Core views
On the evening of October 30, the company released its report for the third quarter of 2023. Among them, Q3 achieved revenue of 1,755 billion yuan in a single quarter, a year-on-year decline of 4.67%. It is estimated that the company's revenue side growth rate was mainly due to short-term pressure on hospital product sales due to the influence of external industries and continued pressure on the pharmaceutical business sector; net profit was 136 million yuan, a year-on-year decline of 47.84%; and the decline on the profit side was mainly due to: 1) Acquisition of Keju Biotech shares in the same period last year. The sharp increase in investment income has led to a high base; 2) Sales in the highly profitable industrial sector are under short-term pressure, and overall performance is slightly lower than our previous expectations. Looking forward to the future, as the company continues to promote marketing innovation and the results of mixed reform gradually become apparent, the overall business trend is expected to gradually improve, promoting the healthy development of the company's performance.
occurrences
The company released its report for the third quarter of 2023
On the evening of October 30, the company released its report for the third quarter of 2023, achieving total operating income of 5.793 billion yuan, an increase of 4.13% over the previous year; realized net profit of 858 million yuan, an increase of 17.73% over the previous year; and realized net profit after deduction of 842 million yuan, an increase of 29.80% over the previous year. The performance performance was slightly lower than our previous expectations.
Brief review
Short-term performance fluctuates, and management improvements can be expected
Overall, in the first three quarters of 23 years, the company achieved revenue of 5.793 billion yuan, up 4.13% year on year, of which industrial revenue increased 12.9% year on year and commercial revenue fell about 4% year on year; realized net profit of 858 million yuan, up 17.73% year on year; realized net profit after deduction of 842 million yuan, up 29.80% year on year; among them, Q3 achieved revenue of 1,755 billion yuan in a single quarter, down 4.67% year on year. It is estimated that the company's revenue side growth slowed down mainly due to short-term pressure on hospital product sales, compounded by external industries, superimposed pharmaceuticals The commercial sector continued to be under pressure; net profit of 136 million yuan, a year-on-year decline of 47.84%; realized net profit of 130 million yuan, a year-on-year decline of 29.64%; the decline on the profit side was mainly due to: 1) the acquisition of Keju Biotech shares in the same period last year, and the sharp increase in investment income led to a high base; 2) short-term sales pressure in the highly profitable industrial sector, and overall performance performance was slightly lower than our previous expectations.
Looking ahead to the whole year: Focus on the development of key varieties of “three cores and nine wings”, and marketing innovation to promote brand strength. In 2023, the company takes “expanding and strengthening green traditional Chinese medicine”, continues to promote the “1+5” strategic plan, focuses on the healthy development of the “Three Core and Nine Wings” key varieties, and launched the “China Heart” plan on the basis of the continuation of the “China Heart” plan, strategically release the “China Heart” strategy, clear the white paper, etc., and continuously expand the company's influence. In addition to this, the company has actively carried out precise marketing strategic cooperation for all categories with the top 100 chains, held special training camps to improve marketing capacity, and terminal empowerment activities such as “Battle Red May”, etc., focusing on promoting cardiovascular chronic disease empowerment programs and entry and marketing plans for varieties such as swallowing pills and gastrointestinal relief pills, etc., and the brand influence has continued to increase. At the same time, the company launched the “China Heart Health Tour” — the “Heart” Empowerment Program for Chronic Disease Management in Drugstores, and launched the “Love Your Voice China Plan” to promote the Internet of Droplets in 24 provinces and cities, store more than 400 stores nationwide, and develop more than 2,000 medical terminals. In the first three quarters of 2023, the company's key varieties of quick-acting heart-saving pills, phroat cleansing pills, Yasugong niuhuang pills, and Jingwanhong Ointment all achieved double-digit year-on-year growth in sales revenue and sales volume.
Looking ahead to the whole year, as the company actively promotes management and marketing system reforms, focuses on the healthy development of “three cores and nine wings” key varieties, and the gradual restoration of industry order, it is expected that the company's pharmaceutical industry sector is expected to gradually resume steady growth under the leadership of large varieties, and the pharmaceutical business sector is expected to gradually stabilize, promoting the healthy development of the company's performance throughout the year.
Gross margin has increased dramatically, and the quality of operations has remained healthy
In the first three quarters of 2023, the company's comprehensive gross margin was 44.86%, a year-on-year increase of 3.86pp, mainly benefiting from changes in revenue structure; the sales expense ratio reached 25.11%, a year-on-year increase of 2.73pp, mainly due to the year-on-year increase in market expansion and maintenance fees and employee remuneration; the management expense ratio reached 4.39%, a year-on-year decrease of 0.46pp, mainly due to the repurchase of restricted stocks, equity incentive expenses rebounded; and the R&D expenses rate reached 1.49%, a decrease of 0.17 pp over the previous year, and remained basically stable. Net cash flow from operating activities decreased 35.81% year over year, mainly due to a year-on-year increase in cash for purchasing goods and receiving labor payments; net cash flow from investment activities decreased by 412.33% year over year, mainly due to a year-on-year decrease in cash received from investment and net cash paid from investment; net cash flow from fund-raising activities fell 3.35% year on year, mainly due to a year-on-year increase in dividend payments. The rest of the financial indicators are generally normal.
Profit forecasting and investment ratings
As a large Chinese medicine company controlled by Tianjin Pharmaceutical Group, the company has deep brand accumulation and rich variety resource reserves; we believe that with the implementation of mixed reforms by the company's controlling shareholders, the introduction of private enterprises to stimulate business vitality, and at the same time launch the “14th Five-Year Plan” strategic plan, continue to promote the “1+5” strategic layout, promote the healthy development of the “Three Core and Nine Wings” key varieties, and future growth can be expected. We expect the company to achieve operating income of 8.208 billion yuan, 9.440 billion yuan and 10.868 billion yuan respectively from 2023 to 2025, and net profit of 1,015 billion yuan, 1,198 billion yuan and 1,421 million yuan respectively, equivalent to EPS (dilution) of 1.32 yuan/share, 1.56 yuan/share and 1.84 yuan/share, corresponding PE of 22.6x, 19.2x and 16.2x respectively, maintaining the “buy” rating.
Risk analysis
1. Reforms fall short of expectations: Reforming organization and marketing, streamlining institutions and personnel, and reforming remuneration incentives after the implementation of the mixed reform; the effects of the reforms fall short of expectations, or have an impact on the company's profit expectations; 2. Policy risks such as resistance restriction and collection: the intensification of anti-resistance policies may cause the antimicrobial market to shrink, affecting the advancement of policies such as consistency evaluation; collection policy risks, including related product price reductions and hospital-side market share being taken over; 3. Drug price reduction risk: Incidents such as inter-provincial collection alliances and increased market competition may cause the company's product prices to fall beyond expectations, and further exceed expectations influence the company's revenue and profit expectations; 4. Risk of price fluctuations of raw materials: The price of Chinese herbal medicines will be affected by various factors such as the macro environment, natural disasters, planting conditions, etc., and is prone to large fluctuations. 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.