Incidents:
On March 28, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 15.623 billion yuan, an increase of 10.58% over the previous year; achieved net profit of 822 million yuan, an increase of 131.99% over the previous year, and realized net profit without deduction of 774 million yuan, an increase of 111.35% over the previous year. Looking at a single quarter, in Q4 2023, the company achieved operating income of 3.44 billion yuan, a year-on-year decrease of 1.57%, and realized net profit of 64 million yuan, a year-on-year decrease of 35.73%, and realized net profit deducted from non-return to mother of 59 million yuan, an increase of 19.96% over the previous year.
The performance was in line with expectations. Modern Chinese Medicine achieved high growth and split the Chinese herbal medicine resource business for the first time.
According to the performance forecast released by the company in January 2024, net profit due to mother is expected to be about 830 million yuan in 2023, an increase of about 137.34%; net profit without deduction to mother is expected to be about 760 million yuan, an increase of about 107.29% year on year, and the final annual report disclosure results are basically in line with expectations. By business sector: In 2023, the pharmaceutical industry achieved sales revenue of 10.388 billion yuan, up 19.40% year on year, of which modern traditional Chinese medicine achieved sales revenue of 6.604 billion yuan, up 31.64% year on year, and many core varieties achieved high growth; chemical pharmaceuticals achieved sales revenue of 3.784 billion yuan, an increase of 2.72% year on year. We speculate that it was mainly affected by the changing external policy environment; the pharmaceutical business achieved sales revenue of 7.726 billion yuan, a decrease of 3.31% year on year. The revenue growth failed to meet expectations. The company achieved sales revenue of 6.604 billion yuan, up 31.64% year on year. Management reduced costs and costs, and the operating quality of the two major business platforms in Sichuan and Chongqing was greatly improved; in 2023, the company split the Chinese herbal medicine resource business for the first time, achieving annual revenue of 1,017 billion yuan, an increase of 118.71% over the previous year. The annual report indicates that the company's standardized Chinese herbal medicine base covers an area of 200,000 mu, including 50,000 mu of large varieties of “Project No. 1” perilla, 12,000 mu of Cangshu, and 10,000 mu in mid-summer.
Adhere to the large variety strategy and achieve high growth in core varieties.
The company adheres to the large variety strategy, focuses on “6+1" key treatment areas, and achieved high growth in core varieties in 2023. Specifically, Agastache Zhengqi Oral Liquid achieved sales revenue of 2,271 million yuan, an increase of 45% year on year; Express syrup achieved sales revenue of 881 million yuan, up 67% year on year; Tongtian Oral Liquid achieved sales revenue of 316 million yuan, up 10% year on year; sinusitis oral liquid achieved sales revenue of 261 million yuan, up 22% year on year; and compound acetaminophen tablets (II) (Hashitong) achieved sales revenue of 163 million yuan, an increase of 55% year on year. By the end of 2023, the company had 1,240 approvals for Chinese and Western medicines, 86 national exclusive production approvals, 411 varieties of the 2023 edition of the national medical insurance catalogue (739 approval numbers), and 368 product regulations for the 2018 edition of the national basic drug catalogue. According to the business plan, in 2024, the company will continue to adhere to the large variety (category) strategy and build a multi-variety, omni-channel, and digital integrated marketing platform. We expect core products to continue their high growth trend.
The reform of state-owned enterprises is being advanced in depth, improving quality and efficiency even further.
Since the entry of Sinopharm Group in 2021, with the gradual implementation of various reform measures, the company's operating performance in 2022 and 2023 has improved dramatically. In 2023, the company's net interest rate reached 5.46%, an increase of 3.04pct over the previous year, further improving quality and efficiency. The gross margin of the company's main business reached 48.50% in 2023, an increase of 3.14 pct over the previous year. We estimate that mainly due to changes in business structure, the gross margin of the pharmaceutical industry was relatively high. Among them, the gross margin of the pharmaceutical industry reached 64.74%, an increase of 0.62 pct over the previous year. We believe that it mainly benefited from capacity upgrades, the company coordinated production capacity layout, upgraded intelligent control systems, and the output value of the pharmaceutical industry increased 28% year on year in 2023. The company's sales expense ratio in 2023 was 33.45%, an increase of 0.41pct over the previous year. We estimate that the pharmaceutical industry's sales expense ratio is relatively high, mainly due to changes in business structure. In 2023, the company's management expense ratio was 4.74%, a year-on-year decrease of 0.53 pct; in 2023, the company's financial expenses ratio was 0.94%, a year-on-year decrease of 0.33 pct.
Investment advice:
Based on the company's business trends and development plans, we assume that the revenue growth rate of the pharmaceutical industry from 2024 to 2026 is 15%, 15%, and 15%, respectively, the pharmaceutical business revenue growth rate is 10%, 10%, and 10%, respectively, and the revenue growth rate of Chinese herbal medicine resources is 50%, 40%, and 30%, respectively. Based on the above assumptions, we expect the company's revenue from 2024 to 2026 to be 17.791 billion yuan, 20.414 billion yuan, and 23.327 billion yuan, respectively, and net profit to mother of 1,070 billion yuan, 1,284 billion yuan, and 1,566 billion yuan respectively. Considering the remarkable results of the company's state-owned enterprise reform in recent years, referring to the valuation levels of comparable companies such as Donga Ejiao and China Resources 39, the company was given a PE valuation of 22 times in 2024, corresponding to a target price of 42.24 yuan for 6 months, and an investment rating of Buy-A.
Risk warning: the risk that the reform of state-owned enterprises falls short of expectations; the risk of price reduction in the collection of proprietary Chinese medicines or chemicals; the risk of fluctuating prices of Chinese herbal medicines.