Core viewpoints

On the evening of October 27, the company released its results report for the third quarter of 2023, with operating income of 6.5 billion yuan, an increase of 38.03% over the same period last year, a net profit of 278 million yuan, an increase of 42.03% over the same period last year, and a net profit of 271 million yuan after deduction, an increase of 37.26% over the same period last year. Looking forward to Q4, outpatient planning continues to drive prescription outflow, stack company store scale continues to expand, business structure continues to optimize, we are optimistic about the steady release of the company's performance potential.

Event

The company released the third quarter report of 2023, and the results were in line with our expectations on October 27, and the company released the third quarter report of 2023. In the first three quarters of 2023, the company achieved operating income of 6.5 billion yuan, an increase of 38.03% over the same period last year, a net profit of 278 million yuan, an increase of 42.03% over the same period last year, and a net profit of 271 million yuan after deducting non-return, an increase of 37.26% over the same period last year.

Brief comment

Actively undertake the outflow of prescription, and the scale effect appears gradually.

In the first three quarters of 2023, the company's revenue increased by 38.03%, mainly due to: 1) the company actively accepted the incremental business brought about by the outflow of prescriptions in the hospital, and the sales revenue of prescription drugs and over-the-counter drugs increased by 47.91% in the first three quarters. 2) the online business continued to develop, and the company's online channel revenue reached 1.604 billion yuan in the first three quarters, an increase of 67.92% over the same period last year. 3) the sales of branded goods increased by 45.81% to 817 million yuan over the same period last year. The net profit of home ownership increased by 42.03% compared with the same period last year, and the net profit of non-home ownership increased by 37.26% over the same period last year, mainly due to: 1) the gradual maturity of new stores and sub-new stores, accelerating the contribution of profit growth; 2) the company actively implemented the rent control and rent reduction strategy, and the rent rate decreased; 3) the company strengthened fee control and efficiency, and the expense rate decreased by 1.02% over the same period last year.

In the third quarter of 2023, the company achieved operating income of 2.162 billion yuan, an increase of 26.96% over the same period last year, mainly due to: 1) the continuous outflow of prescriptions in the hospital resulting in incremental passenger flow; 2) online revenue, especially the rapid growth of third-party O2O business. 23Q3, the company achieved a net profit of 120 million yuan, an increase of 13.94% over the same period last year, and a net profit of 116 million yuan, an increase of 11.69% over the same period last year. The growth rate was lower than that of the revenue end, mainly due to increased sales promotion efforts, and the sales expense rate increased by 1.17% in the third quarter alone.

The expansion of stores is advancing steadily, and the performance is expected.

In the first three quarters of 2023, the company built 603 self-built stores and acquired 61 stores, with a net increase of 656 stores. At the end of the period, the total number of stores reached 4711 (including 325 convenience stores), including 3939 health insurance stores, accounting for 89.81% of the total number of drugstores. As of September 30, 2023, the company has a total of 565 chronic disease stores, 188 special disease stores, 132 dual-channel qualified stores and 304 outpatient pharmacies. We believe that the company will continue to accelerate the expansion of self-built stores in the fourth quarter, and the goal of a net increase of more than 1000 stores for the whole year may be achieved as scheduled.

Actively undertake the outflow of prescriptions and continue to develop in multiple formats.

Prescription outflow is accelerated and sales promotion attracts passenger flow. In the first three quarters of 2023, the drug demand of residents was gradually released, and the company actively seized the market opportunity to adjust the category structure and undertake the additional incremental business brought about by the outflow of prescriptions from customers in the hospital. At the same time, since 23Q2, the company and industrial enterprises have jointly increased sales promotion and professional promotion efforts to promote the healthy growth of passenger flow and transaction times. In the first three quarters of 2023, the company's sales of prescription and over-the-counter drugs increased by 47.91% compared with the same period last year, and the share of revenue increased by 4.65%. We believe that as the outflow of prescriptions continues to accelerate, the company will adjust its strategy and increase sales promotion in a timely manner. Under the background of weak consumption power, the company's single store revenue still has a lot of room for growth.

Member loyalty remains high, diversified business contribution increment. As of September 30, 2023, the number of active members of the company exceeded 25 million, the consumption of members accounted for more than 70%, the return rate of members reached 78%, and the stickiness of members remained high. In addition, the company actively promotes the sales of online and branded products. In the first three quarters of 2023, online sales increased by 67.92% to 1.604 billion yuan compared with the same period last year, and sales of branded products with high gross margin increased by 45.81% to 817 million yuan. We believe that the company continues to consolidate diversified competitive advantages, product structure continues to optimize, revenue and gross profit growth space is still large.

With the gradual landing of outpatient co-ordination, the base number may affect the growth rate of Q4. Starting from July 1, 2023, the policy of regional outpatient co-ordination in Yunnan Province will be gradually implemented, taking into account the relatively large reimbursement range of retail drugstores. It may continue to urge consumers to flow to the out-of-hospital market, leading to a steady increase in the number of transactions in the head enterprise stores. We believe that the company currently has 304 outpatient pharmacies, the proportion is still small, the follow-up number is expected to accelerate, and then bring additional incremental passenger flow for the company, the superimposed company continues to promote the development of high gross profit business such as online business and OEM products, and the profit structure is expected to continue to optimize, but taking into account the relatively high Q4 base of the company, growth may slow in the fourth quarter.

Structural adjustment affects gross profit margin, and costs are greatly improved during the period.

In the first three quarters of 2023, the company's comprehensive gross profit margin was 35.88%, down 0.68% from the same period last year, mainly due to the increase in the proportion of prescription and over-the-counter drug sales; the sales expense rate was 26.37%, a decrease of 0.67% over the same period last year, mainly because the company actively promoted rent reduction negotiations, rent reduction achieved remarkable results. The rate of management expenses was 2.09%, down 0.44% from the same period last year, and the effect of fee control was ideal; the rate of financial expenses was 1.45%, up 0.10% from the same period last year, mainly due to the increase in unrecognized financing fees and financing interest expenses. The net cash flow generated by operating activities decreased by 13.7% compared with the same period last year, which remained basically stable. Inventory turnover days were 143.02 days, an increase of 3.75 days compared with the same period last year, which remained basically stable; accounts receivable turnover days were 21.73 days, an increase of 1.74 days over the same period last year, mainly due to the impact of the expansion of the company's revenue scale; accounts payable turnover days were 123.93 days, down 4.11 days from a year earlier, basically stable. Other financial indicators are basically normal.

Profit forecast and investment rating

We estimate that the operating income of the company in 2023 will be 9.587 billion yuan, 11.946 billion yuan and 14.796 billion yuan respectively, an increase of 27.6%, 24.6% and 23.9% respectively over the same period last year, and the net profit will be 400 million yuan, 505 million yuan and 639 million yuan respectively, an increase of 10.1%, 26.3% and 26.5% respectively over the same period last year, and EPS is 3.10,3.92 yuan and 4.96 yuan per share respectively. Maintain the "buy" rating corresponding to valuations of 16.5X, 13.0X and 10.3X, respectively.

Risk analysis.

1) the medical insurance policy is stricter: if the medical insurance policy is stricter and the fee control requirements are higher, drug prices as a whole are likely to fall further, and the company's profit margins may face greater pressure.

2) the progress of store expansion is lower than expected: if the store expansion is not as expected, the company's long-term performance growth potential may not be released, or it may have an adverse impact on the company's long-term revenue growth.

3) the decline of store profitability: if the company's late fine management is not in place, it may reduce the store profitability, which will adversely affect the company's long-term profit margin.

4) the progress of prescription outflow is lower than expected: if the prescription outflow is not as expected, the business increment caused by store-end prescription outflow will be reduced, affecting the performance release.