Incident: The company released its 2023 annual report, achieving operating income, net profit attributable to mother, and net profit excluding non-return to mother of RMB 156.23/8.22/ 774 million yuan, respectively, +11%/132%/111% YoY; net operating cash flow of RMB 672 million, -62% YoY; and EPS (basic) of 1.48 yuan. It is proposed to distribute a cash dividend of 3.0 yuan (tax included) to all shareholders for every 10 shares, with a dividend payment rate of 20.32%. The results are basically in line with the pre-increase announcement.
Comment:
Q4 Performance is under pressure. The revenue of the pharmaceutical industry grew rapidly throughout the year, and the pharmaceutical commercial revenue declined. 4Q23 revenue, net profit attributable to mother, and net profit after deducting non-net profit were $34.40/0.64/059 million, respectively, compared with -1.6%/-35.7%/+20.0%. The pressure on performance was related to high base, R&D expenses, and increased asset impairment losses. The pharmaceutical industry/pharmaceutical commercial/Chinese herbal medicine resources achieved revenue of 103.88/ 77.26/1,017 billion yuan before being offset in 2023, +19%/-3%/+119% over the same period last year. The revenue growth momentum of industry and Chinese herbal medicine resources was relatively good. The Chinese herbal medicine sector has achieved comprehensive coordination, pioneered a new model of government-enterprise cooperation, continued to expand the scale of herbal medicine cultivation, and promoted digitalization. The decline in pharmaceutical commercial revenue is estimated to be related to fluctuations in hospital policies and regional policies. Net cash flow from operating activities declined sharply in 2023, due to the popularity of pandemic-related products and large advance payments at the end of '22.
The marketing of the traditional Chinese medicine industry broke through the circle, and the main product strategy continued to be strong. The company adheres to the intelligent manufacturing of modern traditional Chinese medicine as the main strategic line. In the pharmaceutical industry in 2023, modern traditional Chinese medicine and chemicals achieved revenue of 66.04/37.84 billion yuan, +31.64%/2.72% over the same period last year. The main product brand strategy continues to gain strength, dig deeper into product value, expand functions and promote accurate media delivery, and promote the rapid growth of OTC products. Academic empowerment in the prescription drug market helps clinical promotion and brand promotion. Sales revenue of the core products Agastache Zhengqi Oral Liquid, Emergency Syrup, Tongtian Oral Liquid, Sinusitis Oral Liquid, and Xanletong was +45%/67%/10%/22%/55%, respectively.
Structural optimization improves quality and efficiency, and increases R&D and digital transformation. 2023 gross margin +3.18pp to 48.60% yoy, net net margin +2.36pp to 4.96% yoy. Among them, the gross margin of the pharmaceutical industry was +0.62 pp to 64.74% year on year, related to product structure optimization, price and cost control level; pharmaceutical commercial gross margin was +0.15 pp to 9.60% year over year, related to supply chain construction and commercial reform; and gross margin of Chinese herbal medicine resources was +0.11 pp to 7.90% year on year. In terms of cost ratios, sales/management/R&D/finance expense ratios were +0.41/-0.53/ +0.74/-0.33pp, respectively. Marketing and R&D investment increased, energy for medium- to long-term development, and management and financial expense ratios were effectively controlled. The quality and efficiency of the company's operations improved. The balance ratio in 2023 was -6.09pp to 74.01% year on year, and the number of accounts receivable turnover days was reduced by 2.78 days year on year. In 2024, the company will focus on digital transformation, use data to enable production, operation and organizational transformation, develop the industrialization of Chinese herbal medicine resources, and open up a second growth curve.
Profit forecasting, valuation and rating: The company has deep brand and variety resources, comprehensively promotes the management and rectification of state-owned enterprises, accelerates digital transformation, and can be expected for medium- to long-term high-quality development. Considering the increase in capital expenditure, digital transformation, and R&D investment, we lowered our 24-25 net profit forecast to 10.90/1,377 billion yuan (down 17%/16% from the previous forecast), and the net profit forecast for the additional 26 years was 1,655 billion yuan, +33%/26%/20% year-on-year. The current stock price corresponds to 17/13/11 times PE. Considering the lower valuations of leading state-owned enterprises, we maintained a “buy” rating.
Risk warning: Sales of core products fell short of expectations; capital restructuring progress fell short of expectations; reforms fell short of expectations.