Incident: The company released its 2023 annual report, achieving operating income, net profit attributable to mother, and net profit after deducting non-return to mother of 86.74/10.71/1,181 billion yuan, respectively, +0.42% YoY/+60% YoY, net operating cash flow of 2,576 billion yuan, +12.98% YoY; EPS (basic) 0.72 yuan. It is proposed to distribute a cash dividend of 3.3 yuan (tax included) to all shareholders for every 10 shares, with a dividend payment rate of 46.03%. The results are in line with market expectations.
Comment:
Revenue grew steadily throughout the year, and net profit not returned to mother was released at a rapid pace. Net profit attributable to mother turned a loss into profit in 2023, which is related to the loss on changes in the fair value of financial assets being lower than the previous year; net profit after deduction of non-return to mother increased sharply, mainly due to an increase in the company's endogenous performance and a decrease in accrued asset impairment losses compared to the same period last year. By industry, the revenue of the pharmaceutical industry and pharmaceutical business in 23 was 74.21/1,215 billion yuan respectively, +3.22%/-14.21% year-on-year. The industry developed steadily, and commercial revenue declined somewhat. By product, revenue from traditional Chinese medicines, chemical preparations, and biopharmaceuticals was +6.62%/-5.30%/-23.47%, respectively. The revenue from traditional Chinese medicines continued to grow steadily. The decline in chemical formulation revenue was related to the reduction in the collection price of Diqing products from July 2022. The sharp decline in biopharmaceutical revenue was related to increased market competition and the tightening of in-hospital policies.
Product structure optimization boosts gross profit margin and greatly improves operational efficiency. In 2023, the company's gross sales margin was +2.75pp to 66.80% year on year, and the gross margin of the pharmaceutical industry and pharmaceutical business was +1.85pp/ +2.29pp, respectively. The increase in gross margin was related to product structure improvements; in 2023, the company's period expense ratio was +0.73pp to 48.70% year on year, of which the sales/management/finance/R&D expense ratio was +0.89/-0.33/ -0.57/+0.75pp, respectively. The investment in marketing and R&D increased. The company's endogenous profitability rebounded markedly, and net interest rate after deducting non-return income was +5.2 pp to 13.6% year over year. At the end of 2023, the company's accounts receivable were reduced by 203 million yuan to 688 million yuan year-on-year, and the number of accounts receivable turnover days was shortened by 13.0 days to 32.8 days year-on-year, and operational efficiency was greatly improved.
A good harvest of innovative traditional Chinese medicine is in sight, and digital intelligence research is leading the development of the industry. The company adheres to an innovation-driven strategy and invested 1,315 billion yuan in R&D throughout the year, +29.49% over the same period last year. By the end of 2023, the company had 98 products under development, including 41 Class 1 innovative drugs, 36 in clinical trials, and 26 in clinical phase II and III:
Two classic traditional Chinese medicines, loquat lung cleansing drink and warm jingtang, were submitted for production. Nine innovative traditional Chinese medicines are in phase III clinical research. The indications for Anshen Dripping Pills, T89 AMS, and Puyouke for acute ischemic stroke have been enrolled in all cases. The National Key Laboratory for the Creation of Modern Traditional Chinese Medicine was successfully established; a contract was signed with HUAWEI CLOUD to jointly build a large model of traditional Chinese medicine, combining the company's special data on traditional Chinese medicine and the HUAWEI Cloud Pangu Big Model to accelerate the innovation and transformation of modern traditional Chinese medicine.
Profit forecasting, valuation and rating: As a leader in modern traditional Chinese medicine, the company's core varieties are growing steadily. The company adheres to an innovation-driven strategy and actively lays out research and development of traditional Chinese medicine, chemicals and biopharmaceuticals, and is expected to benefit from the industrial policy dividends of innovative traditional Chinese medicine. We maintained the company's 2024-2025 net profit forecast of 11.92/1,345 billion yuan, and added a 2026 net profit forecast of 1500 billion yuan, an increase of 11%/13%/12% over the previous year. The PE corresponding to the current price was 20/17/16 times, maintaining the “buy” rating.
Risk warning: Risk of price reduction in drug collection; failure of new drug development or marketing falling short of expectations.