacific Securities: The continuous sinking of soft mirror resources and the promising prospects for increase in domestication rate.

The Pacific Securities released a research report stating that in recent years, with the continuous sinking of flexible endoscope resources and the cost-effective advantages of domestic equipment being highlighted in lower-grade hospitals, the procurement ratio of first-grade, second-grade, and undetermined-grade hospitals has been increasing year by year. Coupled with some tertiary hospitals that have not achieved deep integration with Japanese companies, there is a significant potential for substitution. In addition, by referring to the process of domestic substitution for ultrasound and CT equipment, through continuous upgrades and iterations, the performance of these two types of domestic equipment tends to mature, and the rate of domestication has been continuously increasing. With the gradual upgrade of the mainframe, the continuous improvement of the endoscope body, and the gradually accumulated recognition, as well as lower prices, the prospects for the increase in the rate of domestication of flexible endoscopes are promising. The main points of view of Pacific Securities are as follows: There is a large demand for flexible endoscope screening and low penetration, with considerable market space. Flexible endoscopes help improve the efficiency of diagnosis and treatment, and can enhance the profit-making ability of hospitals. Flexible endoscopes have been applied to various departments such as digestive, respiratory, hepatobiliary, and urinary systems. Compared to other imaging equipment, flexible endoscopes have high resolution and real-time visualization characteristics, coupled with endoscopic instruments, they can achieve efficient diagnosis and treatment, significantly improving the efficiency and accuracy of diagnosis in various medical fields, making it the preferred method and gold standard for the diagnosis of esophageal and gastric diseases; in treatment, it can improve the accuracy and safety of treatment, significantly reduce patient recovery time, and reduce surgical risks and complications. In terms of payment, common gastroscopes, colonoscopes, and other examination items are covered by medical insurance, with reimbursements ranging from about 70% to 90% for employees' medical insurance and about 50% to 70% for urban and rural residents' medical insurance, clearing obstacles on the payment side. In addition, conducting flexible endoscope screening can also enhance the profit-making ability of hospitals: conservatively estimated, for most second-tier and above hospitals with an annual diagnosis and treatment of over ten thousand patients in the digestive outpatient department, flexible endoscope diagnosis and treatment can become a profitable project for the hospital. Policy support promotes the popularization of flexible endoscopes, with an accumulated market increment of about 93 billion yuan from 2020 to 2030. China has a high incidence of cancer, especially in gastrointestinal and respiratory cancers, ranking first in the world. However, the penetration rate of gastric cancer flexible endoscope screening in China is relatively low, and the early diagnosis rate and five-year survival rate of gastric cancer are much lower than that of Japan and South Korea. Early diagnosis and treatment of tumors is a national important health target, providing policy guarantees for the popularization of flexible endoscopes; equipment updates are in the bidding stage and the approval amount reached a new high by early 2025, which is expected to accelerate the process of flexible endoscope deployment. Based on the calculation that China's early diagnosis rate of gastric cancer will reach 20% by 2030, we estimate that the accumulated market increment of flexible endoscopes from 2020 to 2030 will be about 93 billion yuan. High industry barriers, acceleration of domestic breakthroughs Multifaceted high industry barriers. The flexible endoscope industry has high barriers and deep moats, mainly reflected in the following three aspects: (1) industry side: the development of domestic flexible endoscopes started about 40 years later than Japan, and the bottleneck of core components in the past further restricts the industry development. (2) product side: Integration in small spaces requires higher demands on technology and processes; Innovation and iteration in functional systems in small optical systems create higher barriers. (3) demand side: Product refinement needs long-term cooperation with clinical doctors; High stickiness leads to obvious market education advantages; The closed system leads to higher demands from hospitals on the variety of scopes during procurement. The richness of flagship products rivals foreign brands, and strength fosters recognition In terms of mainframe performance, domestic leading products have caught up over the years, gradually equaling imports in key indicators such as image quality and staining. At the same time, high-resolution imaging with AI enhances screening results. In terms of matching endoscope bodies, leading enterprises have reached the same level as imports in basic indicators such as curvature and field of view, and have expanded to high-complexity scopes such as duodenoscopes, achieving breakthroughs in high-end technologies such as dual-focus, optical magnification, and ultra-thin systems. Domestic enterprises are closing the gap with imports in equipment selection and clinical trials, gradually gaining recognition from hospitals while maintaining price advantages. Currently, there is still a certain gap between domestic leading products and imports in terms of refinement, such as in the maneuverability of scope bodies, Olympus' RIT function, and Fuji's ColoAssist technology are stronger. In addition, reviewing the situation of other domestic manufacturers, their products lag significantly behind in mainframes and scope bodies compared to domestic leaders, and are not expected to pose a significant threat to domestic leaders in the short term. Continuous increase in domestic market share, vast opportunities await the leading brands By 2024, the top five flexible endoscopes will account for over 80% of the market share, with Olympus holding a market share of over 40%, mainly due to its establishment of closed-loop barriers in upstream raw material supply and component manufacturing, staining technology, end-sale, and after-sales services. With the upgrading of domestic products and increased recognition, the domestication rate of flexible endoscopes increased from 22.56% to 28.33% from 2019 to 2024. Domestic replacements are gradually radiating from lower-level hospitals to tertiary hospitals, with the domestication rate of flexible endoscopes in tertiary hospitals exceeding 20% by 2024, and reaching a new high in the first two months of 2025. Risk warning: risks of equipment bidding and bidding not meeting expectations, risks of equipment group procurement reducing prices, risks of slow promotion of high-end products.