occurrences

On March 22, 2024, the company released its annual report. In 2023, the company achieved operating income of 7.703 billion yuan, -6.99% year on year; realized net profit of 445 million yuan, +16.05% year on year; net profit without return to mother was 335 million yuan, +33.45% year over year.

Incident reviews

The commercial sector structure was optimized, and the profit side growth rate in the fourth quarter was impressive

In 2023, the company's revenue side fell 6.99% year on year, mainly due to business restructuring after the company merged into China Resources 39, optimized business structure in the commercial sector, and reduced foreign aid business. The company continues to optimize its product structure and promote cost reduction and efficiency. In 2023, the company achieved net profit of 445 million yuan, +16.05% year-on-year, and net profit after deducting non-return to mother of 335 million yuan, or +33.45% year-on-year.

Profit side growth rate was impressive in the fourth quarter. Looking at a single quarter, the company achieved revenue of 2,092 billion yuan in 2023Q4, and realized net profit of 59 million yuan, +458.75% year-on-year, after deducting net profit of 25 million yuan, +388.53% year-on-year.

The company's gross margin has been rising steadily. The company's overall gross margin was 45.41%, +1.31 percentage points year on year; the cost ratio for the period was 35.78%, +1.37 percentage points year on year; of which the sales expenses ratio was 31.58%, +2.21 percentage points year on year; management expenses ratio was 4.07%, -0.51 percentage points year on year; R&D expenses ratio was 0.93%, +0.08 percentage points year on year; financial expenses ratio was 0.13%, -0.33 percentage points year on year. Net operating cash flow was $356 million, +40.25% year over year.

Focus on reform, integrate and reshape strong empowerment

In 2023, Kunyao Group officially became a member company under China Resources 39, setting a new starting point and embarking on a new journey. During this year's integration phase, the company firmly implemented China Resources's “1246” model and further promoted the “Four Reshaping”, including value reshaping, business reshaping, organizational reshaping, and spiritual reshaping, to further focus on its main business, make up for shortcomings, and continuously enhance its core competitiveness.

Seize the opportunities of the “silver age” era and create a leader in the field of aging health - chronic disease management. On January 15, 2024, the General Office of the State Council released the first special document “Opinions on Developing the Yinfa Economy to Improve the Welfare of the Elderly”, which calls for strengthening the construction of general hospitals and geriatrics departments in traditional Chinese medicine hospitals, expanding the application of traditional Chinese medicine in health care, and developing traditional Chinese medicine services such as the prevention and treatment of geriatric diseases and chronic diseases. On this basis, the company will continue to deeply cultivate the banking sector and follow the trend. While consolidating the public medical grade hospital market, the company will actively expand primary and clinic channels, dig deeper into the core potential market, and strengthen the ability to sink prescription drugs.

In 2023, the company won the bid for injectable proprietary Chinese medicine (freeze-dried) in Shanghai, in order to stabilize the basic collection market and go one step further; Hessuketone tablets won the bid in volume procurement of proprietary Chinese medicines in Shanghai and Zhejiang Province, laying the foundation for a breakthrough in sales volume achieved in the above regions.

Hesketone for injections (freeze-dried) maintained steady growth, with a year-on-year increase of 22.65%; Hesketong oral products achieved a year-on-year increase of 19.44%. Among them, Hesketong softgels increased 33.04% year on year, and Hesketone tablets increased 15.09% year on year.

Kunming Traditional Chinese Medicine 1381 is taking advantage of the momentum and strives to build a leading premium Chinese medicine company to reshape cultural brands through multiple platforms and dimensions to enhance the cultural communication value of the “Kun Chinese Medicine 1381” brand. At the same time, it uses the 39 9 commercial channels to further integrate commercial channels, optimize the original business model, and continue to build a Kung Pharmaceutical sales channel with “reasonable coverage, rapid circulation, and effective sales”.

The company focuses on “big variety - big brand - big category”, focusing on building strong products and continuously cultivating products with high growth potential.

In 2023, the core product of Kun's traditional Chinese medicine, Shu Gan Granules, achieved an increase of 11.11% through anti-depressant treatment; high incidence of respiratory diseases such as influenza and mycoplasma pneumonia increased demand for terminal drugs, and products such as oropharyngeal cleansing pills and lung clearing phlegm pills continued to gain strength in the potential product group of traditional Chinese medicine. Oropharyngeal cleansing pills increased 44.32% year on year, and Panlan clean-up tablets increased 21.19% year on year.

Focus on innovation, strengthen the foundation, and accelerate R&D to stimulate new momentum

In 2023, the company invested a total of 125 million yuan in R&D. KYAZ01-2011-020 clinical phase II, a self-developed class 1 drug suitable for ischemic stroke, has started more than 20 research centers. The trials are progressing in an orderly manner, and enrollment is progressing smoothly. The clinical phase I climbing phase study of KYAH01-2016-079, a class 1 innovative drug suitable for isocitrate dehydrogenase-1 (IDH1) gene mutation, has completed enrollment in 3 dose groups. As of the disclosure date of the report, the drug marketing license for seviramgane carbonate suspension and the clinical trial application for the KPC149 oral solution drug, a Class 2.2 improved new drug, have been accepted by the State Drug Administration. Clonazepam injection, the first domestic psychoactive drug with the same type to report consistency evaluation, has passed the consistent evaluation of the quality and efficacy of generic drugs.

The company focused on strategic development goals and accelerated its overseas expansion. In 2023, the company's self-developed product, dihydroartemisinin piperaquine phosphate tablets 40mg/320mg, passed WHO pre-certification. The product is conditionally included in the procurement scope of antimalarial drugs by international organizations and public institutions, marking that the company has become a qualified supplier in the international public procurement market. The company cooperated once again with the Bill and Melinda Gates Foundation to provide funding, technology and market access support for the development of new antimalarial drug products and WHO pre-certification. The two sides joined hands to contribute to the global antimalarial industry and help achieve a “malaria-free world”. In 2023, the company submitted 61 overseas registration applications and obtained registration approvals for 30 overseas products, including 10 new registration approvals. For the first time, Kunyao 37 Blood Saetong softgels were exported to the Uzbek market; the company reached a cooperation agreement with Hong Kong's Huaruntang to launch the company's No. 37 powder in Hong Kong; the company's 37 products entered the Central Asian and Hong Kong markets for the first time, and the internationalization of the 37 industry continued.

Investment advice

We adjusted our previous profit forecast. According to the company's latest disclosure of the 23 annual report data, the company carried out sector structure optimization, and we lowered the company's 24-25 profit forecast. We expect the company's revenue for 2024-2026 to be 85.18/96.00/10.943 billion yuan, respectively (the original forecast value for 24-25 was 100.87/11.090 billion yuan), up 10.6%/12.7%/14.0% year on year, respectively, and net profit to mother was 639/802/991 million yuan (24-991 million yuan), respectively The original forecast for '25 was 75/ 918 million yuan), with year-on-year increases of 43.8%/25.5%/23.5%, respectively, and the corresponding valuation was 26X/20X/16X.

Maintain a “buy” rating.

Risk warning

Risk of changes in industry policies, risk of drug development innovation, risk of product marketing falling short of expectations.