Core viewpoints

On the evening of October 27, the company released its report for the first three quarters of 2023, in which Q3 achieved operating income of 843 million yuan in a single quarter, down 13.45% from the same period last year. The slowdown in revenue growth is mainly due to the impact of the adjustment of the company's marketing structure and the collection of superimposed chemical products. The net profit from home was 142 million yuan, an increase of 26.48% over the same period last year, and the net profit from non-return was 145 million yuan, an increase of 55.78% over the same period last year. The rapid growth at the profit end was mainly due to the relatively concentrated investment rhythm of brand promotion last year, which was relatively concentrated in the third quarter, while this year's investment pace was relatively balanced, resulting in quarterly fluctuations in profits. On the whole, the company's Q3 revenue is under short-term pressure, and cost optimization promotes high profit growth.

Event

The company releases the first three quarters report of 2023

On the evening of October 27, the company released a report for the first three quarters of 2023, with operating income of 3.14 billion yuan, an increase of 9.24% over the same period last year, a net profit of 589 million yuan, an increase of 16.74%, and a non-return net profit of 559 million yuan, an increase of 24.19% over the same period last year. Performance is in line with our previous expectations.

Brief comment

Q3 income in a single quarter is under short-term pressure, and cost optimization promotes high profit growth.

In the first three quarters of 2023, the operating income was 3.14 billion yuan, an increase of 9.24% over the same period last year, the return net profit was 589 million yuan, an increase of 16.74% over the same period last year, and the non-return net profit was 559 million yuan, up 24.19% over the same period last year. Among them, Q3 achieved operating income of 843 million yuan in a single quarter, down 13.45% from the same period last year. The slowdown in revenue growth is mainly due to the impact of the adjustment of the company's marketing structure and the collection of superimposed chemical products. The net profit from home was 142 million yuan, an increase of 26.48% over the same period last year, and the net profit from non-return was 145 million yuan, an increase of 55.78% over the same period last year. The rapid growth at the profit end was mainly due to the relatively concentrated investment rhythm of brand promotion last year, which was relatively concentrated in the third quarter, while this year's investment pace was relatively balanced, resulting in quarterly fluctuations in profits. On the whole, the company's Q3 revenue is under short-term pressure, and cost optimization promotes high profit growth.

The first three quarters of 2023 are divided into sections: 1) OTC business: realized operating income of 2.271 billion yuan, an increase of 13.08% over the same period last year, and a gross profit margin of 73.00%, an increase of 1.87% over the same period last year, of which Q3 realized revenue of 625 million yuan in a single quarter, down about 7% from the same period last year. It is speculated that sales revenue has declined mainly due to the adjustment of marketing structure and changes in market competition pattern of products such as lactobacillus tablets and multivitamin tablets. 2) Great Health Business: the operating income was 385 million yuan, an increase of 46.59% over the same period last year, and the gross profit margin was 38.94%, an increase of 5.83% over the same period last year. Q3 achieved an income of 101 million yuan in a single quarter, an increase of about 19% over the same period last year. The three categories go hand in hand to promote the continued good growth of the large health business sector, and the profitability has also continued to improve. 3) prescription drug business: the operating income was 463 million yuan, down 16.93% from the same period last year, and the gross profit margin was 67.07%, down 0.27% from the same period last year. Q3 achieved revenue of 119 million yuan in a single quarter, down about 44% from the same period last year, mainly due to the inclusion of voriconazole in the eighth batch of collection, superimposed the impact of compliance upgrading in the medical industry, resulting in short-term pressure on the company's prescription drug business.

Looking forward to the whole year: the old two-wheel drive OTC is full of new life, which is expected to promote the steady growth of the annual performance and look forward to the whole year. In terms of OTC business, as the company strengthens its core business and ensures endogenous growth, it is expected to continue steady growth in 23 years driven by core products. In terms of large health business, as the company continues to sort out its development positioning in exploration and speed up online transformation and new media promotion, it is expected to maintain a good growth trend in 23 years; in terms of prescription drugs, as the company continues to improve the coverage quality of the original prescription drug business, strengthen product promotion, actively cultivate new categories, stack Hayes Pharmaceutical to strengthen integration development, actively deal with collection and other external risks, it is expected to remain stable for 23 years. Overall, with the gradual weakening of the impact of the adjustment of the company's marketing organizational structure, the OTC plate continues to build the layout of four categories around its core strengths, and at the same time actively develop health products, consolidate the stock business of prescription drugs, and enhance its operational capacity, and its annual performance is expected to achieve healthy growth.

The gross profit margin has risen steadily, and the other financial indicators are basically normal.

In the first three quarters of 2023, the company's comprehensive gross profit margin was 67.70%, an increase of 1.15pp over the same period last year, and a steady increase in profitability; the sales expense rate reached 39.02%, a decrease of 0.08pp over the same period last year, which was mainly affected by the rhythm of expenses such as brand promotion; the management expense rate reached 4.58%, an increase of 0.19pp over the same period last year, and an ideal fee control effect; and the R & D expense rate reached 2.26%, a decrease of 0.28pp compared with the same period last year, which remained basically stable. The net cash flow generated by business activities increased by 25.51% over the same period last year, achieving steady growth. Other financial indicators are basically normal.

Profit forecast and investment rating

As a veteran OTC enterprise of China Resources Pharmaceutical Holdings, the company has focused on the three key business layouts of OTC, Great Health and prescription drugs for many years. We believe that as the company's OTC plate revolves around the core advantages, adhere to the road of development of large categories and items, consolidate the business positioning of "practitioners of regular medicine at home", and actively develop healthy products and strengthen the clinical hospital line, the development of "endogenous + epitaxial" double-wheel drive is expected to grow in the future, and the old OTC enterprises are expected to coruscate a new life. We estimate that the operating income of the company in 2023 will be 4.24 billion yuan, 4.878 billion yuan and 5.633 billion yuan respectively, and the net profit will be 700 million yuan, 810 million yuan and 935 million yuan respectively, equivalent to 1.11,1.29,1.49 yuan per share (EPS), respectively, representing an increase of 17.4%, 15.7% and 15.5% respectively over the same period last year. The corresponding PE is 17.5x, 15.1x and 13.1x respectively, maintaining the "buy" rating.

Risk analysis.

1) the product promotion is not up to expectations: the company's investment in sales is increasing, and if the product promotion is not as expected, it will affect the sales revenue and then the company's profits; 2) at the risk of price reduction, the company's series of core products may further enter the collection list, reduce product prices, compress product profits, and then affect 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, which in turn affects the company's profits. Assuming that the increase in the price of traditional Chinese medicine raw materials causes the company's gross profit margin to fall by 1.0% per year in 2023, 2024 and 2025, the company's net return profit 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 increase in the price of traditional Chinese medicine raw materials causes the company's gross profit margin to fall by 2.0% per year in 2023, 2024 and 2025, the company's net return profit will drop from the current 687 million yuan, 790 million yuan and 908 million yuan to 615 million yuan, 704 million yuan and 805 million yuan.