Core views

On the evening of March 21, the company released its 2023 annual report. The annual revenue, net profit attributable to mother, and net profit after deduction were 7.703 billion yuan, 445 million yuan, and 335 million yuan respectively, up -6.99%, 16.05% and 33.45% year-on-year respectively. Overall, the company has further consolidated its foundation, and the quality of operations has been steadily improving. Excluding the effects of various impairment, the main business operation was in line with our previous expectations. Looking ahead to 24 years, the company will continue to promote strategic integration, build quality Chinese medicines around the “1381, 1951, and 777” divisions, deepen chronic disease management, and expand the geriatric health industry. The 24-year performance is expected to improve quarterly.

occurrences

The company released its 2023 annual report

On the evening of March 21, the company released its 2023 annual report. The annual revenue, net profit due to mother, and net profit after deduction were 7.703 billion yuan, 445 million yuan, and 335 million yuan respectively, up -6.99%, 16.05% and 33.45% year-on-year respectively. The main business operations were in line with our previous expectations.

Brief review

It is important to consolidate the foundation and go to battle lightly. The growth of the main business is in line with expectations, and a marked improvement in business quality is important

Overall, in 2023, the company achieved operating income of 7.703 billion yuan, down 6.99% year on year. The slowdown in revenue growth was mainly due to the decline in the commercial sector's commercial revenue scale, superposition and reduction in foreign aid business, and the industrial sector still achieved steady growth; achieved net profit of 445 million yuan, an increase of 16.05% year on year, and achieved net profit after deduction of 335 million yuan, an increase of 33.45% year on year. The profit side achieved good growth mainly benefited from the company actively promoting continuous optimization of product structure and multiple measures to promote cost reduction and efficiency ; Among them, Q4 achieved operating income of 2,092 billion yuan in a single quarter, up 0.14% year on year, and achieved steady growth on the revenue side; achieved net profit of 0.59 million yuan, up 458.75% year on year; realized net profit after deduction of 0.25 million yuan, up 388.53% year on year. The profit side grew faster year on year mainly due to factors such as the low base for the same period last year, and the slowdown in month-on-month growth was mainly affected by factors such as the company's calculation of various impairment preparations. Overall, the company has further consolidated its foundation, and its operating quality has been steadily improved. Excluding various impairment effects (including asset impairment losses of 66 million yuan and credit impairment losses of 53 million yuan, for a total of 119 million yuan), the company's main business operations are in line with expectations.

Kunyao Huesetong: Committed to building a benchmark for the 37 industry chain. The core product of Xuesaitong has achieved good growth. Through continuous academic and brand exploration, the company further explores the academic value of the 37 7 industry chain. On the basis of the existing 37 industry layout, it continues to focus on the key layout of “extend the chain - repair the chain - strengthen the chain”, accelerate the integration of upstream, middle and downstream resources, and promote the development of the 37 7 industry chain to achieve high-quality development, standardization and organized development of the 37 7 industry chain to achieve high-quality development of the 37 7 industry chain and build a benchmark for the 37 industry chain. In terms of products, the company adheres to the dual channel drive of brand channels, continuously deepens channel cultivation, gives full play to the combined advantages of multiple dosage forms and product regulations of Kunyao Blood Saucetong, and does a good job in top-level product design and forward-looking layout. While actively participating in national and inter-provincial drug collection and tightening the bid window to expand market share, the company continues to take a dual approach of expanding channels and stabilizing the grassroots level, and continues to empower strong brands and strong academics. The channel penetration rate and market share of the company's 37 product groups have steadily increased. In 23, Hesketong tablets won the bid in volume procurement of proprietary Chinese medicines in Shanghai and Zhejiang. The company's Hesetong oral products achieved a year-on-year increase of 19.44%, with the core product Hesketong softgel achieving a year-on-year increase of 33.04%; in addition, injectable Hesetong (freeze-dried) won the bid in volume procurement of proprietary Chinese medicines in Shanghai. Through steady promotion and development of market channels, the company strives to stabilize the injection market pattern and promote a year-on-year increase of 22.65% year-on-year.

Kunming Traditional Chinese Medicine: Under the strategy of focusing on large single products, the CHC business is clearly improving its growth rate as the company's premium Chinese medicine platform, and the core business of Kun Traditional Chinese Medicine continues to focus. In 2023, it achieved revenue of 947 million yuan and net profit of 138 million yuan.

On the basis of using 39 commercial channels, the company further integrates commercial channels, optimizes the original business model, and steadily increases terminal coverage through multiple channels and channels. In addition, the company relies on 39's terminal operation and management capabilities, brand operation capabilities and strategic planning capabilities to focus on “big variety - big brand - big category”, focusing on building strong single products, continuously cultivating products with high growth potential, and exploring more classic famous products with a long heritage to promote the continuous steady growth of Kunming Traditional Chinese Medicine 1381. In 2023, while stabilizing in-hospital sales, Shugan Granules, the core product of Kun Traditional Chinese Medicine, accelerated the layout of out-of-hospital channels, increasing 11.11% year over year. Against the backdrop of high incidence of respiratory diseases such as influenza and mycoplasma pneumonia, products such as oropharyngeal cleansing pills, lung clearing and phlegm relief pills, and Panlan heat clearing granules in the potential product group of Kunming continued to gain strength, achieving year-on-year increases of 44.32%, 24.21%, and 21.19% respectively. In addition to this, Kun Traditional Chinese Medicine relied on Shenling Spleen and Stomach Pellets to launch a fast digestion model, cooperated with the cross-border partner Wen's Foods to launch the first domestic “cure and nourish” spleen preparation product, the Shenling Chicken series, and cooperated with Chacha Melon Seed to launch a healthy snack - the Shenling Melon Seed series, to achieve a new experiment in new consumption across borders between brands. Overall, the company's CHC business is improving its quality and growth rate, laying a solid foundation for continuous business integration, and is expected to further increase its market share and brand influence.

Looking forward to 24 years: Strategic integration continues to advance, and management is expected to improve quarterly. The outlook for 24 years is expected to be “KPC? “1951, Kunming Traditional Chinese Medicine 1381, 777” The three major divisions joined forces to promote the company's development: 1) KPC? 1951 Division:

Focusing on core treatment fields such as “cardiovascular, skeletal muscle, respiratory system, neuropsychiatry”, etc., we will create a leader in serious treatment in the field of geriatric health; in terms of pipeline, by strengthening and implementing superior varieties in the hospital, accelerate the increase in potential products and enrich the product pipeline; in terms of marketing, through “academic+brand” two-wheel drive, the company will comprehensively improve marketing efficiency; in terms of channels, the company will actively develop collection and response strategies, stabilize the basic market, and improve channel coverage capabilities. 2) Kunming Traditional Chinese Medicine 1381 Division: Focusing on the three core roads of “strong channels, excellent system, and building a railway army”, the company will focus on the core products of Kun Traditional Chinese Medicine, increase brand exposure through advertising, accelerate terminal transformation and rapidly improve channel coverage; at the same time, dig deeper into the classic recipes of Qiankun Traditional Chinese Medicine to create more traditional Chinese medicine products, and use 39's experience and advantages to empower the company to jointly build the “Kunming Traditional Chinese Medicine 1381” boutique Chinese medicine brand. 3) Sanqi Oral 777 Division: Focusing on the 377 industry chain, dedicated to chronic disease management and aging health, providing more specialized solutions to meet clinical needs; at the same time, actively respond to proprietary Chinese medicine collection policies, give full play to the combined advantages of multiple dosage forms and multiple product regulations in the Hsuxitong Oral Series, continue to strengthen brand building and academic building, build leading brands in the 37 field, actively optimize the dealer channel structure, and enhance the terminal coverage and marketing capabilities of Hessugong Oral Products.

Considering this year's cost investment and continued integration, we expect the company's operations to show a trend of low and gradual improvement in 24 years.

A five-year strategic plan was released to become a leader in the silver hair health industry

On March 21, 2024, the company issued a resolution of the 24th board of directors of the 10th session to review and pass the bill on the company's strategic plan (2024-2028). According to the strategic plan, it is proposed that the company will closely focus on “inheriting quality Chinese medicine, with the 37 industry chain as the core, the strategic core of aging health, expanding the field of chronic disease management, and becoming the first stock in the silver hair health industry”, focusing on the two core business areas of boutique Chinese medicine and aging health—chronic disease management, through short-, medium-, and long-term three-step development action plans, seven strategic initiatives, six planning guarantees and six core competencies, focusing on building chronic disease management with 37 series products as the core, and the “Kunming Traditional Chinese Medicine 1381” series as the core two major Chinese medicines A platform dedicated to becoming an “aging health -A “leader in chronic disease management” and a “leader in quality Chinese medicine”. The strategic plan clearly states that through endogenous development and epitaxial expansion, the company will strive to double operating income by the end of 2028, reach 10 billion yuan in industrial revenue (CAGR = 18%), and strive to become the first stock in the Yinfa Health Industry.

Profitability continues to increase, and net operating cash flow is improving year by year

In 2023, the company's consolidated gross margin was 44.82%, an increase of 3.30pp over the previous year, mainly affected by changes in revenue structure. The sales expense ratio reached 31.58%, an increase of 2.21pp over the previous year, mainly affected by changes in the revenue structure; the management expense ratio reached 4.07%, a year-on-year decrease of 0.51 pp, mainly benefiting from the company's active promotion of cost reduction and efficiency. Net cash flow from operating activities increased 40.25% year on year, mainly due to a decrease in cash from procurement payments this year; net cash flow from investment activities decreased by 44.59% year on year, mainly due to unexpired and unrecovered payments for financial management purchases this year; net cash flow from financing activities fell 397.70% year on year, mainly due to higher loan repayments this year. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We believe that: 1) The company is a leading enterprise in natural botanicals. Under the “gold single product+category cluster” combination strategy, it can guarantee the company's long-term steady growth; 2) the company's product structure is becoming more and more reasonable, the operating chassis is more stable, and the revenue and channel structure are continuously optimized, which is expected to drive the sustainable growth of the company's performance; 3) With the entry of China Resources 39, the company will use 39's rich management experience and industrial resource background to further improve operating efficiency and enhance competitive advantage, and the two sides can develop collaboratively to achieve a win-win situation. The company is expected to achieve operating income of 8.786 billion yuan, 10.036 billion yuan and 11.486 billion yuan respectively, and net profit to mother of 611 million yuan, 749 million yuan and 912 million yuan respectively, equivalent to EPS (diluted) of 0.81 yuan/share, 0.99 yuan/share and 1.20 yuan/share, respectively, with year-on-year increases of 37.5%, 22.5%, and 21.8%, respectively, maintaining the “buy” rating.