Core views
On March 20, the company released its 2023 annual results report, achieving operating income of 49.696 billion yuan, a year-on-year increase of 9.23%, achieving net profit of 2,146 billion yuan, an increase of 9.26% over the previous year, and realized net profit after deducting 2,093 billion yuan, an increase of 9.52% over the previous year, and achieved earnings of 2.84 yuan per share. The results exceeded our expectations. Looking ahead to 2024, the in-hospital diagnosis and treatment order is expected to gradually resume, and the impact of hospital compliance sales may stabilize. Combined with the continuous promotion of business innovation and transformation and detailed cost-side control, the potential for performance growth may be unleashed at an accelerated pace.
occurrences
The company released its 2023 annual results report. The performance exceeded our expectations. On March 20, the company released the 2023 annual results report, achieving operating income of 49.696 billion yuan, a year-on-year increase of 9.23%, achieving net profit of 2,146 billion yuan, an increase of 9.26% over the previous year, and realized net profit without deduction of 2,093 billion yuan, an increase of 9.52% over the previous year. The performance exceeded our expectations.
Brief review
The effect of fee control is obvious, and I am optimistic about steady growth throughout '24
Throughout 2023, the company's revenue increased 9.23% year on year, mainly due to the gradual restoration of diagnosis and treatment order in Beijing, and the company continued to promote innovative business transformation to gain additional growth momentum; net profit to mother increased 9.26% year on year, and net profit after deducting back to mother increased 9.52% year on year, mainly due to the company continuing to promote refined cost control, and the cost rate for the period fell 0.38 percentage points year on year.
In the fourth quarter of 2023, the company achieved revenue of 13.166 billion yuan, an increase of 20.17% over the previous year, mainly due to: 1) the low revenue base; 2) the gradual restoration of in-hospital diagnosis and treatment order in Beijing, and the gradual release of demand for medication. In 23Q4, the company achieved net profit of 684 million yuan, an increase of 28.41% year on year; achieved net profit of 662 million yuan after deduction, up 35.46% year on year, all faster than revenue growth. Mainly due to the company's continuous promotion of refined cost management, the sales expense ratio decreased 0.42 percentage points year on year, and the financial expenses ratio fell 0.76 percentage points year on year, driving the overall net interest rate increase.
Traditional distribution consolidates the foundation of performance, innovative business provides new growth momentum, and the impact of in-hospital compliance sales stabilizes, and the company's competitiveness is steadily improving. In 2023, the company continued to follow up on the implementation of volume-procured varieties, nationally negotiated varieties, and newly marketed varieties to accelerate the transformation of the traditional drug distribution business to providing complete pharmaceutical solutions, and steadily expanded its revenue scale. We believe that at this stage, the impact of in-hospital compliance sales is stabilizing, demand for drug use is steadily being released, the company's internal control system is perfect, variety advantages are obvious, market competitiveness is prominent, and it will maintain its leading position in pharmaceutical distribution in Beijing in the future.
Innovative businesses continue to be optimized to contribute additional performance increases. In 2023, the company relied on improving the distribution network layout to continue to promote innovation and transformation of characteristic businesses and accelerate overall performance growth. 1) Industrial sector: The company focuses on marketing system reform, continuously optimizes the product system, and increases investment in research and development of new drugs. Throughout 2023, Guorui Pharmaceutical's profit increased 32.57% year-on-year on the basis of a 20% decrease in revenue, and there is plenty of growth momentum; 2) Device business: The company continues to expand the coverage of the device distribution business, introduce new varieties, and enhance the needs of individual medical institutions through accelerated informatization and intelligent capacity building, and the scale is expected to accelerate; 3) Dental business: The future of the subsidiary Sinopharm revolves around the four main product lines of “painless, periodontal, sensory control, and orthodontics” Structure. Revenue for the full year of 2023 increased 10.46% year on year to 161 million yuan, profit increased 28.92% year on year to 73.87 million yuan, and net interest rate increased significantly; 4) Retail business: The subsidiary Sinopharm New Specialty Pharmacy made full use of the advantages of the original distribution business, optimized product procurement costs, and continued to enrich the product system while accelerating the expansion of coverage. Revenue for the full year of 2023 increased 250.43% year on year to 40.693 million yuan.
The market advantage of narcotics distribution is stable, and the return on investment contribution is steady
In 2023, the company steadily promoted the “cannabis drug” strategy, enhanced its professional academic service capabilities for narcotics customers, combined with the company's continuous optimization of narcotics supply chain management capabilities, and the company's narcotics distribution market advantage was stable. Throughout 2023, the company achieved investment income of 359 million yuan, up 23.09% year on year. Investment income in joint ventures and joint ventures was 457 million yuan, up 19.89% year on year. The profit side contribution was obvious. Among them, Yichang Renfu's revenue increased 14.97% year on year to 8.060 billion yuan, and profit increased 16.88% year on year to 2,429 billion yuan. We believe that demand for narcotics is expected to be released steadily in 2024, and its contribution to the company's profit may increase steadily.
The impact of hospital compliance sales is stabilizing. We are optimistic about the steady growth outlook for the full year of 2024. We believe that the impact of hospital compliance sales may stabilize, and demand for in-hospital medication is expected to grow steadily, driving the company's traditional distribution business to show a steady growth trend. At the same time, as in-hospital surgeries are carried out normally, demand for anesthetic drugs may increase steadily, providing more space for optimizing profitability while increasing revenue. Furthermore, the company's innovative businesses such as industry, equipment, dentistry, and retail are expected to accelerate in volume, compounded by the company's more refined cost-side controls and the continued advancement of state-owned enterprise reforms. We are optimistic that the company's profitability will maintain steady long-term growth.
Category adjustments affect gross profit margins, and the fee control effect is better
For the whole of 2023, the company's comprehensive gross margin was 8.03%, down 0.37 percentage points from the previous year, mainly due to changes in the category structure. The sales expense ratio was 1.94%, down 0.17 percentage points year on year, and the fee control effect was obvious; the management expense ratio was 0.94%, down 0.02 percentage points year on year, basically stable; financial expenses were -0.25%, down 0.19 percentage points year on year. Net cash flow from operating activities increased 13.84% year over year to 2,727 billion yuan, mainly due to the company's strengthened repayment management. The number of inventory turnover days was 30.24 days, down 1 day from year on year, and remained stable; the number of accounts receivable turnover days was 53.26 days, up 7.93 days year on year, mainly due to the company reducing the scale of accounts receivable financing; the number of accounts payable turnover days was 61.85 days, down 5.87 days year on year, mainly due to the high impact of the external environment in the same period last year and the base figure was high. The rest of the indicators remained relatively stable.
Profit forecasting and investment ratings
We expect the company to achieve operating income of 53.569 billion yuan, 57.814 billion yuan and 62,438 billion yuan respectively, up 7.8%, 7.9% and 8.0% year-on-year respectively, with net profit attributable to mother being 2,325 billion yuan, 2,535 billion yuan and 2,765 billion yuan respectively, up 8.3%, 9.1% and 9.1% year-on-year respectively. Equivalent EPS is 3.08 yuan/share, 3.36 yuan/share and 3.67 yuan/share. The corresponding PE is 10.2X, 9.3X, 8.6X , maintaining the buy rating.
Risk analysis
1) Drug price reduction risk: Narcotic drugs and a class of psychotropic drugs are the company's core business with stable earnings. Once the price of this category changes, it will have a great impact on the company's earnings;
2) Risk of reform and business transformation: The company is a state-owned enterprise. If the state-owned enterprise reform falls short of expectations, employees cannot share the results of reform and development with the enterprise, or it may adversely affect the company's long-term revenue growth;
3) Increased market competition: Major competitors or new entrants in the market may weaken the company's comparative advantage and sustainable development ability, affect the company's market competitiveness, and thereby affect the company's long-term development;
4) Accounts receivable turnover risk: If the company's accounts receivable cycle is extended or cannot be recovered, it may cause time and economic losses to the company.
5) Policy risk: The pharmaceutical industry is a highly regulated industry. Stringent policies may adversely affect the company's operations.