Incidents:
On March 21, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 7.703 billion yuan, a year-on-year decrease of 6.99%, achieved net profit of 445 million yuan, an increase of 16.05% over the previous year, and achieved deducted non-net profit of 335 million yuan, an increase of 33.45% over the previous year.
Looking at a single quarter, in 2023, Q4 achieved operating income of 2,092 billion yuan, a year-on-year increase of 0.14%, achieved net profit of 59 million yuan, an increase of 458.75% over the previous year, and achieved deducted non-net profit of 25 million yuan, an increase of 388.53% over the previous year.
The business structure has been optimized and adjusted, and core products have maintained high growth.
2023 is the first year that China Resources 39 joined the Kunming Pharmaceutical Group. It is a key year for the implementation of various state-owned enterprise reform initiatives. Due to relatively many internal adjustments and changes, performance fluctuated in stages, which is in line with our definition characteristics of the “reform implementation” stage in the Chinese Medicine State-owned Enterprise Reform Analysis Framework (see the in-depth report “What are the potential catalysts for the Chinese medicine industry in 2024”). On the revenue side, the company's revenue declined year on year in 2023, mainly due to business structure optimization and reduction in foreign aid business; in terms of business split, oral administration achieved operating income of 3,055 billion yuan in 2023, up 5.58% year on year; injections achieved operating income of 1,059 billion yuan, up 11.09% year on year; pharmaceutical business achieved operating income of 3.322 billion yuan, a decrease of 7.40% year on year. On the profit side, the company's net profit and net profit after deducting non-net profit increased significantly year on year in 2023, mainly due to the company's further promotion of cost reduction and efficiency and strict control of various expenses. In 2023, management expenses decreased 17.29% year over year, and financial expenses decreased by 73.19% year on year.
In 2023, the company adhered to the large variety strategy, and the optimization and adjustment of the business structure highlighted the value of core varieties. Among them, in 2023, injectable Hesetong (freeze-dried) increased 22.65% year on year, overall Hesetong oral products increased 19.44% year on year (of which Hesketong softgels increased 33.04% year on year, blood clotting tablets increased 15.09% year on year), oral and pharyngeal cleansing pills increased by 44.32% year on year, Panlan clean-up tablets increased 21.19% year on year, and lung cleansing pills increased 24.21% year on year.
Shareholders were successfully integrated, and a five-year strategic development plan was announced. The future focus is “inventory integration” and “incremental expansion.”
The integration between the company and its shareholder China Resources 39 is progressing steadily according to the mechanism of 100 day integration, 1 year integration, and 3 year integration. Currently, the 100-day integration and one-year integration have been successfully completed. The company and China Resources 39 have converged on strategy, business, organization, and culture, laying the foundation for the company to continue to promote three-year integration. At the same time, the company announced a strategic development plan for the next five years (2024-2028) — “Through endogenous development and epitaxial expansion, we will strive to double operating revenue and reach 10 billion yuan in industrial revenue by the end of 2028.” According to the company's development strategy, the future will focus on a chronic disease management platform with 37 series products as the core and a premium Chinese medicine platform with the “Kunming Traditional Chinese Medicine 1381” series products as the core. 1) The point of the chronic disease management platform is inventory integration: China Resources Shenghuo's Bloodstone series products under China Resources 39 have a competitive relationship with the company. With the entry of China Resources 39, in 2023, China Resources Shenghuo and Kunming Pharmaceutical Group participated in joint events such as the 37 Industry Chain Seminar and the Chinese Medicine Industry Chain Salon, and jointly invested in the establishment of Yunnan 37 Research Institute Co., Ltd. The relationship between the two sides is moving from competition to collaboration. If competition issues in the industry are properly resolved in the future, the two sides are expected to join forces to become leaders in the 37 industry chain. 2) The highlight of the boutique Chinese medicine platform is the incremental expansion: As an old traditional Chinese medicine brand in Yunnan, China Pharmaceutical has failed to successfully reach the whole country due to lack of channel resources and limited sales radius. China Resources 39 has the country's leading dealer and chain terminal customer system - “39 Commercial Road”, which can cover more than 400,000 pharmacies across the country. In 2023, Kunming Traditional Chinese Medicine used the “39 Commercial Road” to increase terminal coverage. According to the “Investor Relations Activity Record”, as of the first three quarters of 2023, KCM Group has completed first-level channel integration work for 20 domestic provinces and regions, It is expected to turn Kun Traditional Chinese Medicine into a nationally renowned fine Chinese medicine brand.
With the implementation of the “Four Reshapings”, high-quality development of state-owned enterprise reforms can be expected.
In 2023, the company thoroughly implemented the “Four Reshaping” of “Value Reshaping, Business Reshaping, Organizational Reshaping, and Spiritual Reshaping”. 1) Value Reshaping: Hold a mid-term seminar on the “14th Five-Year Plan” strategy and review promotion meeting to lay a solid foundation for promoting strategy decoding and implementation. 2) Business restructuring:
Initiate marketing organizational reforms and establish the three core business divisions “KPC1951, Kunming Traditional Chinese Medicine 1381 and 777” to promote the company's business implementation by inheriting quality Chinese medicines, building 37 benchmarks, and deepening the elderly health industry. 3) Organizational restructuring: Using China Resources 39's rich management experience, 6S management systems and tools, we promote digital transformation and implementation of refined management. 4) Spiritual Reshaping: Officially release the “Lecheng Culture” concept to guide the reshaping of corporate culture. As the corporate culture of China Resources Group, “Four Reshaping” plays an important role in this round of state-owned enterprise reform. Take Donga Ejiao, a subsidiary of China Resources Group, as an example. During the 14th Five-Year Plan period, Donga Ejiao deeply implemented the “Four Reshapings” to promote the company's high-quality development, achieve a series of impressive results, and continuously achieve high performance growth. We believe that KPC is in a critical period of state-owned enterprise reform. With the implementation of various measures, it can be expected to achieve high-quality development in the future.
Investment advice:
Based on the company's development plans and business characteristics, we assume that the company's oral revenue growth rates from 2024 to 2026 will be 16%, 16%, and 16%, respectively, the injection revenue growth rates will be 12%, 12%, and the pharmaceutical business revenue growth rates will be 10%, 10%, and 10%, respectively. Based on the above assumptions, we expect the company's revenue from 2024 to 2026 to be 8.672 billion yuan, 9.769 billion yuan, and 11.013 billion yuan, respectively, and net profit to mother of 623 million yuan, 761 million yuan, and 929 million yuan respectively. Considering that the company is in a critical period of state-owned enterprise reform, the strategic plan is clear, the long-term goals are clear, and high-quality development can be expected. Referring to the valuation levels of comparable companies such as Donga Ejiao, Tong Ren Tang, and China Resources 39, the company was given a PE valuation of 30 times in 2024, corresponding to a target price of 24.60 yuan for 6 months, giving it a buy-A investment rating.
Risk warning: risk of price reduction in the collection of proprietary Chinese medicines; risk of price fluctuations of Chinese herbal medicines; risk of state-owned enterprise reforms falling short of expectations.