The company is expected to maintain a high dividend ratio: According to the company announcement, Sinopharm Holdings achieved revenue/net profit of 596.91 billion yuan in 2023, +8%/+6% year-on-year; the performance was slightly lower than our expectations. Gross margin fell 0.46 ppts year over year to 8.13% in 2023. The sales expense ratio, management expense ratio, and financial expense ratio were 2.93%/1.45%/0.41%, respectively, -0.10 ppts/ -0.03 ppts/ -0.17 ppts year over year. Due to good cost control, the net interest rate to mother was only -0.03 ppts to 1.52% year over year. Operating cash flow fell 18% year over year to $17.2 billion in 2023. The capital expenditure was 2.5 billion yuan, which was basically the same. Free cash flow of $14.7 billion was generated in 2023, with free cash flow of $5.3 per share. The company plans to pay a dividend of 0.87 yuan per share to the company's shareholders by the end of 2023, with a dividend rate of 4.2%. The average dividend rate of the company in the last three years has reached 4.6%. We believe that the company's steady performance and abundant free cash flow will help maintain a high dividend rate. We forecast the company's 2023-26 revenue/net profit CAGR of 11%/13%.

Distribution business revenue is expected to maintain steady growth over the next three years: pharmaceutical distribution achieved revenue of 441.1 billion yuan in 2023 (+8% year over year). In 2023, the eighth and ninth batches of drugs were collected and launched. By the end of 2023, the average price of 2,374 drugs included in the first nine batches had dropped by more than 50%. The reduction in drug terminal sales prices has also led to the optimization of the supply chain and intermediate links. In 2023, the company's pharmaceutical marketing business maintained a high growth rate, with a year-on-year increase of more than 30%. We believe that with the normalization and institutionalization of collection, distributors' gross margins may be under pressure. However, we are optimistic about Sinopharm Holdings, which is the leading company, to further increase its market share. Medical device distribution achieved revenue of $132 billion in 2023 (+8% YoY). The growth rate in 2023 has slowed compared to 12% in 2022, mainly due to the high base in 2022 due to the distribution of epidemic prevention materials.

The dual-channel policy is expected to drive sales growth in DTP pharmacies: achieve revenue of 35.7 billion yuan (+8% year over year) in 2023. With the implementation of policies such as individual account reform and outpatient coordination, there has been a short-term trend of patients returning to hospitals and primary care institutions, and the overall growth rate of the retail industry has slowed. Due to the gradual implementation of the dual-channel policy, demand for specialty drugs such as severe and chronic diseases continues to increase on the retail side, driving sales growth in specialty pharmacies (DTP pharmacies). The company's specialty pharmacy revenue increased by more than 20% year-on-year, and continues to be higher than the industry average. National University Pharmacy's revenue increased 1.3% year over year, but profit efficiency increased dramatically. Net profit increased 51% year over year. By the end of 2023, the company had 12,109 retail pharmacies (net increase of 1,356) and 1,593 specialty pharmacies (net increase of 153). The company's dual-channel pharmacies grew 28% year over year to 1,127.

Maintain the buy rating and lower the DCF (WACC 8.8%) target price to HK$29.83: We have fine-tuned the 2024-25 EPS forecast and added the 2026 forecast. Our latest target price is 8.5x the 2024 P/E, which is basically equivalent to the average value of 8.1x for comparable companies.

Risk warning: 1) Medical device distribution growth is lower than expected; 2) payment collection delays or arrears; 3) retail pharmacy competition intensifies.