Revenue for 2023 was basically in line with our expectations, but net profit fell short of our expectations: Tong Ren Tang released an annual report. In 2023, the company achieved revenue of 17.861 billion yuan, an increase of 16% over the previous year; net profit to mother was 1,669 billion yuan, an increase of 17% year on year. Among them, in 4Q23, the company achieved revenue of 4.140 billion yuan, a year-on-year decrease of 7%; net profit to mother was 278 million yuan, a year-on-year decrease of 34%. In 2023, the company's gross margin decreased by 1.5 ppts to 47.3% year on year, and net profit margin increased 0.1 ppts to 9.3% year over year. In 2023, Tongrentang Technology/Tongrentang Sinopharm and Tongrentang Commercial achieved revenue of 6.773/13.77/ 10.345 billion yuan respectively, +13%/-8%/+21% YoY; net profit of 9.92/5.32/550 million yuan, or -1%/+52% YoY. The parent company achieved revenue of 4.109 billion yuan, +11% year over year; net profit of 1,249 billion yuan, +14% year over year.
The revenue growth rate of other products in the pharmaceutical industry accelerated: in 2023, the pharmaceutical industry sector achieved revenue of 11.079 billion yuan, an increase of 13% year on year; gross margin fell 2.0 ppts year on year to 57.6% year on year. The top five products (Angong beef yellow series, Tongren beef yellow Qingxin series, Wu Zi Yanzong series, Liuwei Dihuang series, and Jin Qi series) achieved revenue of 4.953 billion yuan, an increase of 10% over the previous year. The accelerated release of second-tier products (revenue of 3.97 billion yuan, +19% year-on-year vs. 15% year-on-year growth in 2022) has driven the overall industrial growth rate to exceed the growth rate of major products. In 2023, cardiovascular revenue increased 8% year over year to 4.388 billion yuan, and gross margin fell 3.6 ppts year over year to 57.6%; we believe this is due to increased operating costs due to lower raw material prices.
The pharmaceutical business sector's single-store revenue is expected to continue to rise: in 2023, the pharmaceutical business sector achieved revenue of 10.246 billion yuan, an increase of 21% year on year; gross margin increased 0.2 ppts year on year to 31.1% year on year. By the end of 2023, Tong Ren Tang Commercial had established a total of 1,001 Tong Ren Tang pharmacies (net increase of 59 during the year). Among retail pharmacies, 630 have set up traditional Chinese medicine medical clinics, accounting for 63%; 783 have obtained the “Medical Insurance Designated Retail Pharmacy” qualification, accounting for 78%. We believe that Tongrentang Commercial will benefit from the favorable policies of including Chinese pharmacies as designated medical insurance sites, the inclusion of traditional Chinese medicine clinic expenses in medical insurance, and the opening of centralized funding for outpatient pharmacies. The revenue of individual stores is expected to increase.
Reiterating the purchase, the target price for DCF (WACC: 7.3%) was lowered to $57.60: due to our 2024-25 profit forecast being lowered. Our target price for 2024 is 37x, which is 20x higher than the average P/E of comparable companies. We believe that the company, as a leader in non-prescription proprietary Chinese medicines, should receive a valuation premium.
Risk warning: 1) policy uncertainty; 2) risk of price fluctuations in proprietary Chinese medicine raw materials; 3) increasingly fierce competition.