Core views

On March 25, the company released its 2023 annual results report. Throughout 2023, the company achieved operating income of 596.57 billion yuan, an increase of 8.05% over the previous year, achieved net profit of 9.054 billion yuan, an increase of 6.19% over the previous year, and achieved basic earnings of 2.90 yuan per share. Profit side performance slightly exceeded our expectations. In 2024, the impact of in-hospital compliance sales will stabilize. The company's drug distribution business may maintain steady growth, and equipment sector operations are expected to improve month-on-month. Combined, the company continues to focus on building the advantages of integrated batch and zero, and the net interest rate of the retail business continues to be optimized. We are optimistic about the steady release of the company's long-term performance potential.

occurrences

The company announced its 2023 annual results announcement. The profit side performance slightly exceeded our expectations. On March 25, the company issued the 2023 annual results announcement, achieving operating income of 596.57 billion yuan, an increase of 8.05% over the previous year, and achieved net profit of 9.054 billion yuan, an increase of 6.19% over the previous year, and the profit side performance slightly exceeded our expectations.

On March 22, 2024, the board of directors of the company proposed a final dividend of RMB 0.87 (tax included) per share for the year ended December 31, 2023, totaling approximately RMB 2,715 billion. If the profit distribution plan is reviewed and approved by the shareholders' meeting on June 13, 2024, the company will distribute dividends to shareholders on the shareholders' register no later than August 13, 2024.

Brief review

Structural adjustments affect gross profit margins, and we are optimistic about 24-year operating improvements

Throughout 2023, the company achieved operating income of 596.57 billion yuan, up 8.05% year on year, mainly due to a steady increase of 8.47% in pharmaceutical distribution and a steady increase of 7.75% in device distribution; achieving net profit of 9.054 billion yuan, up 6.19% year on year. The growth rate was slightly lower than revenue growth, but slightly exceeded our previous expectations, mainly due to: 1) Affected by compliant sales, the overall gross margin decreased by 0.46 percentage points to 8.13%; 2) The effectiveness of fee control was obvious. The sales expenses ratio, management expense ratio, and financial expense ratio respectively declined year on year 0.10, 0.03 and 0.17 percentage points; 3) The company disposed of some property, plant, equipment and usage rights assets, and other revenue increased by 540 million yuan over the same period last year.

In the fourth quarter of 2023, the company achieved operating revenue of 15.650 billion yuan, up 3.35% year on year, mainly due to in-hospital compliance sales; net profit of 2,957 billion yuan, up 10.82% year on year, higher than revenue side growth, mainly due to: 1) Although gross margin decreased 0.35 percentage points due to category structure, the company continued to promote cost control, and the expense ratio decreased by 0.44 percentage points during the period; 2) other revenue contributions.

Performance improved month-on-month, business innovation and transformation accelerated

Throughout 2023, the company's pharmaceutical distribution business revenue grew steadily by 8.47% to 441,051 billion yuan, mainly due to steady growth in key regions such as Beijing, Shanghai, Jiangsu and Zhejiang, and the rapid development of markets in northwest China such as Gansu and Ningxia. Operating profit increased 2.15% year on year to 13.216 billion yuan, and operating profit margin decreased 0.19 percentage points year on year to 3.00%, mainly due to category restructuring. In 2023, the company accelerated the acquisition of collected varieties and steadily promoted business innovation and transformation: 1) improving integrated service capabilities in the supply chain of innovative drugs and original drug products; 2) building a large-scale, compliant and specialized marketing service platform to provide customers with specialized and personalized marketing and promotion plans. The annual drug marketing revenue increased by more than 30% year-on-year. We believe that in 2024, the company will continue to promote business innovation and transformation. Through innovative marketing services, the pharmaceutical distribution business is expected to grow steadily.

The profitability of the equipment sector was briefly under pressure, and service+manufacturing advantages gradually showed throughout 2023. The company's equipment distribution business revenue grew steadily by 7.75% to 13.213 billion yuan, mainly due to the company's continuous expansion of sales network coverage and optimization of the product structure. Operating profit decreased 10.98% year on year to 4.525 billion yuan, and operating profit margin decreased 0.73 percentage points year on year to 3.48%, mainly due to the impact of base figures and hospital compliance sales. In 2023, the company continued to strengthen the supply chain service system, actively undertaking equipment asset management and maintenance services, SPD services and medical testing projects. Throughout the year, it added 124 SPD projects, 158 centralized distribution projects for single hospitals, and 4 centralized distribution projects for regional medical consortia and medical communities. In addition, the company accelerated device research and development projects, and formally signed a joint venture agreement with GE Healthcare in '23 to officially launch R&D and manufacturing of high-end imaging equipment. Sinopharm Xinguang 4K endoscopic systems have also obtained marketing approval. We believe that in 2024, the company will continue to deepen terminal network coverage and cultivate device distribution service advantages. Combined with the company's upstream R&D department, it is expected that profitability will be enhanced, and the device sector is expected to show a long-term steady growth trend.

The profitability of the retail sector continues to improve. The advantages of specialized services are obvious. Throughout 2023, the company's retail business revenue grew steadily by 8.22% to 35.689 billion yuan, of which specialty pharmacy revenue increased by more than 20% year-on-year. Operating profit increased 40.17% year over year to 1,145 billion yuan, and operating margin increased 0.73 percentage points to 3.21% year over year, mainly due to the company continuing to promote retail business integration, actively connecting with regional prescription outflow platforms and Internet hospital platforms, undertaking the implementation of outpatient coordination policies, and continuing to obtain in-hospital prescriptions and consolidate the advantages of specialized services. By the end of 2023, the number of the company's retail pharmacy stores was 12,109, a net increase of 1,356 compared with the end of 2022, with a net increase of 153 specialty pharmacies to 1,593. Looking ahead to 2024, the company may continue to increase coverage in empty regions, accelerate the implementation of prescription outflow and outpatient coordination policies, actively adjust the category structure, and the profitability of the retail sector may continue to improve.

Continuously strengthen terminal coverage and steadily improve profitability

In 2023, due to hospital compliance sales, the in-hospital diagnosis and treatment order was abnormal in some months, and the demand for diagnosis and treatment of some patients was delayed or suppressed. As a result, the company's category structure changed greatly, and the profitability of drug and device distribution declined slightly. Looking ahead to 2024, the impact of hospital compliance sales will tend to be normal, hospital diagnosis and treatment order may be carried out normally, superimposed companies will continue to expand terminal network coverage, and the scale of distribution business revenue may show a steady growth trend.

At the same time, the company is gradually improving the pharmaceutical distribution marketing system and accelerating the SPD service and manufacturing business for device distribution. The profitability of the distribution business may gradually improve. In terms of the retail sector, the company's profitability is relatively low at this stage. With the gradual completion of sector integration, profitability is expected to increase steadily. Furthermore, the company is actively promoting digital transformation and improving business efficiency under the premise of strict risk control. Expense control may continue to be deepened during this period, and the state-owned enterprise reform process progresses steadily. We are optimistic that the company's performance potential will gradually be unleashed.

Structural adjustments affect gross profit margins, and fee control effects are remarkable

For the whole of 2023, the company's comprehensive gross margin was 8.13%, down 0.46 percentage points from the previous year, mainly due to the impact of in-hospital compliance sales on the variety structure.

The sales expense ratio was 2.93%, down 0.10 percentage points from the previous year, and the fee control effect was good; the management expense ratio was 1.45%, down 0.03 percentage points from the previous year, remaining relatively stable; the financial expense ratio was 0.41%, down 0.17 percentage points from the previous year, and the fee control effect was good. Net cash flow from operating activities decreased 18.08% year over year to 17.173 billion yuan, mainly due to the expansion of the company's sales scale. The number of inventory turnover days was 40 days, which remained stable; the number of accounts receivable turnover days was 109 days, a decrease of 4 days over the previous year, mainly due to the year-on-year improvement in downstream payments. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 644.439 billion yuan, 697.893 billion yuan and 757.781 billion yuan respectively, up 8.0%, 8.3% and 8.6% year-on-year respectively, and realized net profit to mother of 9.801 billion yuan, 10.663 billion yuan and 11.623 billion yuan respectively, up 8.3%, 8.8% and 9.0% year-on-year respectively. Equivalent EPS is 3.14 yuan/share, 3.42 yuan/share and 3.72 yuan/share, corresponding PE is 5.9X, 5.4X, 5.0X, maintaining a “buy” rating.

Risk analysis

1) Drug collection risk: The gradual expansion of the scope of centralized drug procurement may cause a certain price reduction risk to the company and affect some of the company's business profits. Moreover, as the number of products won bids for volume procurement increases, its excessive scale may have a great impact on the company's operating income and profits.

2) Reforms and business transformation risks: The company is a state-owned enterprise. If the reform of the state-owned enterprise falls short of expectations, the long-term incentive effect of employees is insufficient, or there is an adverse effect on the company's long-term income growth;

3) Market competition intensifies: Major competitors or newcomers to the market may weaken the company's comparative advantage and ability to develop sustainably, which in turn affects 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 financial losses to the company; 5) Policy risk: The pharmaceutical industry is a highly regulated industry, and if there are strict policies, it may adversely affect the company's operations.