Daishanlin released its three-quarter report for 2023. In the first three quarters of 2023, the company achieved operating income of 17.723 billion yuan, an increase of 19.61% over the previous year; net profit of 1,174 billion yuan, an increase of 27.20% over the previous year; and net profit after deducting non-return net profit of 1,164 billion yuan, an increase of 26.91% over the previous year. In 2023Q3, the company achieved operating income of 5.731 billion yuan, an increase of 12.44% over the previous year; net profit of 257 million yuan, an increase of 22.90% over the previous year; net profit after deduction of 266 million yuan, an increase of 25.02% over the previous year.

Self-built stores are growing rapidly, and direct-run franchises are speeding up the layout, driving rapid growth in franchise and distribution business. The company added 1,446 direct-run stores in the first three quarters (including 1,019 self-built and 427 mergers and acquisitions). The number of direct-run stores at the end of the period increased by 18.5% year on year, 1,681 new Alliance stores were added, and the number of franchise stores increased by 113.5% year over year at the end of the period. As of the end of 2023Q3, the company had 12,993 stores (including 3688 franchise stores). The company uses the characteristics and advantages of direct-run franchise stores to rapidly deploy direct-run franchise stores in disadvantaged regions, driving rapid growth in franchise and distribution business revenue. In the first three quarters of 2023, the company's retail revenue was 14.903 billion yuan, up 12.04% year on year, and franchise and distribution revenue was 2,344 billion yuan, up 109.36% year on year.

23Q3 Net interest rate improved, and business quality improved. 2023Q3, the company's gross sales margin was 36.24%, down 1.07pp from the previous year, mainly due to the increase in distribution franchise business and the share of prescription drugs. Among them, retail gross margin was 39.07%, down 0.4 pp year on year; franchise and distribution margin was 11.51%, up 2.33 pp year on year. In 23Q3, the company's sales expense ratio declined to 23.07%, down 1.58pp from the previous year, mainly due to the increase in the share of distribution and franchise business and refined management. 2023Q3, the company's net sales margin was 4.69%, an increase of 0.52pp over the previous year.

Profit forecasting and investment advice: The company is deeply involved in the national layout in South China, and continues to rapidly expand its store network layout through self-construction, mergers and acquisitions, and direct franchises. We have adjusted our profit forecast. We expect the company's 2023-2025 EPS to be 1.15, 1.45, and 1.82 yuan respectively, and the PE corresponding to the stock price on November 7, 2023 will be 21.4X, 16.9X, and 13.4X respectively, maintaining the “increase in holdings” rating.

Risk warning: Health insurance policy changes have exceeded expectations, expansion and integration have fallen short of expectations