Incident: The company released its 2023 annual report. During the reporting period, it achieved operating income of 17.861 billion yuan, an increase of 16.19% over the previous year; net profit to mother of 1,669 billion yuan, an increase of 16.92% over the previous year; and realized net profit after deducting non-return to mother of 1,657 billion yuan, an increase of 18.32% over the previous year.
Steady growth was achieved throughout the year, and the parent company's revenue and profit performance was impressive. The company achieved revenue of 4.140 billion yuan in the fourth quarter, a year-on-year decrease of 7.44%; achieved net profit of 278 million yuan, a year-on-year decrease of 34.47%; falling within the previous performance forecast range. 1) In 2023, Tong Ren Tang's parent company achieved revenue of 4.109 billion yuan, a year-on-year increase of 11.21%, net profit of 1,249 billion yuan, and a year-on-year increase of 14.50%; mainly due to the company's active market development, deepening marketing reforms, and steady development of the main business. 2) In 2023, Tongrentang Technology achieved revenue of 6.773 billion yuan, a year-on-year increase of 13.04%, net profit of 590 million yuan, and a year-on-year increase of 1.25%. Tongrentang Technology continued to promote a large-scale strategy, anchoring the marketing strategy of “controlling channels, stabilizing prices, and strong terminals”. The revenue side achieved good growth. Affected by rising raw material prices, gross margin declined slightly. 3) Tongrentang Sinopharm and Tongrentang Commercial achieved revenue of 1,377 billion yuan (-7.94%) and 10.345 billion (+20.94%) in 2023, respectively.
Pharmaceutical industry: Core products are growing well, and fluctuations in raw material prices have led to phased pressure on gross margins. In 2023, the company's pharmaceutical industry achieved revenue of 11.079 billion yuan, an increase of 12.60%; the gross margin of the industrial sector was 46.97%, a year-on-year decrease of 1.98pp, which is expected to be due to rising raw material prices. In 2023, the company's top five products achieved a total revenue of 4.953 billion yuan (+9.97% YoY), accounting for 44.71% of the current pharmaceutical industry revenue; the gross profit margin was 54.82%, which is significantly higher than the overall industrial sector, down 5.44pp from 2022, which is expected to be related to the rise in the price of the core raw material beech. By treatment area, cardiovascular, and cerebrovascular, supplements, clean-up, gynecology/other revenue increased by 8.02%/10.41%/16.10%/8.16%/19.12% respectively in 2023, all of which achieved good growth.
Pharmaceutical business: rapid recovery after the epidemic, and the steady expansion of stores. After the impact of the epidemic subsided, the commercial sector recovered rapidly in 2023, achieving revenue of 10.246 billion yuan, an increase of 20.82% year on year; gross margin reached 31.11%, up 0.16pp year on year. By the end of 2023, Tong Ren Tang Commercial had set up a total of 1001 retail stores, adding 59 new stores in 2023, including 62 new stores and 3 closed. Among retail pharmacies, 630 have set up traditional Chinese medicine clinics, accounting for 62.94% of the total number of retail pharmacies; 783 have obtained the “Designated Medical Insurance Retail Pharmacy” qualification, accounting for 78.22% of the company's total retail pharmacies.
Expenses are properly controlled, and profit levels are still high. The company's overall gross profit margin in 2023 was 47.29%, a year-on-year decrease of 1.
51pp; net profit margin was 14.46%, up 0.15pp year on year; sales/management/financial expense ratios were 19.24%/10.09%/-0.62%, respectively, -0.74pp/ -0.06pp/ -0.59pp; reflecting the improvement in the company's overall operating efficiency. In 2023, the number of inventory turnover days was 306.59 days and the number of accounts receivable turnover days was 23.75 days, which remained stable.
Profit forecast and investment suggestions: According to the annual report, we have adjusted the profit forecast. The company is expected to achieve operating income of 206.08, 232.47, and 25.804 billion yuan in 2024-2026, up 15%, 13%, and 11% year-on-year; achieve net profit of 19.64, 22.97, and 2,564 billion yuan (the value before the 2024-2025 forecast was 20.83 billion yuan and 2,391 billion yuan), up 18%, 17%, and 12% year-on-year. Considering that the company is a relatively scarce traditional Chinese medicine resource company, the century-old brand has built high barriers, and it is expected that under the wave of state-owned enterprise reform, it will enter a new stage of development and maintain a “buy” rating.
Risk warning events: the risk of fluctuations in raw material prices, the risk of increased market competition, the risk of policy changes, the risk that the reform of state-owned enterprises falls short of expectations, and the risk of untimely updates of information and data on the use of research reports.