Performance review
1-3Q23 performance is in line with our expectations
The company announced 1-3Q23 results: operating income of 197.508 billion yuan, up 13.1% year on year; net profit of 3.797 billion yuan, decrease of 21.1% year on year; net profit after deduction of 3.304 billion yuan, down 10.6% year on year. The performance is in line with our expectations.
Development trends
The main business in the third quarter alone maintained healthy management. Excluding the impact of one-time special gains and losses, such as the relocation earnings of the subsidiary Qingchunbao in the same period last year and the current shareholding company Shangyao Kangxino's asset impairment preparations, the company's adjusted net profit was 4.265 billion yuan in the 1-3 quarter of 2023, an increase of 8.57% over the previous year.
The company's revenue for the third quarter was 64.916 billion yuan, up 3.2% year on year; net profit was 1,187 billion yuan, up 6.1% year on year; net profit was 1.05 billion yuan, up 8.7% year on year. The sales expense ratio of 1-3Q23 company was 5.3%, down 0.6 percentage points from the previous year, and the management expense ratio was 2.1%, down 0.1 percentage points from the previous year.
The Chinese medicine sector has maintained a growth trend. In the 1-3 quarter of 2023, the company's pharmaceutical industry revenue was 20.8 billion yuan, an increase of 5.09% over the previous year, and the industrial business contributed 1,813 billion yuan in profit, an increase of 9.72% over the previous year. In the 1-3 quarter, the Chinese medicine sector achieved industrial revenue of 7.472 billion yuan, an increase of 16.51% over the previous year. Evidence-based medical research on the six major types of traditional Chinese medicine, Yangxin tablets, blood stasis tablets, Guanxin tablets, Hapbaodan, Gastric Rejuvenation, and Ginkgo biloba, continues to advance, and the number of cases enrolled in the group has further increased.
The company is reorganizing its business platform. In the 1-3 quarter of 2023, the company's distribution business revenue was 177.194 billion yuan, up 14.17% year on year; retail business revenue was 6.532 billion yuan, up 15% year on year; and commercial business contributed profit of 2,626 billion yuan, up 8.8% year on year. In the 1-3 quarter, sales in the company's innovative pharmaceutical sector increased by 21% year on year, and successfully signed 21 import contracts for general import of products. In order to better empower commercial business development, the company announced that it has launched a North-South integration project in the pharmaceutical business sector. The company hopes that the integrated commercial unit will focus on the five strategic priorities of innovative drugs and import platform services, national omni-channel integrated marketing services, device health and international supply chain services, integrated national business development, and digitalization and new retail development, giving full play to the advantages of North and South, and expanding industrial collaboration.
Profit forecasting and valuation
We keep our 2023/2024 EPS forecast of 1.37 yuan/1.56 yuan unchanged. The current A-share price corresponds to the price-earnings ratio of 13.1 times /11.6 times in 2023/2024, and the H-share price corresponds to the price-earnings ratio of 7.4 times /6.3 times in 2023/2024. We maintain that A shares outperform the industry rating and target price of 22.0 yuan remain unchanged, corresponding to a price-earnings ratio of 16.0 times /14.0 times in 2023/2024, with a margin of increase of 21.9% compared to the current stock price. We maintained that H shares outperformed the industry rating. Considering the shift in the valuation center of the H share circulation sector, we lowered the target price of H shares by 6.5% to HK$14.7, corresponding to a price-earnings ratio of 9.6 times/8.1 times in 2023/2024, with 29.2% room for increase from the current stock price.
risks
Centralized drug procurement pressure; pharmaceutical industry business growth fell short of expectations; new product development fell short of expectations.