Core views

On August 24, the company announced its 2023 semi-annual results announcement. In 2023, H1 achieved revenue of 3,946 million yuan, an increase of 30.91% over the previous year; realized net profit of 560 million yuan, an increase of 23.84%; realized net profit of 368 million yuan, an increase of 15.65% over the previous year. The performance growth was in line with previous forecasts. Overall, in the first half of the year, the company carried out themed marketing activities around consumer demand, effectively enhanced product market competitiveness and marketing momentum, promoted rapid expansion of leading products in the context of strong terminal demand, and led to rapid revenue growth.

occurrences

The company released the 2023 semi-annual results announcement

On August 24, the company announced its 2023 semi-annual results announcement. In 2023, H1 achieved revenue of 3,946 million yuan, an increase of 30.91% over the previous year; realized net profit of 560 million yuan, an increase of 23.84%; realized net profit of 368 million yuan, an increase of 15.65% over the previous year. The performance growth was in line with previous forecasts.

Brief review

Large varieties led to rapid revenue growth. The growth rate slowed slightly under cost pressure on the profit side. Overall, in '23, H1 achieved a year-on-year increase of 30.91%, not taking into account inter-segment revenue. Among them, the parent company, Tong Ren Tang Sinopharm, and other subsidiaries achieved year-on-year increases of 26.69%, 39.00%, and 31.93%, respectively. The parent company and domestic subsidiaries maintained good growth, and the overseas subsidiary Tong Ren Tang Sinopharm also achieved a rapid recovery from a low base for the same period last year. Looking at the profit side, the company's net profit increased by 23.84% year on year, and net profit on the return side increased 15.65% year on year. The relatively slow growth rate on the profit side was mainly due to: 1) the short-term pressure on the company's profitability due to rising raw material prices, which dragged down current performance; 2) the parent company's growth rate was slow.

Quarterly, Q1 achieved revenue of 2,057 billion yuan in '23, an increase of 42.04% over the previous year, net profit of 210 million yuan, an increase of 30.38% over the previous year. Both sides of revenue and profit achieved rapid growth driven by large varieties and overseas subsidiaries; in '23, Q2 achieved revenue of 1,890 billion yuan, an increase of 20.62% over the previous year, and the revenue side basically continued a good growth trend, driven by leading varieties such as cold and heat cleansing granules and fresh vein drinks; net profit on the return side was 800 million yuan, up 0.52% year on year, and the profit side growth rate slowed down month-on-month Mainly due to the gradual deepening of the impact of rising raw material prices.

Looking forward to the second half of the year: Continuously deepening the large-scale strategy and further expanding the coverage of the Revitalization Campaign to H1 2023, the company will further expand the coverage of the Rejuvenation Campaign around the theme of “Tong Ren Tang Sheng Yu for 300 Years”. Through initiatives such as integrated channels, strengthened control, and terminal development, etc., the company promoted comprehensive online and offline empowerment and increased product sales volume. By the first half of the year, the company had sold 8 million varieties and 52 varieties sold over 5 million. In the first half of the year, the company carried out themed marketing activities focusing on consumer demand, effectively enhancing product market competitiveness and marketing momentum, and promoting rapid release of leading products in the context of strong terminal demand. Among them, the Cold Relief Granule Series, the Fresh Veal Drink Series, the Ejiao Series, the Jin Qui Kidney Gas Series, and the Beef Huang Detox Tablet series achieved year-on-year increases of 158.11%, 70.86%, 55.88%, 22.78%, and 13.36%, respectively.

Looking ahead to the second half of the year, although H2's profit side base was slightly higher last year, as the company promoted full online and offline empowerment through measures such as continuing to deepen its large-scale strategy, integrating channels, strengthening control, and strengthening terminals, etc., it is expected that the market position and share of core products are expected to further increase. Combined with the recovery of the retail industry in Hong Kong, it is expected that the performance recovery of overseas subsidiaries will drive steady growth in the company's annual performance.

Fluctuations in raw material prices led to pressure on gross margin. Various cost ratios remained normal at H1 in 2023. The company's comprehensive gross margin was 39.71%, down 3.19 pp from the previous year. It is estimated that it was mainly due to rising raw material prices; the sales expense ratio reached 15.67%, down 0.80 pp from the previous year, and the fee control effect was ideal; the management expense ratio reached 7.94%, an increase of 0.43 pp over the previous year, and remained stable.

The accounts receivable turnover ratio increased from 6.79 at the end of 2022 to 7.52 in mid-2023, and the inventory turnover ratio rose from 1.97 at the end of 2022 to 2.47 in mid-2023. The turnover levels of accounts receivable and inventory remained stable; the rest of the financial indicators were basically normal.

Profit forecasting and investment ratings

We believe that the company is backed by the Tongrentang century-old brand, is rich in diverse resources, and has deep operating barriers. As the company's large-scale strategy and marketing reforms continue to advance, it can guarantee the company's long-term steady growth; we expect the company to achieve operating income of 6.788 billion yuan, 7.704 billion yuan and 8.758 billion yuan respectively in 2023-2025, and net profit of 660 million yuan, 749 million yuan and 852 million yuan respectively, equivalent to 0.51 yuan/share, 0.58 yuan/share, and 0.66 yuan/share, year-on-year. The increases were 13.1%, 13.3%, and 13.5%, respectively. The corresponding PE was 11.3x, 10.0x, and 8.8x, respectively, maintaining the “buy” rating.

Risk analysis

1. Risk of COVID-19. Currently, the domestic epidemic situation is still fluctuating. It will have an impact on industrial production, logistics and express delivery, etc., which may affect the production, logistics and sales of public goods, which in turn affects the company's performance; 2. The risk of drug price reduction, where competitive markets such as the company's core products may increase, leading to a decline in product prices, which in turn affects the company's profit expectations; 3. Risk of raw material price fluctuations. The raw materials for traditional Chinese medicine products are clearly cyclical. Currently, the price of raw materials remains high. The price of raw materials may rise further, leading to a further increase in cost pressure, which in turn affects the company's performance; 4. The company Reforms fall short of anticipated risks. The company is actively promoting reform work, but there may be situations where the effects of the reforms fall short of expectations, etc., which in turn affects the company's profit expectations.