Key points of investment
Incident: Daren Tang released its 2023 annual report. During the reporting period, it achieved revenue of 8.222 billion yuan (-0.33% YoY), net profit of 987 million yuan (YoY +14.49%), net profit of 952 million yuan (YoY +23.80%); Single Q4 achieved revenue of 2,429 billion yuan (-9.57% YoY), net profit to mother of 129 million yuan (-3.25% YoY); the results were in line with expectations.
The industry has performed well, and the coverage rate of main products has improved markedly. Industrial revenue in 2023 was 4.930 billion yuan, up 10.34% year-on-year, and reached a new high. The company has systematically promoted the “three core and nine wings” strategy, with sales of over 100 million varieties, of which sales of quick-acting heart saving pills exceeded 2 billion yuan for the first time. Qingyu drip pills, Angong gyuhuang pills, Jingwanhong Ointment, and anti-inflammatory pills entered the 200 million yuan category. Furthermore, sales of clearing-throat drip pills have doubled for two consecutive years. By treatment area, cardiovascular, respiratory system, digestive system, urinary system, and facial features achieved revenue of 23.73/3.87/2.32/1.95/266 million yuan, +20.17%/+37.44%/-23.63%/-1.65%/+91.51% compared with the same period last year. By product, quick-acting laxative pills and Jingwanhong Ointment have covered 500,000 pharmacies and 100,000 medical terminals; the coverage rate of products such as clearing-throat drops, lung cleansing and anti-inflammatory pills, and gastrointestinal relief pills has increased significantly; sales of Niuhuang Qingxin Pills, Angong Niuhuang Pills, and Qinggong Shumao Pills have achieved effective penetration; in 2023, sales of Qingyuan Yuhuang pills/Jingwanhong Ointment/Angong Yuhuang Pills/Quick-acting Heart Relief Pills increased by 80.79%/64.66%, respectively. 8.50%/16.50%/14.16%
Business dragged down performance, and return on investment reached a new high. Commercial revenue in 2023 was 3.762 billion yuan, down 11.19% year on year. The net profit of the wholly-owned subsidiary Zhongxin Pharmaceutical was -033 million yuan, down 21.16% year on year. Investment income was 308 million yuan, up 12.36% year on year. Among them, SME and Tianjin Hongrentang each contributed 245/32 million yuan, +38.84%/-3.01% over the same period last year.
Profitability continues to increase. The gross margin in 2023 was 44.01%, +4.08pct year on year, of which industrial and commercial gross margins were 69.67%/5.29%, respectively, and +1.30/+0.02pct year on year. The sales cost rate/management cost rate/R&D expense ratio were 25.86%/4.64%/2.25%, respectively, +1.99/+0.06/+0.39pct. Net interest rate without return to mother was 11.58%, +2.26pct year on year, and 7.83% net interest rate after deducting investment income, +1.83 pct year on year. The average ROE hit a ten-year high of 15.04%, +1.66pct year-on-year.
Drive core industries to maintain double-digit growth in 2024. The company will continue to focus on the main business, focus on main products, and focus on the market; deepen brand strategy, expand regional coverage, differentiate provincial and regional positioning, maintain steady growth in the Beijing, Tianjin and Hebei base regions, focus on accelerating the growth of Guangdong, Lu, Jiangsu, Chuan and Xiang regions, accelerate the cultivation of potential regions in Zhejiang, Shanghai, Liao, E, Yun and Chongqing, and strive to achieve a market size exceeding 100 million yuan in 19 provinces and regions by 2024, covering 200 cities; and promoting core industries to maintain double-digit growth.
Give it a “buy” rating. We expect 2024-2026 net profit of 11.63/14.11/17.14 billion yuan, an increase of 17.90%/21.25%/21.55% year-on-year, and EPS of 1.51/1.83/2.23 yuan, corresponding to PE18.47x/15.23x/12.53x. Considering the company's deep brand heritage and channel vitality given by marketing transformation, it was given a “buy” rating.
Risk warning: risk of policy adjustments, risk of cost fluctuations, risk of core products falling short of expectations