1Q22 performance is in line with our expectations

The company announced its results for the first quarter of 2022: operating income was 20.539 billion yuan, an increase of 2.46% over the same period last year, and net profit was 1.806 billion yuan, an increase of 10.95% over the same period last year, corresponding to earnings per share of 1.11 yuan. The net profit deducted from non-return increased by 10.85% to 1.764 billion yuan compared with the same period last year.

Trend of development

Gross profit margin rose in the first quarter of 2022 compared with the same period last year. 1Q22's operating revenue increased by 2.46% over the same period last year, mainly affected by the epidemic and the high base of 1Q21. We expect the revenue of 1Q22's big health section to grow by 5-10% year-on-year, mainly due to the totem jar of Wang Laoji's surname launched by the company during the Spring Festival in 2022. In the future, the company will adhere to innovation-driven, in-depth exploration of "auspicious culture" brand assets, vigorously enhance the flexible customized supply capacity, and continue to promote the upgrading of herbal tea products and the development of younger and fashionable. In addition, the company's gross profit margin was 23.6%, up 1.1 percentage points from a year earlier.

The rate of sales expenses increased compared with the same period last year, while the rate of management expenses remained unchanged from the same period last year. In the first quarter of 2022, the company's sales expense rate was 9.1%, an increase of 0.2 percentage points over the same period last year. The rate of management expenses was 2.6%, which was the same as the same period last year.

The rate of R & D expenditure was 1.2%, an increase of 0.2% over the same period last year. The net cash flow generated by operating activities was 918 million yuan, down 45.4% from the same period last year, mainly due to the collection time for the Spring Festival in 2022, which partly occurred at the end of 2021.

The company actively explores the mechanism of professional managers and other innovative measures. Guangzhou Pharmaceutical, a subsidiary of the company, as the first pilot unit within the company, has formally launched and implemented the professional manager system in 2021, and promoted the implementation of the professional manager system in two other subordinate enterprises. In the future, we expect that the company will actively promote other qualified enterprises to implement the professional manager system.

Profit forecast and valuation

We maintain the 2022 EPS 2023 forecast of 2.52 yuan / 2.90 yuan, corresponding to a year-on-year increase of 10.0% 15.1%. The current A share price corresponds to the price / earnings ratio of 10.8 times / 9.4 times 2023 for the A share price, and 6.7 times / 5.8 times for the H share price / earnings ratio for 2022amp 2023. We maintain the outperforming industry rating and keep the A-share price unchanged from 37.8 yuan (corresponding to 15.0 times 2022 price-to-earnings ratio and 13.0 times 2023 price-to-earnings ratio, which has 39.0% upside space compared to the current share price). Maintain the H-share price list price of 26.4 Hong Kong dollars (corresponding to 9.0 times 2022 price-to-earnings ratio and 7.8 times 2023 price-earnings ratio, 34.1% upside compared to the current stock price).

Risk

The competition in the consumer market is fierce, and the price of Danan medicine is under pressure.