Core viewpoints

On the evening of August 10, the company released its half-yearly results report for 2023. H1 realized HK $813 million in revenue in 2023, an increase of 29.8% over the same period last year, and its net profit reached HK $266 million, an increase of 23.9% over the same period last year. Looking forward to the second half of the year, although the base of H2 was relatively high in the same period last year, as the company actively carried out marketing activities, continued to expand the Guangdong-Hong Kong-Macau Greater Bay Area market, and further improved the layout of the overseas market, under the background of the recovery of local consumption and overseas customs clearance, the company is expected to achieve steady growth for the whole year.

Event

The company issues its 2023 half-yearly results report

On the evening of August 10, the company released its annual report for 2023. H1 realized HK $813 million in revenue in 2023, an increase of 29.8% over the same period last year, a net profit of HK $298 million, an increase of 25.1% over the same period last year, and a net profit of HK $266 million, an increase of 23.9% over the same period last year. The performance is in line with our previous expectations.

Brief comment

Revenue and profit achieved steady growth, and the performance of H1 in 23 years was in line with expectations.

Judging from the overall performance in the first half of 2023, the company achieved revenue of 813 million Hong Kong dollars, an increase of 29.8 percent over the same period last year, and a net profit of 266 million Hong Kong dollars, an increase of 23.9 percent over the same period last year. Profit growth was slightly slower than revenue growth, mainly due to changes in the company's revenue structure, gross profit margin decreased compared with the same period last year. On the whole, the company's performance achieved a good recovery in the first half of the year, and the performance was in line with our previous expectations, mainly benefiting from: 1) the gradual relaxation of the epidemic prevention policy in Hong Kong and the rapid recovery of the local retail industry. Promote good growth in the performance at a low base in the same period last year; 2) with the gradual implementation of customs clearance between Hong Kong and the mainland, the mainland market has achieved good growth driven by the domestic sales of new Chinese medicine products.

The core areas have achieved rapid recovery and are expected to achieve steady growth throughout the year.

From the perspective of local business trends: 1) Hong Kong market: H1 achieved income of HK $439 million in 23 years, an increase of 41.6% over the same period last year, mainly due to the gradual realization of overseas customs clearance in Hong Kong, superimposed on the issuance of consumption vouchers and a series of policies to stimulate consumption. Retail sales in Hong Kong have recovered rapidly. By 23, H1 had recovered to about 85% in the same period in 2019. Promote the rapid recovery of the company's revenue in Hong Kong from a low base in the same period last year. 2) overseas markets: H1 achieved HK $266 million in revenue in 23 years, an increase of 7.7% over the same period last year, of which Macao is expected to achieve steady growth; in addition, as the company actively takes overall planning, other overseas regions are expected to achieve relatively stable growth, driving the growth of revenue in the overseas market as a whole. 3) mainland market: H1 achieved HK $108 million in revenue in 23 years, an increase of 55.0% over the same period last year, which is expected to be mainly due to the new domestic sales of traditional Chinese medicine products, customs clearance between Hong Kong and the mainland, and the gradual resumption of sales of core products. Promote the company's mainland market revenue to achieve good growth.

Looking forward to the second half of the year, although the base of H2 was relatively high in the same period last year, as the company actively carried out marketing activities, continued to expand the Guangdong-Hong Kong-Macau Greater Bay Area market, and further improved the layout of the overseas market, under the background of the recovery of local consumption and overseas customs clearance, the company is expected to achieve steady growth for the whole year.

The gross profit margin decreased due to the influence of the business structure, and the expense rates remained basically normal.

In 2023, H1, the company's comprehensive gross profit margin was 62.4%, a year-on-year decline of 6.7pp, mainly due to the change in business structure caused by the company's new domestic sales business of traditional Chinese medicine products; the sales expense rate was 12.7%, which decreased by 0.8pp over the same period last year; the management expense rate was 10.3%, which increased by 0.6pp compared with the same period last year, and the fee control effect was ideal. The turnover days of accounts receivable increased from 157 days at the end of 2022 to 159 days of H1 in 2023; the days of inventory turnover increased from 283 days at the end of 2022 to 306 days of H1 in 2023; and the remaining financial indicators were basically normal.

Profit forecast and investment rating

We believe that as the overseas business operation platform of Tongrentang Group, the business trend is expected to improve gradually, the superimposed company is actively deepening the reform of the marketing system, and the performance is expected to gradually achieve restorative growth. We estimate that the company's operating income for 2023-2025 will be HK $1.965 billion, HK $2.203 billion and HK $2.46 billion, respectively, and its net profit will be HK $746 million, HK $860 million and HK $984 million respectively, equivalent to HK $0.89, HK $1.03 and HK $1.18 per share (EPS), respectively, representing year-on-year increases of 15.5%, 15.3% and 14.5%, respectively. The corresponding PE is 16.4,14.3 and 12.4 respectively, maintaining the "buy" rating.

Risk analysis.

1. The risk of the impact of COVID-19 's epidemic situation: at present, the domestic epidemic situation still fluctuates. If the epidemic situation continues repeatedly, it may have a certain impact on industrial production, logistics and express delivery, and then affect the sales and performance expectations of the company's related products. 2. Drug price reduction risk: the competitive market such as the company's core products may intensify and lead to a decline in product prices, which in turn affects the company's profit expectations. 3. The risk of price fluctuation of raw materials: the price of traditional Chinese medicine will be affected by many factors, such as macro environment, natural disasters, planting conditions and so on, so it is easy to fluctuate greatly. If the price of raw materials of traditional Chinese medicine rises, the company's production costs may rise sharply, thus affecting the company's profits.