Incidents:
The company released its 2023 annual report, achieving operating income, net profit attributable to mother, and net profit excluding non-return to mother of 391.11/40.94/37.64 billion yuan, respectively, +7.19%/36.41%/16.45%; net operating cash flow of 3.503 billion yuan, +9.14% year over year; and EPS (basic) of 2.29 yuan. It is proposed to distribute a cash dividend of 20.77 yuan (tax included) to all shareholders of the company for every 10 shares, with a dividend payment rate of 90.53%. The results are in line with market expectations.
Comment:
Multiple factors put pressure on 23Q4 results, and the four major business segments grew steadily throughout the year. 23Q4 achieved revenue, net profit attributable to mother, net profit after deducting net profit of 94.23/ -0.30/ -0.90 billion yuan, compared to -1.57%/-104%/-117% year-on-year. The main reason for the decline in performance was the high 22Q4 base, 23Q4 promotion activities, and the calculation of employee remuneration payable was more concentrated compared to the previous three quarters, and the return on changes in fair value of transactional financial assets declined after the disposal of secondary market securities investments. By business, pharmaceuticals, health products, traditional Chinese medicine resources and provincial pharmaceuticals respectively achieved revenue of 66.85/65.04/16.33/23.559 billion yuan in 2023, or +8%/5%/13%/6% year-on-year, all of which reached record highs.
The core products in the Baiyao series grew well, with sales revenue of aerosols exceeding 1.7 billion yuan, YOY +15.27%; sales revenue of other brands of traditional Chinese medicine products increased significantly. Sales revenue of Pudilan anti-inflammatory tablets and Agastache Zhengqi Water all exceeded 100 million yuan, up nearly 16%/124% year-on-year respectively; and sales revenue of Gong She-Ning capsules was YOY +47%. Plant supplement products also achieved good growth, with sales revenue of Qishukang Oral Liquid of 231 million yuan, and YOY +15%. The toothpaste category's market share further increased to 24.6%, ranking first in the industry; Yang Yuanqing's sales revenue exceeded 300 million yuan, and YOY +36%. Traditional Chinese medicine resources achieved external revenue of 17.1 billion yuan, YOY +22%, of which YOY +81% of the export revenue of Sanqi Chinese herbal medicines.
2024-2028 Strategic planning leadership and organizational structure optimization. The “Outline of the 2024-2028 Strategic Plan of Yunnan Baiyao Group” clearly defines the company's strategic position as a leader in China's pharmaceutical industry, an important promoter of inheritance and innovation, and a protector of people's healthy lives. In 2024, the company adjusted its organizational structure, focused on the traditional four major business groups (BG), and reorganized the four emerging business divisions (BU) to enhance team competitiveness, technological innovation capabilities, group management and control capabilities, and platform service capabilities, and promote group resource sharing and overall collaboration. Facing the future, the pharmaceutical business group will develop a business layout around the three strategic goals of “leading traumatology, hundreds of thousands of households, and leading the 37 industry”. The health products business group has the strategic development goal of “becoming an integrated oral health, scalp care, and body care solution provider”. The Traditional Chinese Medicine Resources Business Group will gradually establish a long-term stable, high-quality and traceable supply chain system for authentic raw materials from Yunnan, and build a continuously leading traditional Chinese medicine resources industry platform. Provincial pharmaceutical companies will improve new regional circulation to ensure a leading position in the regional distribution market. The company actively explores and incubates emerging business segments, including the Nourishing Health Products Division, the Skin Beauty Division, the Medical Devices Division, and Tianyi Tea Products Division. It will create a new performance growth point for the company by creating a new business model based on a accurately customized “comprehensive solution” based on the big data service back office.
Comprehensively improve the quality and efficiency of operations, and improve the layout of the R&D system. In 2023, the company's gross margin was +0.18pp to 26.51% year on year. After deducting non-net interest rate and weighted average ROE, it was +0.77/2.64pp to 9.62%/10.51% year over year, respectively, achieving the best level in the past 5 years. The balance of transactional financial assets was $149 million, a sharp decrease of 93.82% from the beginning of the year, and the operating risk was significantly reduced. The number of inventory turnover days decreased by 19.22 days to 90.4 days year on year, and the balance ratio decreased by 1.95pp to 25.80% year over year. The company continues to strengthen the construction of R&D capabilities, set up an R&D management committee to coordinate the overall R&D system, build four major cross-regional R&D centers (namely Kunming, Beijing, Shanghai, and Wuxi centers) with the Central Research Institute as the core, and scientifically plan short, medium and long-term R&D projects. Short-term layout secondary development of marketed varieties and rapid pharmaceutical device development; promote innovative traditional Chinese medicine development in the medium term, continue to build Yunnan Baiyao transdermal formulation star products, and comprehensively lay out the country's important needs in the field of trauma; focus on the transformation of innovative drug research and development results to create high-demand traditional Chinese medicine products, and lay out the development of multiple innovative drugs with nuclear drug development as the center.
Profit forecasting, valuation and rating: The company adheres to long-term principles as the core development concept, consolidates the four major business groups, creates new business growth points, and promotes endogenous potential+epitaxial exploration. Digital transformation can be expected. Considering the slow recovery in domestic consumption, the increase in marketing investment in the health products business, and the company's increased R&D capacity, we lowered the company's 24-25 net profit forecast to 45.59/5,030 billion yuan (down 14%/16% from the previous forecast, respectively), and the net profit forecast for 26 years was 5.444 billion yuan, up 11%/10%/8% year on year. The current stock price corresponds to PE 18/20/17 times. Considering the low valuation of leading state-owned enterprises, we maintained the “increase in wealth” rating.
Risk warning: digital transformation does not meet expectations; risk of new business expansion; risk of R&D failure.