Revenue for 2023 was in line with our expectations, and profit was lower than our expectations. Shanghai Pharmaceutical released its 2023 results: revenue of 260.295 billion yuan, up 12.21% year on year; net profit to mother was 3,768 billion yuan, down 32.92% year on year, corresponding basic earnings per share of 1.02 yuan, after deducting non-net profit of RMB 3.596 billion, down 16.31% year on year. Profit was lower than our expectations, mainly due to depreciation of Shangyao Kangxino and fines.
Development trends
The company's commercial sector continued to grow well in 2023. In 2023, the company's pharmaceutical distribution revenue was 233.76 billion yuan, up 13.62% year on year, and gross profit margin was 6.31%, down 0.27 percentage points year on year; the commercial sector contributed 3.350 billion yuan in profit, up 7.67% year on year. The company completed the merger and acquisition of Hunan Runji Pharmaceutical and the merger and acquisition of the business sector of Zhengda Tianqing, filling the gaps in the company's distribution networks for biological products in Hunan Province and Suzhou and Lianyungang cities. In 2023, the sales amount of the company's pharmaceutical CSO business was about 2.9 billion yuan, a year-on-year increase of about 50%. The company's vaccine agent revenue was about 5.2 billion yuan, an increase of 19% over the previous year. Furthermore, the company announced the launch of the North-South platform integration project for the commercial sector in August 2023. We believe it is expected to increase the company's industrial collaboration and further optimize the network layout.
The company's Chinese medicine segment maintained good performance in 2023. In 2023, the company's industrial sector revenue was 26.257 billion yuan, down 1.87% year on year, of which sales revenue of 60 key varieties was 14.940 billion yuan; gross profit margin was 58.49%, a year-on-year decrease of 0.05 percentage points; the industrial sector contributed 2.16 billion yuan to profit, down 5.04% year on year. In 2023, the company's Chinese medicine division's revenue was 9.817 billion yuan, an increase of 10.30% over the previous year. The average sales revenue growth rate of products such as Shengmai Drink, Gastric Rejuvenation, and Rokushin Pills exceeded 40%.
Innovative products are gradually entering the harvest period, and the innovation pipeline is continuously optimized. In 2023, the company's R&D expenses were 2.204 billion yuan, an increase of 4.35% over the previous year. According to the company's announcement, the NDA marketing application for I001 tablets (chemical class 1) for high blood pressure indications was accepted in June 2023. The NDA marketing application for X842 (a new class 1 new P-CAB oral drug introduced by the company) for reflux esophagitis was accepted in February 2023. As of 2023, the company has submitted pre-NDA or marketing applications for 3 innovative drug pipelines, and 4 are in critical research or phase III clinical phase III.
Profit forecasting and valuation
Considering the impact of the decline in hospital prescriptions on the industry, we lowered the company's 2024 EPS forecast of 16.5% to 1.30 yuan, a year-on-year increase of 27.6%, and introduced the 2025 EPS forecast of 1.43 yuan, an increase of 10.1% over the previous year. Considering the good growth of the company's main business, innovative products are expected to enter the harvest period. We maintain our outperforming industry rating and target price of $22 for A-shares (corresponding to 2024/2025 17.0 times/15.4 times price-earnings ratio) and HK$14.7 for H shares (corresponding to 2024/2025 10.0 times/8.7 times price-earnings ratio). The current A share price corresponds to the 2024/2025 price-earnings ratio of 13.6 times/12.3 times, with 24.9% upside compared to the target price; the H share price corresponds to a price-earnings ratio of 7.7 times/6.7 times 2024/2025, with 30.1% upside compared to the target price.
risks
Centralized drug procurement pressure; pharmaceutical retail and medical device distribution business growth fell short of expectations.