Core views

On the evening of August 23, the company released its 2023 semi-annual report, achieving revenue of 2,298 million yuan, up 20.87% year on year; realized net profit of 447 million yuan, up 13.95% year on year; realized net profit deduction of 414 million yuan, up 16.04% year on year; achieved steady growth in the first half of the year, driven by non-prescription drugs (OTC) and health services. The performance was in line with our previous expectations. As the company's OTC division focuses on core strengths and continues to build a four-category layout; at the same time, it actively develops health products, consolidates prescription drug inventory business, and enhances operational capacity, and is expected to continue its steady growth trend throughout the year.

occurrences

The company released the 2023 semi-annual report

On the evening of August 23, the company released its 2023 semi-annual report, achieving revenue of 2,298 million yuan, an increase of 20.87% over the previous year; realized net profit of 447 million yuan, an increase of 13.95%; achieved net profit of 414 million yuan, an increase of 16.04% over the previous year; and performance was in line with our previous expectations.

Brief review

Focus on the three key business layouts, and achieve steady growth in core categories

In 2023, H1 achieved revenue of 2,298 million yuan, up 20.87% year on year. The revenue side achieved steady growth driven by non-prescription drugs (OTC) and big health businesses; achieved net profit of 447 million yuan, an increase of 13.95% year on year; realized net profit of 414 million yuan after deducting non-return net profit of 414 million yuan, an increase of 16.04% year-on-year. Slower profit side growth was mainly due to the pace of investment in brand promotion ahead of the same period last year and increased sales expenses. Overall, the company's performance in the first half of the year achieved steady growth driven by products such as the gut category and the throat cough category. The performance was in line with our previous expectations.

In Q2 2023, the company achieved revenue of 981 million yuan, an increase of 1.14% over the previous year. The slowdown in revenue side growth rate was mainly due to stabilizing demand for product terminals; achieving net profit of 206 million yuan, a year-on-year decline of 1.16%; achieving net profit of 189 million yuan deducted from non-return income, an increase of 3.20% year-on-year. The decline on the profit side was mainly due to low cost investment in the same period last year, which led to a high base.

The OTC and Big Health businesses have achieved good growth, and the prescription drug business has performed steadily. Focusing on the three major business priorities of “strengthening OTC, developing big health, and laying out prescription drugs”, the company continues to focus on high-quality development goals, consolidate brand potential, promote the sustainable development of the product hierarchy, and promote the improvement of the management level of M&A enterprises. Looking at the 2023 H1 sub-section:

1) Strengthen OTC's core business to ensure endogenous growth: The company's OTC business achieved revenue of 1,646 billion yuan, an increase of 23.27% over the previous year, and a gross margin of 73.46%, an increase of 1.93 percentage points over the previous year. It achieved good growth driven by intestinal categories such as lactobacillus tablets, compound fresh bamboo extract, and nasal cough categories. Profitability also increased steadily under the impetus of product scale.

2) The Big Health business cultivates potential businesses and sorts out the development position: The company's Big Health business achieved revenue of 285 million yuan, a year-on-year increase of 59.47%, and gross margin of 33.15%, a year-on-year decrease of 0.08 percentage points. The three categories went hand in hand, driving the Big Health business sector to achieve relatively rapid growth, and profitability remained stable.

3) The prescription drug business consolidates inventory business and enhances operational capacity: The company's prescription drug business achieved revenue of 344 million yuan, a year-on-year increase of 0.16%, a year-on-year increase of 69.97%, an increase of 3.87 percentage points over the previous year. The revenue side remained stable, and profitability increased steadily.

Looking forward to the second half of the year: In terms of prescription drugs, established two-wheel drive OTC is expected to drive steady growth in annual performance. Looking forward to the second half of the year. In terms of OTC business, as the company strengthens its core business and guarantees endogenous growth, it is expected to achieve steady growth in 23 years; in terms of the health business, it is expected to maintain a rapid growth trend in 23 as the company continues to sort out its development position in exploration and accelerate online transformation and new media promotion; in terms of prescription drugs, as the company continues to improve the coverage quality of the original prescription drug business, strengthen product promotion, and actively cultivate new products, superposition Hayes Pharmaceuticals is strengthening integrated development and continuously improving business quality. It is expected to achieve steady growth in '23. Overall, as the company's OTC division focuses on core strengths and continues to build a four-category layout; at the same time, it actively develops health products, consolidates prescription drug inventory business, and enhances operational capacity, and is expected to continue its steady growth trend throughout the year.

The gross margin achieved a steady increase, and the rest of the financial indicators were basically normal

In H1 in 2023, the company's comprehensive gross margin was 67.99%, up 1.40 pp year on year, and profitability increased steadily; sales expense ratio reached 39.41%, up 3.51 pp year on year, mainly affected by the pace of brand promotion and other expenses; management expense ratio reached 4.01%, down 0.15 pp year on year, fee control effect was ideal; R&D expense ratio reached 1.99%, down 0.33 pp year on year, and remained stable. Net cash flow from operating activities increased 10.74% year on year, achieving steady growth; net cash flow from investment activity decreased by 82.91% year on year, mainly due to a decrease in bank financial maturity in the current period compared to the same period of the previous year. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

As an established OTC enterprise of China Resources Pharmaceutical Holdings, the company has focused on the three key business layouts of OTC, big health, and prescription drugs for many years. We believe that as the company's OTC sector revolves around core advantages, adheres to the path of large categories and single product development, consolidates the “practitioner of regular medicine at home” business position, and at the same time actively invigorates health products and strengthens the clinical hospital line. The “endogeny+extension” two-wheel drive development can be expected to grow in the future. We expect the company to achieve operating income of 4.442 billion yuan, 5.184 billion yuan and 6.06 billion yuan respectively from 2023 to 2025, and net profit of 687 million yuan, 790 million yuan, and 908 million yuan respectively. EPS (diluted) equivalent to 1.09 yuan/share, 1.26 yuan/share, and 1.44 yuan/share, with year-on-year increases of 15.3%, 15.0% and 14.8%, corresponding PE of 16.7x, 14.5x and 12.6x respectively, maintaining the “buy” rating.

Risk analysis

1) Product promotion does not meet expectations: The company's sales investment is increasing. If product promotion falls short of expectations, it will affect sales revenue and further affect the company's profit; 2) The risk of collection price reduction, the company's core products may further enter the collection list, reduce product prices, reduce product profits, and further affect the company's profit expectations; 3) Risk of raw material price fluctuations: the price of Chinese herbal medicines will be affected by various factors such as the macro environment, natural disasters, and planting conditions. It is easy for the company to fluctuate greatly. If the price of traditional Chinese medicine raw materials rises, the company's production cost may rise sharply, which in turn will affect the company's production costs. Profit; Assuming the rise in the price of raw materials of traditional Chinese medicine causes the company's gross margin to drop 1.0% each year for 23-25, respectively, then the company's net profit for 2023, 2024, and 2025 will drop from the current 687 million yuan, 790 million yuan, and 908 million yuan to 651 million yuan, 747 million yuan, and 856 million yuan; assuming that the company's gross margin for 23-25 will drop 2.0% each year, then the company's net profit for 2023, 2024, and 2025 will fall from now Of 687 million yuan, 790 million yuan, and 908 million yuan, it fell to 615 million yuan, 704 million yuan, and 805 million yuan.