Key points of investment
Performance: Revenue grew steadily in 2023, with short-term profit pressure 2023 performance: revenue of 26,295 billion yuan, yoy +12.21%; when split, the company's distribution sector revenue was 233.76 billion yuan, yoy +13.62%; industrial sector revenue was 26.257 billion yuan, yoy -1.87%; retail revenue was 9.110 billion yuan, yoy +10%. Net profit to mother was 3,768 billion yuan, yoy -32.92%; net profit to mother after deducting one-time special profit and loss was 4.919 billion yuan, an increase of 2.99% over the previous year.
2023 net profit split: net profit of the company's commercial sector was 3.350 billion yuan, yoy +7.67%; net profit of the industrial sector was 2.116 billion yuan, yoy -5.04%; participating companies contributed 538 million yuan, yoy +13.23%.
2023Q4 performance: revenue of 62,787 billion yuan, yoy +9.44%; when split, the company's distribution sector revenue was 56.566 billion yuan, yoy +11.94%; industrial sector revenue was 5.457 billion yuan, yoy -21.66%; retail revenue was 2,578 billion yuan, yoy -0.20%. Net profit attributable to mother - RMB 29 million, a significant year-on-year decline.
Growth: The commercial side is optimistic about innovative distribution expansion, and the industrial side is optimistic about traditional Chinese medicine and innovative drugs entering the release period. Commercial side: Under the pressure of the phased influence of policies, the company has maintained rapid double-digit growth. In terms of the national distribution network layout, in 2023, the company completed mergers and acquisitions of Hunan Runji Pharmaceutical and the commercial divisions of Zhengda Tianqing, filling the gaps in the networks of biological products in Hunan Province, as well as Suzhou and Lianyungang cities. It is worth noting that the company continued to make efforts in innovative distribution business, deepened sales cooperation with overseas MNC, and achieved a higher growth rate than the sector as a whole. The total number of imported products added by the company in 2023 reached 29, and the CSO business revenue was 2.9 billion yuan, or about 50%. Specifically, the company's cooperation with Bayer has exceeded 1 billion yuan, and a sales contract with Sanofi has reached more than 5 billion yuan; at the same time, the company's vaccine distribution business revenue reached 5.2 billion yuan, yoy +19%. The company and Pfizer have reached a contract sales contract for the 13-valent pneumococcal polysaccharide conjugate vaccine (Peier 13), which has achieved a shift from distribution and sales promotion. Furthermore, in 2023, the company's non-pharmaceutical product distribution revenue was 36.3 billion yuan, yoy +6.45%. We expect the growth rate to slow down mainly due to the high base due to public health events in 2021-2022. Looking ahead, we are optimistic about the continued and rapid expansion of the company's commercial side in high-value-added and emerging distribution businesses such as innovative distribution and non-pharmaceutical distribution, and that the company will achieve continuous improvement in internal operating efficiency under the promotion of the North-South platform integration project.
Industrial side: Due to the phased impact of the 2023 Q3 pharmaceutical policy and the sharp price reduction of injectable polymyxin B, the main product of the subsidiary Shanghai Pharmaceutical First Biochemical, and price reduction adjustments for the remaining 17 varieties, the company's industrial growth rate was suspended throughout the year. Specifically, the number of products whose annual industrial revenue exceeds 100 million yuan was 48, the same as last year; 60 key varieties achieved revenue of 14.940 billion yuan, a decrease of 5% over the previous year. Looking ahead, we expect traditional Chinese medicine and innovative medicine to be the main support for the future growth of the industrial sector. In 2023, the company's traditional Chinese medicine achieved revenue of 9.8 billion yuan, yoy +10.3%, accounting for 37% of the revenue on the industrial side. By strengthening sales promotion and other methods, the company has greatly increased the revenue of over 100 million varieties such as Shengmai Drink, Stomach Rejuvenation, and Rokushin Pills, with an average growth rate of over 40%. We believe that in addition to the key Chinese medicines that have been selected, the company's stock of traditional Chinese medicine brands and products is rich in resources, and the momentum for future growth will continue to be strong. In terms of innovative drugs, as of 2023, the company has entered the clinical stage with 68 pipelines, including 55 innovative drugs and 13 new improved drugs. Among them, X842 and I001 have submitted NDAs, SRD4610 has submitted pre-NDA, and the BCD-100 and BCD-085 pipelines and four indications have entered clinical phase III. We expect that starting in 2024, the company may usher in a commercialization window for innovative drugs. With the support of strong sales capabilities on the industrial side, we are optimistic about the growth elasticity brought about by innovative drugs.
Profitability: Gross profit margin, sales expense ratio, phased adjustments of various types of impairment, and the upward trend in 2024 clearly indicates the decline in the company's profit margin in 2023. We believe it is mainly related to transient influencing factors such as the high profit base in 2022, changes in the company's revenue structure in the first half of 2023, the impairment of Shangyao Cansino's assets in the first half of 2023, payment of fines from Shanghai Pharmaceutical First Biochemical in the second half of 2023, and various other asset impairment. We believe that the company's profitability remains stable, and there is a strong certainty that net interest rates will rebound after 2024.
Gross profit margin: In 2023, the company's gross margin was 12.04%, yoy-1.1pct, probably related to changes in the company's revenue structure; when broken down, the gross profit margin of distribution was 6.31%, yoy-0.27pct, which may be related to the continued expansion of in-hospital collection products and improved accounting periods; industrial gross margin was 58.49%, yoy-0.05pct; retail gross margin was 11.96%, yoy-0.66pct. We anticipate that industrial and retail gross margins may both be related to phased changes in product structure. Looking ahead, gross margin is expected to stabilize under the trend of innovative distribution with higher added value and an increasing share of innovative products.
Expense side: The company's sales expenses ratio was 5.34%, a significant year-on-year decrease of 0.82 pct. Sales expenses were 13.9 billion yuan, a year-on-year decrease of 2.6%. Looking at the breakdown, the sales expenses rate on the industrial side was 32.29%, which was basically the same as the previous year. The commercial sales expenses ratio was 2.23%, yoy-0.4 pct. Among them, in addition to a slight increase in employee remuneration, sales promotion expenses, etc. have all been reduced. We expect that it may mainly be related to factors such as the phased impact of policies and optimization and adjustment of the sales system. Looking ahead, we expect the company's future industrial sales expenses rate to remain at the current level under system optimization, while the commercial sales rate may pick up as the phased impact of the policy is eliminated. In addition, the company's R&D expense ratio was 0.85%, yoy-0.06pct; the financial expense ratio was 0.57%, the same as the previous year; and the management expense ratio was 2.19%, slightly up 0.04pct year on year. We expect that the company's R&D expense ratio and financial expense ratio may remain relatively stable in the future, while the management fee ratio may be gradually optimized as the industry and industry improve quality and efficiency.
Other income statement items: ① Net income from investment: It will be affected by the asset impairment calculation losses of the confirmed joint venture company Shangyao Cansino in the second quarter of 2023. After adding this impact, the joint venture's investment income was basically the same year on year. It is expected that this portion will contribute or continue in the future. On the other hand, in 2023, the company confirmed a loss of 188 million yuan in financial assets measured at amortized cost, an increase of nearly 100 million yuan over the previous year. It was mainly affected by the termination of accounts receivable factoring business without recourse rights. The corresponding bad debts accrued about 450 million yuan. ② Asset impairment losses:
In 2023, it was 550 million, an increase of nearly 70% over the previous year. It is mainly affected by a sharp increase of 200 million dollars in inventory price losses. It is mainly related to the sharp price reduction of industrial products; long-term equity investment impairment losses of 180 million yuan are expected to be mainly related to Shanghai Shi Commercial Factoring Co., Ltd.'s impairment charges of 150 million yuan, or settlement of bad debts involving accounts receivable financing described above.
Business quality: The trend of improving account periods continues. I am optimistic that growth momentum will continue to be released. The company's accounts receivable turnover in 2023 was 96.60 days, yoy-0.39 days. As the phased impact of the policy is removed, we expect that backyard payments may improve steadily in 2024. In terms of receivables quality, the company's credit impairment losses in 2023 were 280 million yuan, a year-on-year decrease of 10%. Impairment losses accounted for 0.37% of the total amount of receivables, a year-on-year decrease of 0.09pct. Overall, the company's net operating cash flow in 2023 was 5.232 billion yuan, yoy +10.31%. I am optimistic that the improving trend of future operating cash flow will continue with simultaneous improvements in the accounting period and the quality of accounts receivable. In terms of capital structure, the company's balance ratio in 2023 was 62.11%, up 1.48pct from the previous year. The balance ratio level is still low, and there is plenty of room for improvement. Referring to the pharmaceutical distribution business model, we expect the company to still have sufficient growth momentum in the future.
Profit forecasting and valuation
We expect the company to achieve operating income of 2859.1/3178.1/351.6 billion yuan in 2024-2026, up 9.84%/11.15%/10.63% year-on-year; achieve net profit of 50.45/57.53/6.447 billion yuan, up 33.90%/14.03%/12.05% year-on-year, corresponding EPS of 1.36/1.55/ 1.74 yuan/share. The closing price on April 9, 2024 corresponds to PE 12 times, maintaining the “gain” rating.
Risk warning
Risk of short-term fluctuations in upstream and downstream operations due to accelerated industry clearance; risk of R&D progress falling short of expectations; risk of financial leverage