Core views:

The company released its three-quarter report for '23, and the results were in line with expectations. The company achieved revenue of 17.723 billion yuan (yoy +19.61%), net profit to mother of 1,174 billion yuan (yoy +27.20%), and net profit after deducting non-return to mother of 1,164 billion yuan (yoy +26.91%) in the first three quarters. The results were in line with expectations. Looking at a single quarter, the company achieved operating income of 5.731 billion yuan (yoy +12.44%), net profit to mother of 257 million yuan (yoy +22.90%), and net profit after deducting non-return to mother of 266 million yuan (yoy +25.02%) in Q3.

The overall operation is steady, and the franchise business is developing rapidly. By business segment, in the first three quarters (1), the company's retail business achieved revenue of 14.903 billion yuan (yoy +12.04%), and the franchise and distribution business achieved revenue of 2,344 billion yuan (yoy +109.36%), with gross margin of -0.4/+2.33pct, respectively.

The company quickly deployed direct-run franchisees in weak regions, driving rapid growth in franchise and distribution business revenue. (2) The company achieved revenue of 12.742 billion yuan (yoy +20.87%), 2,082 billion yuan (yoy +16.16%), and 2,423 billion yuan (yoy +16.12%), and gross margin of -2.11/+1.51/-2.36 pct, respectively. (3) Revenue in South China/Central China/East/Northeast China, North China, Northwest China and Southwest China increased by 12.69%/13.65%/30.92%/70.91%, respectively.

Accelerate the expansion of stores and actively implement expansion strategies outside the province. The company registered a net increase of 2,948 stores in the first three quarters of 23, of which the number of newly opened/acquired/franchised/closed stores was 1019/427/1681/179, respectively. As of September 30, '23, the company had a total of 12,993 stores (including 9305 direct-run stores and 3,688 franchised stores). The company continues to deeply cultivate the South China region. While maintaining steady revenue growth, the company actively implements expansion strategies outside the province and maintains rapid growth in Northeast China, North China, Southwest China and Northwest China.

Profit forecasting and investment advice. EPS is expected to be 1.18/1.47/1.80 yuan/share in 23-25, respectively, corresponding to PE21.23x/16.96x/13.86x. Referring to comparable company valuations, we think it is appropriate to give the company a reasonable valuation of 22xPE in 2024, corresponding to a reasonable value of 32.34 yuan/share, maintaining a “buy” rating.

Risk warning. Prescription outflows are progressing less than expected; cross-regional management risks; policy risks.