Key points of investment
Incident: China Resources 39 released its 2024 quarterly report. During the reporting period, it achieved revenue of 7.294 billion yuan (YoY +14.82%), net profit attributable to mother of 1,364 billion yuan (+18.49% YoY), and net profit not attributable to mother of 1,328 billion yuan (+17.38% YoY); performance exceeded expectations.
24Q1 achieved rapid growth. In the CHC business, continued consumer demand and the continuation of the high incidence of colds boosted the release of market demand for 999 influenza, which recorded good growth; the increase in 999 cold medicine brand power led to the strong rise of other segment products such as 999 antiviral oral liquid, 999 banyan root granules, and 999 Xiaochaihu granules. The prescription drug business continues to enrich the product line, focusing on product value discovery and competitiveness improvement. The Sinopharm business continues to stabilize the foundation of business development, enhance business development resilience, actively respond to volume joint procurement in multiple regions of the formula granule business, and maintain a healthy development trend. KPC achieved revenue of 1,853 billion yuan (-3.01% YoY), net profit attributable to mother of 119 million yuan (-9.41% YoY), and net profit of 113 million yuan (YoY +9.11%).
The level of profit has been rising steadily. In 24Q1, the company's net interest rate of deducted non-return mother was 18.20%, +0.40pct year on year; considering that the 23Q1 Kunyao Group did not fully combine, and that the net interest rate of KPMG was low, we expect the net interest rate of the company's endogenous business to increase even higher year-on-year. The gross margin was 53.42%, -0.65pct year on year; considering that the gross margin of the CHC business is higher than the company average and that the gross margin of KPC Group is low, we expect the gross margin of the company's endogenous business to rise steadily. Sales/management/R&D expenses were 21.41%/4.64%/1.88%, respectively, -0.69/ -0.22/-0.20pct year on year.
The integration of traditional Chinese medicine is progressing steadily. The successful completion of the 100-day integration and one-year integration promoted the deep integration of KPC Group with the company at the strategic, organizational and cultural levels, and laid a deep foundation for the three-year integration work. In the future, the two sides will continue to promote full integration and deepen the deep integration of the two sides at the level of resource integration, business development and organizational culture.
The company expects double-digit revenue growth in 2024, and net profit will match the level of revenue growth.
The cold breathing category in the CHC business is expected to continue its rapid growth trend in the first half of '24, and requires continuous dynamic observation in the second half of the year; the prescription drug business will strengthen academic leadership, increase investment in R&D, enrich the product line, and promote good business growth; the formula granule business is expected to achieve restorative growth and respond positively to the impact of collection that may face future business; and Kunyao Group will continue to promote rapid growth around the next 5 years.
Maintain a “buy” rating. We expect net profit from 2024-2026 to be 33.45/39.02/4.524 billion yuan, an increase of 17.26%/16.63%/15.96% year-on-year, and EPS of 3.39/3.95/4.58 yuan, corresponding to PE17.50x/15.01x/12.94x. Considering that the company has strong brand operation and resource integration capabilities, strong channel system management and terminal coverage, it maintains a “buy” rating.
Risk warning: policy adjustment risk, cost fluctuation risk, merger and acquisition integration risk