2023 net profit is in line with our expectations

Sinopharm Holdings announced 2023 results: revenue of 596.57 billion yuan, up 8.05% year on year; net profit to mother was 9.054 billion yuan, up 6.19% year on year, corresponding to profit of 2.90 yuan per share, which is in line with our expectations. In the fourth quarter of 2023, the company's revenue was 150.6 billion yuan, up 3.4% year on year, and net profit to mother was 2.96 billion yuan, up 10.8% year on year.

Development trends

The distribution business is growing steadily. In 2023, the company's distribution revenue increased 8.47% year over year to 441.05 billion yuan, and the division operating margin was 3.00%. The company achieved steady growth in key regions and markets such as Beijing, Shanghai, Jiangsu and Zhejiang, and developed rapidly in vast northwest markets such as Gansu and Ningxia.

In 2023, the company's pharmaceutical marketing business revenue increased by more than 30% year-on-year. We believe that the company's distribution business is expected to further optimize the network layout and continue to develop new business formats in the future.

New businesses are growing rapidly. In 2023, the company's retail revenue was 35.69 billion yuan, up 8.22% year-on-year, and the division operating margin was 3.21%. National University Pharmacy's revenue was 24.41 billion yuan, up 1.3% year on year, and net profit was RMB 53 billion, up 50.66% year on year. The company's medical device distribution revenue was 130.21 billion yuan, up 7.75% year on year, and the operating profit margin of the device division was 3.48%. Furthermore, the company's R&D projects in the device industry have made new breakthroughs, and commercialization is progressing in an orderly manner. According to the company's announcement, at the beginning of 2023, the company signed a joint venture agreement with GE Healthcare, and the “Sinopharm Imaging/Sino Imaging” brand was officially released in November 2023; the 4K endoscopic camera system independently developed by Sinopharm Xinguang has been approved for marketing.

Other situations: In 2023, 1) the company's comprehensive gross margin was 8.13%, down 0.46 percentage points year on year, mainly due to an increase in the share of distribution business revenue; 2) total sales and management expenses ratio was 4.79%, down 0.3 percentage points year on year; 3) financial expenses ratio was 0.41%, down 0.17 percentage points year on year; 4) operating cash flow was 17.17 billion yuan. We believe that the company is expected to maintain a relatively stable gross margin by optimizing its business structure in the future.

Profit forecasting and valuation

Considering the impact of the decline in prescriptions at the hospital side, we slightly lowered the 2024 EPS forecast by 3.5% to 3.13 yuan, an increase of 8.0% year over year, and introduced the 2025 EPS forecast of 3.39 yuan, an increase of 8.0% year over year. We maintain our outperforming industry rating and target price of HK$26, corresponding to a price-earnings ratio of 7.4 times/6.5 times in 2024/2025. The current stock price corresponds to a price-earnings ratio of 5.9 times 5.2 times 2024/2025, with 25.9% upside from the target price.

risks

Centralized drug procurement pressure; pharmaceutical retail and medical device distribution business growth falls short of expectations