2022 revenue and net profit fell short of our previous expectations
The company announced its 2022 results: revenue was RMB 14.304 billion, down 24.9% from the previous year; the net profit of the mother was RMB 764 million, down 60.5% from the previous year, corresponding to a profit of RMB 0.15 per share. The performance was lower than our previous expectations. The main reason was that the formula pellet business segment was affected by the short-term impact of certain national standard changes and the depreciation of some fixed assets of about 135 million yuan.
Development trends
The Chinese medicine tablet business is growing strongly. The sector's revenue in 2022 was 1,933 billion yuan, up 31.8% year on year, accounting for 13.5% of total revenue; gross margin was 20.7%, up 3.3 percentage points year on year.
According to the announcement, the sector's revenue and gross profit growth was mainly due to: 1) continued strengthening of medical terminal market development and increased brand influence and customer stability; 2) improved ability to guarantee the supply of traditional Chinese medicine tablets related to COVID-19, and the higher gross profit level of some anti-epidemic insured tablets; 3) increased recognition of tablet frying service terminals and continued growth in related businesses.
The proprietary Chinese medicine business is relatively stable. In 2022, the sector's revenue was $3.122 billion, down 2.3% year over year, or 21.9% of total revenue. According to the announcement, the decline in revenue was mainly affected by factors such as the epidemic and the integration of commercial channels, and sales of 2H22 products declined; in 2022, the gross margin of this sector was 57.9%, down 0.7 percentage points from the previous year. The reason for the decline was that the cost of some raw materials was affected by fluctuations in the prices of Chinese herbal medicines.
Formulated pellet business 2H22 achieved month-on-month improvements. The company's revenue from the company's older formula granule business in 2022 was 7.711 billion yuan (YoY -42.5%, accounting for 53.9% of revenue). According to the announcement, the main factors behind the decline in revenue were insufficient provincial standards issued and registered varieties, and terminal configuration was limited. At the same time, some medical institutions stocked sufficient enterprise standard products at the end of 2021, which led to a decrease in demand for terminals in the current period. Looking at the half-year period, the company's 2H22 formula granule revenue was 4.949 billion yuan, an increase of 79.2% over the previous month. The recovery trend is obvious. We believe that in 2023, as the transformation of old and new standards for traditional Chinese medicine formula pellets continues to advance, the revenue and gross profit of the company's formula pellet business are expected to recover in an orderly manner.
Profit forecasting and valuation
Considering that new business investment may result in further cost investment, and at the same time, the promotion of national standards for formulations at the industry level may be slightly slower than our previous expectations, we lowered our net profit in 2023 by 41.8% to 1,178 million yuan, and introduced the 2024 net profit forecast of 1,484 million yuan. The current stock price corresponds to the 2023/2024 price-earnings ratio of 14.8 times/11.4 times. Considering the upward shift in the sector's valuation center and maintaining an outperforming industry rating and the target price of HK$4.68, corresponding to 16.9 times the 2023 price-earnings ratio and 13.0 times the 2024 price-earnings ratio, there is room for 14.1% upward compared to the current stock price.
risks
Revenue from new business investments fell short of expectations; revenue from formula pellets fell short of expectations.