Zhenghai’s revenue/attributable net profit/recurring net profit came in at RMB160/33/27mn in 1H26,down 14.9/28.4/32.6%YoY.In 2Q26,revenue/attributable net profit/recurring net profit were RMB79/19/15mn,down 12.9/6.6/7.9%YoY.Given the expanding coverage of volume-based procurement(VBP)for the company's core dural repair products and the likely ongoing impact,as well as continued pressure on dental restoration products from demand fluctuations and competition,we downgrade to OVERWEIGHT from Buy.
Dental restoration membrane revenue/gross margin fell YoY
In 1H26,dental restoration membrane revenue was RMB58mn,down 25.1%YoY,with gross margin of 78.93%,down 7.05pp YoY.This mainly reflected weaker demand from private dental implant procedures,slower surgical volume growth,and intensifying competition.Dural membrane revenue was RMB69mn in 1H26,down 13.5%YoY,with gross margin of 88.88%,up 0.04pp YoY.The company won bids for dural membrane products in VBP across provinces.As VBP expands,we expect the company to keep participating actively to defend market share,and the related impact may persist.
Selling expense ratio declined YoY,gross margin fell
In 1H26,the selling/administrative/R&D/financial expense ratios were 37.28/9.13/15.02/-0.06%,changing-0.61/+0.63/+1.64/+0.03pp YoY.The company controlled selling expenses,lowering the selling expense ratio YoY.Gross margin was 82.37%in 1H26,down 1.54pp YoY.We attribute the decline mainly to intensifying competition and VBP pressure on product margins.
Earnings under pressure;downgrade to OVERWEIGHT
Given the rollout of VBP for high-value consumables,the likely continued impact on dural repair products,and pressure on dental restoration products from demand fluctuations and intensifying competition,we expect revenue and gross margin to remain under pressure.We lower our revenue growth forecasts for dental restoration membranes and dural repair products,and cut our gross margin forecast for dental restoration membranes.We forecast 2026/27/28 attributable net profit of RMB70/74/79mn,down 25/28/31%from prior estimates,representing-15.2/+5.7/+6.5%YoY,with EPS of RMB0.39/0.41/0.44.We apply a2026E PE of 46x,in line with the average of 46x for peers on Wind consensus,and derive atarget price of RMB17.87(previous:RMB22.14 based on 43x 2026E PE).
Risks:slower progress on new products than we expect,and weaker volume ramp for VBP-related products than we expect.