Core views

On August 28, the company released its semi-annual report for 2023. In the first half of 2023, the company achieved operating income of 79.357 billion yuan, a year-on-year increase of 16.73%, net profit of 1,343 billion yuan, a year-on-year increase of 5.83%, net profit after deducting 1,295 billion yuan, a year-on-year increase of 17.09%, and a basic earnings of 0.47 yuan per share. The performance was in line with our expectations.

In 2023, the company will continue to optimize its business structure, and the share of revenue from high-margin business is expected to increase steadily. Coupled with residents' demand for medication continuing to recover, we are optimistic that the company's profitability will steadily increase.

occurrences

The company released the 2023 semi-annual report. The performance was in line with our expectations. On August 28, the company released the 2023 semi-annual report. In the first half of 2023, the company achieved operating income, net profit attributable to parent, and net profit of 79.357 billion yuan, 1,343 billion yuan, and 1,295 billion yuan, respectively, with year-on-year increases of 16.73%, 5.83% and 17.09%, respectively. The performance was in line with our expectations.

Brief review

The revenue structure continues to be optimized, and profitability is steadily increasing

In the first half of 2023, the company's revenue side grew by 16.73%, mainly due to:

1) The in-hospital diagnosis and treatment order was gradually restored, and the revenue of urban public hospitals increased 23.29% year on year to 18.138 billion yuan; 2) Drug demand from primary medical institutions increased 26.27% year on year to 7.689 billion yuan; 3) B2B e-commerce platform revenue increased 28.78% year on year to 9.308 billion yuan; 4) Factory brand promotion demand increased. In the first half of the year, the company's general brand promotion business revenue increased 38.74% year on year to 8.637 billion yuan.

In the first half of 2023, the company's net profit to parent increased 5.83% year on year, and net profit not attributable to parent increased 17.09% year on year. The difference in profit side growth rate was mainly due to the company's disposal of non-current assets in the same period last year, resulting in an irregular profit and loss of about 7146 million yuan, while the current period lost 26.56 million yuan.

In the second quarter of 2023, the company's revenue increased 13.5% year on year to 37.265 billion yuan, mainly due to: 1) steady growth in digital pharmaceutical distribution and supply chain business revenue; 2) accelerated growth in general brand promotion business. The company's net profit decreased 4.27% year on year to 782 million yuan, net profit not attributable to parent increased 14.80% year on year to 722 million yuan. The difference in profit side growth rate was mainly due to differences in non-current asset disposal, net profit side growth was slightly faster than revenue, mainly due to continuous optimization of the company's revenue structure, and the share of revenue from higher-margin general brand promotion business, new pharmaceutical retail business, digital logistics technology and supply chain solutions, and healthcare and technology value-added services continued to rise.

Accelerate the development of primary distribution business, help transform distribution business online+offline, restore in-hospital diagnosis and treatment order, and accelerate the layout of primary medical institutions. In the first half of 2023, the company's digital pharmaceutical distribution and supply chain business revenue increased 14.01% year on year to 67.488 billion yuan, and gross margin remained flat at 6.74%. Benefiting from the restoration of in-hospital diagnosis and treatment order, the company's urban public hospital revenue increased 23.29% year-on-year to 18.138 billion yuan in the first half of the year, further increasing its share of total revenue to 22.88%. In addition, the company actively deployed primary care terminals to accelerate the increase in the penetration rate at the primary level. In the first half of the year, the revenue of primary medical institutions increased 29.71% year-on-year to 3.645 billion yuan, driving a 26.27% year-on-year increase in business revenue of the tertiary terminal to 7.689 billion yuan. We believe that in the second half of 2023, the in-hospital diagnosis and treatment order is expected to continue to be restored, demand for in-hospital medication will increase steadily, and the company's offline distribution business revenue is expected to increase steadily.

The contribution of online business is accelerating, and the number of active users is steadily increasing. In the first half of 2023, the company actively implemented digital transformation. The revenue scale of digital distribution business such as the Pharmaceutical 999 B2B trading platform reached 6.054 billion yuan, of which the revenue scale for large-scale pharmaceutical retail e-commerce platforms such as JD and Ali was 3.254 billion yuan. By the end of June 2023, the company's Pharmaceutical Jiujiu platform had a total of 350,000 active users and 199,000 active users of the “Smart Medicine Connect” platform. We believe that through digital empowerment, the company's distribution business is expected to meet more diverse customer needs and collaborate with offline businesses to help transform the traditional distribution business.

The general brand promotion business is growing at an accelerated pace, the industrial sector continues to improve, and the general brand promotion business is growing at an accelerated pace, and the profit structure continues to be optimized. In the first half of 2023, the company's general brand promotion business revenue increased 38.74% year on year to 8.637 billion yuan, and gross margin increased 2.45 percentage points year on year to 16.95% year on year. Among them, general pharmaceutical brand promotion business achieved sales revenue of 4.949 billion yuan, an increase of 48.60% year on year, and general device brand promotion business achieved sales revenue of 3.688 billion yuan, an increase of 27.40% year on year. In the first half of 2023, the company's total number of drug substitutes reached 915, of which 19 varieties are expected to have annual sales of over 100 million yuan. We believe that by actively empowering core manufacturer brands through a sound brand planning and operation system, the company can attract more varieties that have not won the bid, thereby optimizing the overall profit structure.

The industrial sector continues to improve, and sales of OEM products are accelerating. In the first half of 2023, the company's self-production and OEM business revenue in the pharmaceutical industry increased 5.44% year on year to 1,182 billion yuan, and gross margin fell 0.4 percentage points year on year to 22.16%. By business: 1) Western medicine industry: Jingfeng Pharmaceutical, a wholly-owned subsidiary, continues to strengthen quality management and brand promotion, actively create large single metformin tablets, and cultivate high-quality products with raw materials and formulations; 2) Chinese medicine industry:

Jiuxin Traditional Chinese Medicine actively deployed upstream Chinese herbal medicine resources and strengthened product research and development. Sales revenue maintained a steady increase of 932 million yuan in the first half of the year. 3) Private brand:

The company focuses on household use, low consumption, rehabilitation, high consumption and IVD varieties, obtains products through OEM, ODM, clinical outcome transformation, mergers and acquisitions, etc., and actively promotes private brand sales with the support of distribution business advantages. Sales revenue of OEM products increased 43.27% year-on-year to 63.17 million yuan in the first half of the year.

Focus on transformation and development, innovative business continues to gain strength

In the first half of 2023, the company was committed to developing a core system for the “new retail” scenario, building a digital platform for 10,000 stores in Kyushu to help the digital transformation of stores. By the end of June 2023, the company had a total of 15,856 franchise stores, and the number of stores is expected to exceed 30,000 by 2025. Furthermore, through the self-developed “Power Medicine Cloud” platform, the company empowers public medical institutions and tripartite Internet medical platforms with digital technology and efficient operation capabilities. In the first half of 2023, the company's healthcare and technology value-added service revenue increased by 38.83% year on year to 105 million yuan, and gross margin increased 1.3 percentage points to 37.14% year on year. In addition, the company continues to build an efficient supply chain logistics service system for multiple ends. In the first half of the year, revenue from digital logistics technology and supply chain solutions increased 38.05% year on year to 403 million yuan, and gross margin increased 5.2 percentage points to 25.56% year on year. We believe that by accelerating the development of diversified, high-margin, innovative businesses, the company's profitability continues to be optimized, and its performance potential is gradually unleashed.

Traditional businesses are steadily improving, and the effects of innovation and transformation are gradually showing

Looking ahead to the second half of the year, we believe that the in-hospital diagnosis and treatment order will continue to improve, and the company's in-hospital distribution business is expected to show a restorative growth trend. Furthermore, with the gradual implementation of outpatient coordination policies, and the reimbursement rate of primary medical institutions and pharmacies is relatively high, demand for medication use at the primary level and in the outpatient market is expected to be released at an accelerated pace, which in turn brings additional growth to the company's performance. At the same time, the company is actively promoting innovation and transformation, and the share of revenue from high-margin innovative businesses is expected to further increase, thereby reducing the impact of declining gross margin in the traditional distribution sector and further optimizing the company's overall profitability. Furthermore, due to the external environment and changes in the fair value of financial assets held by the company, the company's net interest rate has fluctuated greatly in the past three years. As terminal operations return to normal and the scale of the company continues to expand, the overall net interest rate is expected to rise steadily.

Structural adjustments increased the overall gross profit margin. Net cash flow from operating activities improved sharply. In the first half of 2023, the company's comprehensive gross margin was 8.42%, up 0.40 percentage points from the previous year, mainly due to the increase in the share of high gross profit business revenue; the sales expense ratio was 3.01%, up 0.26 percentage points from the previous year, which remained stable; the management expense ratio was 1.72%, up 0.07 percentage points year on year, and remained stable; the financial expense ratio was 0.76%, down 0.03 percentage points year on year, and remained basically stable. Net cash flow from operating activities increased by 125.22% year-on-year, mainly due to the company's increased mid-year settlement efforts and increased sales repayment. The number of inventory turnover days was 42.14 days, a year-on-year decrease of 1.31 days, and remained stable; the number of accounts receivable turnover days was 69.31 days, a year-on-year decrease of 13.65 days, mainly due to the company's increased efforts to clear accounts receivable; the number of payable turnover days was 39.21 days, a decrease of 2.45 days from the previous year, and remained stable. The rest of the financial indicators are generally normal.

Profit Forecasts and Investment Ratings

The company is expected to achieve operating income of 158.448 billion yuan, 179.353 billion yuan and 203.76 billion yuan respectively from 2023 to 2025, with year-on-year increases of 12.8%, 13.2% and 13.6%, respectively, and net profit of 2,606 billion yuan, 3,099 billion yuan and 3.641 billion yuan, respectively, with year-on-year increases of 25.0%, 18.9% and 17.5% respectively, equivalent to 0.93 yuan/share, 1.11 yuan/share and 1.30 yuan/share, corresponding valuation of 10.1X, 8.5X and 7.2X, maintaining the “buy” rating.

Risk analysis

1) Drug collection risk: The scope of centralized drug procurement is gradually expanding, which may cause a certain risk of price reduction for the company, affecting some of the company's business profits. Moreover, as the number of products that won the bid increase in volume procurement, its excessive scale may have a great impact on the company's operating income and profits; 2) Market competition intensifies:

Major competitors or newcomers in the market may weaken the company's comparative advantage and sustainable development ability, thereby affecting the company's long-term development; 3) Product development risk: if the company's product development progress falls short of expectations, it may damage the company's long-term business competitiveness; 4) Accounts receivable turnover risk: If the company's accounts receivable cycle is extended or cannot be recovered, it may cause time and financial losses to the company; 5) Regulatory risk: On March 2, 2023, the Shanghai Stock Exchange accepted Kyushu Express's application to issue preferred shares to specific targets. During the subsequent inquiry, the company said it was healthy The portion of the urban project permitted for sale by the government is not sold to the public, with the exception of selling the portion that has already obtained a pre-sale certificate to internal employees to provide employee benefits, but in reality there are cases where it is sold to the public. It has been supervised and warned by the Shanghai Stock Exchange, which may adversely affect the company's operations.