Revenue grew steadily in 2023, with a dividend rate of 3.3% in 2023 (3.8% average over the last three years).
Pharmaceutical business: Businesses such as CSO, vaccines, and device health are future growth points; pharmaceutical industry: innovative drug pipelines have entered the harvest period.
The buy rating was maintained, and the SOTP target price was lowered to HK$13.99.
Revenue grew steadily in 2023, and net profit was lower than our forecast: the company released an annual report and achieved revenue of 263 billion yuan in 2023, up 12% year on year; net profit to mother was 3,768 billion yuan, down 33% year on year; net profit after deducting non-return to mother was 3,596 billion yuan, down 16% year on year. Among them, 4Q23 achieved revenue of 62.8 billion yuan, 9% year-on-year; net loss to mother was 28.77 million yuan, down 103% year on year; net profit after deducting non-return to mother was 292 million yuan, down 51% year on year. Operating cash flow of 5.23 billion yuan was achieved in 2023, an increase of 10% over the previous year. In 2023, the company paid 0.41 yuan per share, with a dividend ratio of 40% and a dividend ratio of 2.1% (2.4% in the last three years). We forecast 2023A-26E revenue/net profit CAGR of 11%/19%, respectively.
Pharmaceutical business: Businesses such as CSO, vaccines, and device health are future growth points. In 2023, pharmaceutical distribution achieved revenue of 233.8 billion yuan, an increase of 14% over the previous year. Gross margin fell 0.27ppts to 6.3% year over year. We believe that the gross profit margin of the distribution sector has been lowered mainly due to the continuous expansion of the share of drugs purchased in bulk. In 2023, sales of non-pharmaceutical businesses such as Devices and Health were about 36.3 billion yuan, an increase of 6% year on year; the company's drug contract promotion business (CSO) achieved sales volume of about 2.9 billion yuan, an increase of 50% year on year; and the imported vaccine general distribution business achieved sales revenue of 5.2 billion yuan, an increase of 19% year on year. Pharmaceutical retail achieved revenue of 9.1 billion yuan, an increase of 10% year over year; gross margin fell 0.66 ppts year over year to 11.1%.
Pharmaceutical industry: Innovative drug pipelines have entered the harvest period. In 2023, the pharmaceutical industry achieved revenue of 26.3 billion yuan, a year-on-year decrease of 2%; gross margin decreased 0.05 ppts to 58.5% year over year. By the end of 2023, the company had launched 3 innovative drugs: Ankeri (recombinant human adenovirus type 5), Kellicom (Eureklin), and Peficom (bifidobacterium trifecta), and 1 improved new drug, lansoprazole sodium bicarbonate. There are 68 new drug pipelines that have entered the clinical approval application stage, the follow-up clinical research stage, and the clinical research (IIT) stage initiated by researchers, including 55 innovative drugs (including 3 US clinical phase II) and 13 improved new drugs. In the innovative drug pipeline, 3 have submitted pre-NDA or marketing applications, and 4 are in critical research or phase III clinical phase III. The Chinese medicine sector achieved revenue of 9.8 billion yuan, an increase of 10% over the previous year.
Maintaining the buy rating, the SOTP target price was lowered to HK$13.99, corresponding to 8.2x PE in 2024. Based on the 2023 results and future outlook, we are reducing our 2024-25 EPS by 18%/19%, respectively.
Risk warning: 1) policy uncertainty; 2) price reduction risk; 3) slow progress in drug development; 4) slow progress in obtaining distribution rights for best-selling drugs.