Core views
According to the company's 2023 results announcement, revenue and net profit to mother increased by 13.04% and 1.25%, respectively, year-on-year, in line with forecast expectations. Revenue structures are divided, parent companies and domestic subsidiaries are growing well, and overseas subsidiaries are under pressure in the short term; slow profit growth is mainly due to cost and expense pressure. Looking ahead to 24, as the company continues to deepen its diversification strategy and the recovery of the performance of overseas subsidiaries, it is expected to drive the company's annual performance to achieve steady growth, and I am optimistic that the company's fundamental operations will continue to improve in 24 years.
occurrences
The company announced its 2023 annual results
On the evening of March 22, the company announced its 2023 annual results. It achieved annual revenue of 6.773 billion yuan, up 13.04% year on year; realized net profit of 992 million yuan, down 0.93% year on year; realized net profit of 590 million yuan, up 1.25% year on year. Performance growth was in line with forecast expectations. According to the annual dividend distribution plan, the company plans to pay an annual dividend of $0.18 (tax included) per share, for a total of $231 million.
Brief review
The parent company maintained steady growth, and the subsidiary's performance was under pressure in the short term
Overall, the company achieved a 13.04% year-on-year increase in revenue in the full year of 2023. Among them, the parent company and domestic subsidiaries maintained good growth, and the subsidiary Tongrentang Sinopharm's short-term performance was under pressure; net profit fell 0.93% year on year, and net profit to mother increased 1.25% year on year. The slow profit side growth was mainly due to: 1) rising raw material prices and cost growth; 2) business structure changes.
Looking at the situation in the second half of the year, H2 achieved revenue of 2,827 billion yuan, a year-on-year decline of 5.04%, and a year-on-year decline of 16.08%. Revenue and profit growth in the second half of the year both slowed mainly due to overseas business being pressured under high base. The subsidiary Tongrentang Sinopharm H2 was affected by changes in the external economic environment, and superimposed distributors were still absorbing Ganoderma lucidum spore powder stocks. The mainland market revenue declined sharply in the second half of the year, leading to a sharp decline in overall company revenue in the short term.
Looking ahead to 24 years, as the company continues to deepen its large-scale strategy and promote full online and offline empowerment through measures such as integrating channels, strengthening control, and boosting terminals, it is expected that the market position and share of core products will further increase. Combined with Ganoderma lucidum spore powder, it is expected to drive the company's annual performance to achieve steady growth, and I am optimistic that the company's fundamental operations will continue to improve in 24 years.
The large variety strategy consolidated the basic market. The six major strategies continued to increase product value in 2023. The company continued to deepen the large variety strategy, continuously improving product value through the six major strategies of packaging upgrade, raw material upgrade, channel upgrade, price upgrade, control upgrade, and service upgrade. Ultimately, the number of varieties sold over 100 million reached 9, and the number of varieties sold over 5 million reached 62. At the same time, the company launched the “300 Years of Imperial Medicine” heritage series, covering 24 varieties of proprietary Chinese medicines and 10 varieties of nourishing creams, including well-known products such as Liuwei Dihuang Pills, Shengmai Drink, Jinqu Renqi Pills, Yongsheng Ejiao, and Beijing-made Beef Huang Detox Tablets. They are sold in more than 2,000 chain stores across the country, and the market coverage has increased widely.
Looking at leading products, the company's Shengmai Drink Oral Liquid Series, Cold Remover Detox Series, Liuwei Dihuang Pill Series, Ejiao Series, Jinqu Kidney Qi Pill Series, and Xihuang Pill Series achieved year-on-year increases of 70.63%, 27.42%, 8.58%, 8.04%, 6.98%, -0.92%, and -15.55% respectively. Among them, the good growth of the cold cleansing granule series and the Shengmai Drink series mainly benefited from increased demand related to cold breathing categories and post-healing. In terms of marketing, the company continues to promote “bright action” and “monitor its actions. While consolidating its advantages in channel development, it continuously increases market coverage in empty regions and boosts product sales. At the same time, the company is actively carrying out various special promotional activities, carrying out promotional activities on special themes such as “Family Must-Have No Cold Worries”, “Take Care of Your Baby's Healthy Growth”, and has carried out in-depth cooperation with Youku platform, Mango TV and other platforms for core products such as Flavoured Xiaoyao Pills, Shengmai Drink Oral Liquid, and Beijing-made Beef Yellow Detox Tablets to enhance customer stickiness and stimulate product potential.
Continue to promote clinical research work and protect the high-quality development of the company
The company focuses on cultivating “large varieties” and continues to promote clinical research on various major varieties such as waist strengthening and kidney pills, saihuang pills, flavored Xiaoyao pills, and Shengmai drinking oral liquid. At the same time, it is also carrying out research on new dosage forms and functional treatments for products that have already been marketed. In March of this year, the Class 1.1 new drug, Astragalus granules, jointly developed by the company and Beijing University of Traditional Chinese Medicine, completed pre-clinical research work and is intended for use in chronic heart failure, gas ischemia, and stasis. It was approved by the State Drug Administration and agreed to enter clinical trials, which is expected to further improve the company's product pipeline layout. In addition, the company continues to focus on scientific research and innovation structure, establish a long-term project management mechanism, and improve the project execution capacity and quality inspection level. The quality inspection center under the company successfully passed the strict review by the China National Accreditation Committee for Conformity Assessment (“CNAS”), obtained CNAS laboratory accreditation certificates and accreditation decisions, and obtained corporate product quality reports and passes for mutual recognition in 153 countries and regions, laying a good foundation for overseas development.
The rise in raw materials has put pressure on gross margin in the short term. In 2023, the company's comprehensive gross margin was 42.04%, down 1.22pp year on year, mainly due to the increase in raw material prices; the sales expenses ratio reached 15.95%, up 0.81 pp year on year, mainly due to rising labor costs and increased terminal promotion activities; the management cost ratio reached 9.36%, with an increase of 1.29pp, mainly due to the increase in labor costs and the increase in R&D investment. The accounts receivable turnover ratio increased from 6.79 at the end of 2022 to 7.97 at the end of 2023, and accounts receivable liquidity was strong; the inventory turnover rate fell from 1.97 at the end of 2022 to 1.70 at the end of 2023, and the inventory turnover level was good; the rest of the financial indicators were basically normal.
Profit forecasting and investment ratings
We believe that the company relies on Tong Ren Tang's century-old brand, with rich variety resources and deep operating barriers, which can guarantee the company's long-term steady growth in 2024-2026; we expect the company to achieve operating income of 7.673 billion yuan, 8.693 billion yuan and 9.849 billion yuan respectively, and net profit to mother of 666 million yuan, 754 million yuan and 855 million yuan respectively, equivalent to EPS (diluted) 0.52 yuan/share, 0.59 yuan/share and 0.67 yuan/share, respectively. The growth was 12.8%, 13.1%, and 13.5%, respectively, and the corresponding PE was 9.2x, 8.1x, and 7.1x, respectively, maintaining the “buy” rating.
Risk analysis
1. Drug price reduction risk. Competitive markets such as the company's core products may increase, leading to a decline in product prices, which in turn affects the company's profit expectations; 2. The risk of raw material price fluctuations, the raw materials for traditional Chinese medicine products are clearly cyclical. Currently, the cost price remains high, and the price of raw materials may rise further, leading to a further increase in cost pressure, which in turn affects the company's profit expectations; 4. Impact of pharmaceutical industry policy changes: Pharmaceutical industry policy collection The policy may cause the price of the company's products to drop or sales to decline, which in turn affects the company's revenue and profit expectations.