Incidents:
On March 22, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 4.390 billion yuan, a year-on-year increase of 13.00%, achieved net profit of 708 million yuan, an increase of 18.40% over the previous year, and achieved deducted non-net profit of 704 million yuan, an increase of 38.97% over the previous year.
Looking at a single quarter, in 2023, Q4 achieved operating income of 1,153 billion yuan, a year-on-year increase of 23.04%, achieved net profit of 116 million yuan, an increase of 27.26% over the previous year, and achieved deducted non-net profit of 142 million yuan, an increase of 150.98% over the previous year.
Performance was in line with expectations, and OTC drugs and health products maintained high growth.
According to the “Notice Concerning Major Operating Data for 2023” issued by the company in January 2024, after preliminary accounting, the company's total operating income is expected to increase by about 13% year on year in 2023, and net profit to mother will increase by about 18% year on year. The final results for 2023 are in line with expectations. Looking at the breakdown by business: 1) In 2023, non-prescription drugs achieved operating revenue of 3,050 billion yuan, an increase of 16.46% over the previous year. Among them, the revenue scale of the core single product, stomach health tablets, returned to 1.1 billion yuan; the revenue scale of lactobacillus tablets and bifidobacteria triple-active bacteria enteric capsules (Beifida) all exceeded 500 million yuan. The total revenue for throat medicine compound herbal coral tablets and compound fresh bamboo extract exceeded 300 million yuan; 2) In 2023, prescription drugs achieved operating revenue of 664 million yuan, a decrease of 16.31% over the previous year, mainly due to collection, etc. The impact of policy changes; 3 ) In 2023, Big Health products and others achieved revenue of 650 million yuan, an increase of 49.96% over the previous year. Among them, the revenue scale of the “Shenlingcao” series products exceeded 100 million yuan, and the revenue of the “Chuyuan” series products increased by about 40% year on year. Gastrointestinal health probiotics series products and liver health pure tablets all achieved breakthrough growth, and are expected to become the new over 100 million yuan business.
We insisted on reducing costs and increasing efficiency, and achieved high growth after deducting non-net profit.
In 2023, the company's deducted non-net profit increased 38.97% year on year. We believe it was mainly due to continued progress in reducing costs and increasing efficiency. In 2023, the company promoted the transformation and upgrading of production lines, improving capacity utilization efficiency, optimizing production processes, and reducing procurement costs. The gross margin of the main business reached 65.28% in 2023, an increase of 0.35 pct over 2022. In 2023, the company continued to strengthen its ability to control expenses. The sales expense ratio fell from 38.81% in 2022 to 37.09% in 2023 (1.72 pct year-on-year decrease), and the management expense ratio fell from 5.30% in 2022 to 4.80% in 2023 (0.50pct year-on-year decrease). Due to financial restructuring, financial expenses were reduced by 32.21 million yuan in 2023. Due to the increase in gross margin and the decline in the period expense ratio, the company's deducted non-net interest rate reached 16.03% in 2023, an increase of 2.74 pcts compared to 2022.
A high-quality asset with a high cash dividend ratio and high dividends.
According to the “Notice on the 2023 Annual Profit Distribution Plan”, the company plans to distribute 7 yuan (tax included) for every 10 shares in 2023, and the cash dividend amount is expected to reach 440 million yuan. If the cash dividend amount for the first three quarters of 2023 is added, the cash dividend amount for the full year of 2023 will reach 818 million yuan, and the cash dividend ratio (cash dividend amount/net profit to mother) will reach 115.52%. Referring to the closing price on March 22, 2024, the dividend rate will reach 5.76%.
Starting in 2021, the company adjusted its cash dividend policy, from 1 dividend per year to 2 dividends per year, for the third quarter dividend and annual dividend, respectively. The cash dividend ratio increased dramatically to more than 100%. The reason behind the excess dividends is abundant cash flow. The company's net operating cash flow in 2023 was 1,036 billion yuan, and the company's cumulative net operating cash flow over the past 5 years (2019-2023) was 4.363 billion yuan.
Endogenous+epitaxial two-wheel drive, strong merger and acquisition integration capabilities.
The company's development strategy is clear. The annual report shows that the company adheres to the two-wheel drive strategy of “endogenous development+epitaxial mergers and acquisitions” around the three major business layouts of “strengthening OTC, developing big health, and laying out prescription drugs”. Over the past few years, the company has continuously acquired companies such as Sanghai Pharmaceuticals, Jisheng Pharmaceuticals, and Hays Pharmaceuticals, focusing on the digestive and respiratory fields, supplementing important varieties such as Bazhen Yimu capsules, multi-dimensional element tablets, compound bamboo extract, Chuanbei loquat capsules, bifidobacteria trifecta enteric capsules (Beifida), etc., and formed good synergy with the company's existing product line, showing strong merger and acquisition integration capabilities. Specifically, in 2023, Hays Pharmaceuticals achieved operating income of 983 million yuan and realized net profit of 87.4 million yuan; Gisheng Pharmaceutical achieved operating income of 502 million yuan, achieving net profit of 21.5 million yuan; and Sanghai Pharmaceutical achieved operating income of 271 million yuan and net profit of 13.5 million yuan.
Investment advice:
Based on the company's development plan, we assume that from 2024 to 2026, the company's non-prescription drug revenue growth rates will be 12%, 12%, and 12% respectively; prescription drug revenue growth rates will be 5%, 5%, and 5%, respectively; Big Health products and other revenue growth rates will be 20%, 20%, and 20% respectively. Based on the above assumptions, we expect the company's revenue from 2024 to 2026 to be 4.921 billion yuan, 5.523 billion yuan, and 6.207 billion yuan, respectively, and net profit to mother of 824 million yuan, 930 million yuan, and 1,050 billion yuan respectively. Considering the clear development strategy and steady performance growth, it is a high-quality and high-dividend asset. Referring to the valuation levels of comparable companies such as China Resources 39, Ling Rui Pharmaceutical, and Yunnan Baiyao, the company was given a PE valuation of 20 times in 2024, corresponding to a target price of 26.20 yuan for 6 months, giving it a buy-A investment rating.
Risk warning: Risk of price fluctuations of Chinese herbal medicines, risk of collecting prescription drugs, risk of epitaxial development falling short of expectations.