Introduction to this report:

Distribution has maintained steady growth, and retail revenue growth is slowing down due to the base effect, and the growth rate is expected to pick up in 2024; the company's net interest rate is expected to continue to improve as the results of the introduction and reform of high-margin products gradually become apparent.

Key points of investment:

Maintain an increase in holdings rating. The company released a quick performance report. In 2023, it achieved revenue of 75.477 billion yuan (+2.77%), net profit to mother of 1,599 billion yuan (+7.57%), and net profit of non-return to mother of 1,533 billion yuan (+7.58%). 2023Q4 achieved revenue of 19.075 billion yuan (+1.32%) and net profit attributable to mother of 410 million yuan (-6.61%). The performance was basically in line with expectations. Considering the base effect, the 2023-2025 EPS was lowered to 2.87/3.19/3.53 yuan (originally 2.89/3.30/3.81 yuan), and the target price was maintained at 39.60 yuan, corresponding to the 2024 PE12X, and the holdings increase rating was maintained.

The distribution business is growing steadily, and the net interest rate is expected to gradually increase. In 2023, distribution achieved revenue of $51,957 billion (+3.50%) and net profit of 1,057 billion yuan (+2.52%), in line with expectations. The distribution business is expected to maintain good growth in 2024 due to the impact of industry restructuring, 2023Q2-3 growth has slowed to 1.23%, -0.94%, and 2023Q4 has recovered to 7.09%. The net profit margin reached 2.03% in 2023, which is basically the same as the previous year. In the future, as the share of high-margin businesses increases, the net distribution margin is expected to maintain an upward trend.

The growth rate of the 2023Q4 retail business is expected to pick up in 2024 due to a decline in the high base. In 2023, the retail business achieved revenue of 24.409 billion yuan (+1.26%) and realized net profit of 527 million yuan (+50.66%).

2023Q4 revenue fell 10.18% due to the impact of a high base. Revenue growth is expected to pick up in 2024 as the base effect improves and outpatient coordination contributes further. The net interest rate in 2023 was 2.16% (+0.71pct). The profit level increased significantly. The effects of the reform are gradually showing, and it is expected to continue in the future.

Focusing on “batch and zero integration”, it is expected to benefit the outflow of prescriptions in the long term. The company has a complete distribution network and a national retail business network in the two regions, and has strong upstream bargaining power. In the context of outpatient coordination and volume procurement, it is easier to enjoy prescription outflow dividends based on variety and channel collaboration.

Risk warning: Profit improvements fell short of expectations, and prescription outflows fell short of expectations.