Incident: The company released its 2023 annual report, achieving operating income of 17.861 billion yuan (+16.19%), net profit to mother of 1,669 billion yuan (+16.92%), and net profit of non-return to mother of 1,657 billion yuan (+18.32%).
On a quarterly basis, Q4 achieved operating income of 4.140 billion yuan (-7.44%), net profit to mother of 278 million yuan (-34.47%), and net profit of non-return to mother of 279 million yuan (-31.83%).
The parent company's performance grew steadily, and the subsidiary Zhongtong Rentang Sinopharm's mainland business was dragged down. In 2023, the joint stock parent company achieved net profit of 1,249 million yuan. Net profit after excluding investment income was 985 million yuan, an increase of 19.25% over the previous year, setting the tone for the company's steady growth. Among the main participating holding companies, Tongrentang Technology achieved net profit of 1,164 million yuan (-4.13%). We believe that the decline in profit was mainly a drag on Tongrentang Sinopharm; Tongrentang Sinopharm achieved net profit of 532 million yuan (-10.78%); some distributors in major mainland markets destroyed the Group's inventory of Ganoderma lucidum spore powder; and Tongrentang Commercial achieved net profit of 550 million yuan (+51.97%).
Abundant product resources support steady growth, cardiovascular products lay the core foundation, and clean-up and supplement products are growing rapidly. The company has more than 800 drug regulations and produces more than 400 types of products all year round, covering internal medicine, surgery, gynecology, pediatrics, etc., with rich product reserves, focusing on large-scale concentration, and continuing to promote the implementation of large-scale strategies. In terms of treatment, in 2023, cardiovascular products achieved revenue of 4.388 billion yuan (+8.02%); supplement products achieved revenue of 1,730 billion yuan (+10.41%); clean-up products achieved revenue of 615 million yuan (+16.10%); and gynecological products achieved revenue of 377 million yuan (+8.16%).
Increase the establishment of scientific research projects around the main business, and promote variety cultivation in an orderly manner. In 2023, the company's R&D expenses increased by 28.68% year-on-year, mainly due to increased R&D investment. The company stepped up the establishment of scientific research projects, carried out research and development work on classic famous recipes, Qingnao Xuanjiao Dipping pills, carried out secondary development of key varieties such as Tongren Niuhuang Qingxin Pills, etc., to improve basic data on large varieties; carry out exploratory research on potential varieties to explore the value of varieties; complete research on internal control standards such as Sichuan beef knee to address production quality issues; and resolve endangered rare herbal medicine resources in advance.
Profit forecast: We expect the company's net profit to be 1,911 billion yuan, 2,194 billion yuan, and 2,536 billion yuan respectively, up 14.5%, 15.8%, and 15.6% year-on-year respectively. The corresponding EPS is 1.39 yuan, 1.60 yuan, and 1.85 yuan respectively. The company is a traditional Chinese medicine resource company with a long history, and brand value establishes high barriers. Referring to comparable companies, we gave the company 28-35X PE in 2024, with a corresponding reasonable value range of 39.02-48.77 yuan, continuing to maintain a “superior to the market” rating.
Risk warning: industry policy risks; risks of marketing reforms falling short of expectations; price fluctuations and quality risks of raw materials; risk of core varieties falling short of expectations after price increases.