occurrences

Guang Yuyuan issued a pre-profit announcement for the 2023 annual results. In 2023, it is expected to achieve net profit of 100 million yuan to 120 million yuan, reversing losses from the previous year. At the same time, the company issued an announcement on the correction of early accounting errors and retroactive adjustments, to correct accounting errors and retrospectively adjust the financial statements for the 2016 to 2022 financial statements, and also retroactively adjust the financial statements for the first quarter, half year, and third quarter of 2023.

After the adjustment, there will be no change in the profit and loss nature of the company's disclosed financial statements for the period 2016 to 2022.

Incident reviews

The 2023 results exceeded expectations, and the optimization effect of state-owned investment was highlighted. According to the performance forecast, Guang Yuyuan expects to achieve net profit of 100 million yuan to 120 million yuan in 2023, and net profit without deduction of 90 million yuan to 110 million yuan. According to the 2023 three-quarter report disclosed earlier, Guanyuyuan's net profit for the period was 24.4872 million yuan, and net profit after deduction of non-return to mother was 13.6427 million yuan. After adjustments, the company's net profit for the first three quarters of 2023 was 91.5508 million yuan, and the net interest rate increased to 9.65%. The adjusted performance was superior to previously disclosed results, which also reflected the company's actual situation. According to estimates, Guang Yuyuan expects to achieve net profit of 8.4492 million yuan to mother in the fourth quarter of 2023 to 284.492 million yuan.

In 2023, the company strengthened internal control management and accurately implemented daily budget control. Core business line performance generally increased, and comprehensive gross margin increased. In particular, the share of sales of specialty traditional Chinese medicines continued to increase, and sales expenses decreased year-on-year. The overall increase in the company's net profit led to an increase in the company's net profit, turning a loss into a profit.

The correction of accounting errors is traceable and the recovery of compensation from the original majority shareholders is implemented simultaneously, with the aim of completely solving problems left over from history and going to battle lightly

Guang Yuyuan corrected accounting errors and made retroactive adjustments to the financial statements for the first three quarters of 2016 to 2023, and also made retroactive adjustments to the financial statements issued in 2023.

Among them, since Dongsheng Group, the previous majority shareholder, had promised the company's performance from 2016 to 2018, due to this correction of accounting errors, Guang Yu was far from fulfilling the above performance promises (the net profit indicators promised by Xi'an Dongsheng Group in the previous three years from 2016 to 2018), and Dongsheng Group needed to pay compensation to listed companies. Since then, the company has attached great importance to the recovery of performance promise compensation.

Gradually passing through the painful period of reform, the old brand has a new atmosphere in the new year

2023 is a year of transformation for state-owned enterprises to take over:

1. Management is integrated into the state-owned assets regulation system. Since the launch of the “100 day settlement, cost reduction and efficiency increase, and incremental expansion” in 2022, the results have been remarkable: accounts receivable declined markedly (from 1,094 million yuan in '19 to 553 million yuan in the first three quarters of '23), the cost ratio returned to normal, and the net profit margin increased (sales expenses fell from 70.11% in '22 to 50.59% in the first three quarters of '23, and the net interest rate rose from 5.32% in '22 to 9.65% in the first three quarters of '23), etc. Furthermore, it was further proposed that the top three, two cuts and one control, strengthen the middle and Taiwan, strengthen academics, strengthen sales, reduce acceptance, reduce inventory, and control channels.

2. Determined by senior personnel. In January 2023, Li Xiaojun from the Shanxi State-owned Assets Administration System took over as Party Secretary and Chairman of Shennong Science and Technology Group. In December of the same year, Li Xiaojun officially became Guang Yuyuan's new chairman. The leadership team is clear.

3. Gradually get rid of problems left over from history. The correction of accounting errors is traced back and compensation from the original majority shareholders is sought, and the shadows of the former majority shareholders' operations are removed.

As a traditional Chinese medicine company and pharmaceutical brand that has been passed down from generation to generation for 500 years, Guang Yu Yuan has four core varieties: Guiling Ji, Dingkundan, An Gong Gyuhuang Pills, and Niuhuang Qingxin Pills. After a painful period in 2023, the 2024 state-owned enterprise reform was further revitalized.

Investment advice

Whereas, the company corrected accounting errors and made retroactive adjustments to the financial statements for the first three quarters of 2016 to 2023. Based on the retroactive adjusted results and the latest performance forecast, we adjusted the previous profit forecast. We estimate that the company's revenue for 2023-2025 will be 13.46/17.50/2,229 billion yuan (previous value was 14.2/21.3/3.21 billion yuan), up 19.1%/29.9%/27.4% year on year, respectively, and net profit to mother will be 1.09/1.51/2.06 (previous value was 0.7/234/49 million yuan), respectively, with year-on-year growth of 38.2%/36.8% The corresponding valuation is 109X/79X/58X.

The company's various financial indicators have improved, and the results have been remarkable since the state-owned capital was invested, and we look forward to the release of more reform momentum. Combined with the company's own product strength and brand power, the company's investment value will be highlighted. Therefore, we maintain our “buy” investment ratings.

Risk warning

Risk of fluctuations in raw material supply and prices; risk of governance improvements falling short of expectations, etc.