Core views

In 2024, the company achieved operating income, net profit due to mother, and net profit after deduction of RMB 1,853 million, RMB 119 million, and RMB 113 million, respectively, with year-on-year increases of -3.01%, -9.41%, and 9.11%, respectively. Overall, it is expected that the company's industrial sector will be under pressure in the short term due to the influence of the industry's external environment, the commercial sector will gradually recover under a low base, and the steady improvement in operating quality will drive profit growth in the main business. The overall performance is in line with expectations. Looking ahead to the whole year, the company will continue to promote strategic integration, build quality Chinese medicines around the “1381, 1951, and 777” divisions, deepen chronic disease management, and expand the geriatric health industry. The 24-year performance is expected to improve quarterly.

occurrences

The company released its report for the first quarter of 2024

On the evening of April 19, the company released its report for the first quarter of 2024. Operating revenue, net profit due to mother, and net profit after deduction were 1,853 million yuan, 119 million yuan, and 113 million yuan respectively, up -3.01%, -9.41% and 9.11% year-on-year respectively, achieving earnings of 0.16 yuan per share. The performance growth was in line with our previous expectations.

Brief review

The quality of operations has been improving steadily, and withholding non-growth is in line with expectations

In Q1 2024, the company achieved operating income of 1,853 billion yuan, a year-on-year decrease of -3.01%. It is expected that the industrial sector will be under pressure in the short term due to the influence of the industry's external environment, and the commercial sector will gradually recover under low base; net profit to mother of 119 million yuan, a year-on-year decrease of 9.41%. The year-on-year decline in apparent profit is mainly due to reduced investment income and government subsidies compared to the same period last year; net profit after deduction of 113 million yuan, an increase of 9.11% over the previous year. The main business profit achieved relatively good growth, mainly due to the company's continuous optimization of the cost structure and steady improvement of operating quality . Overall, it is expected that the company's industrial sector will be under pressure in the short term due to the influence of the industry's external environment, the commercial sector will gradually recover under a low base, and the steady improvement in operating quality will drive profit growth in the main business. The overall performance is in line with expectations.

Looking at the 2024 Q1 segment and product line: 1) Kunyao Huesketong series: The company officially launched the new “777” brand, based on blood clothong oral products, gradually expanding to a full range of product lines such as health management, disease prevention, serious treatment and post-illness rehabilitation. At the same time, it completed the integration of retail and medical system sales channels across the country in terms of channels, achieving key control from multi-level channels to focusing on key mainstream customers. In terms of products, it is expected that the growth rate of the core single product, Hesketong softgels, will slow down due to inventory removal, etc., but it is speculated that pure terminal sales will continue to improve. It is expected that injectable hemostasis (freeze-dried) will be pressured in the short term under the influence of external policy environments such as collection.

2) Kun Traditional Chinese Medicine Boutique Chinese Medicine Series: The company focuses on key product brand building, multi-dimensional presentation, and channel combinations to continuously enhance brand value. Among them, the key product, Kun TCM Shenlingjian Spleen and Stomach Granules, appeared on CCTV, Hunan TV and the hit show of the year during the Spring Festival. Kun TCM Liver Relief Granules “Refusing Anxiety” series of short videos were warmly launched, and joined hands with pharmacy chains and Jingdong Health to launch a large-scale pop-up event “Liver Relief Hall” to jointly promote the growth of the “Kung Chinese Medicine 1381” series core products, Shenling Spleen and Stomach Granules increased by 48.42% year-on-year, and Shu Liver Granules compared to the same period The increase was 81.72%, and the number of fragrant sand flat stomach particles increased 26.03% year over year.

Looking forward to 24 years: Strategic integration continues to advance, and management is expected to improve quarterly. The outlook for 24 years is expected to be “KPC? “1951, Kunming Traditional Chinese Medicine 1381, 777” The three major divisions joined forces to promote the company's development: 1) KPC? 1951 Division:

Focusing on core treatment fields such as “cardiovascular, skeletal muscle, respiratory system, neuropsychiatry”, etc., we will create a leader in serious treatment in the field of geriatric health; in terms of pipeline, by strengthening and implementing superior varieties in the hospital, accelerate the increase in potential products and enrich the product pipeline; in terms of marketing, through “academic+brand” two-wheel drive, the company will comprehensively improve marketing efficiency; in terms of channels, the company will actively develop collection and response strategies, stabilize the basic market, and improve channel coverage capabilities. 2) Kunming Traditional Chinese Medicine 1381 Division: Focusing on the three core roads of “strong channels, excellent system, and building a railway army”, the company will focus on the core products of Kun Traditional Chinese Medicine, increase brand exposure through advertising, accelerate terminal transformation and rapidly improve channel coverage; at the same time, dig deeper into the classic recipes of Qiankun Traditional Chinese Medicine to create more traditional Chinese medicine products, and use 39's experience and advantages to empower the company to jointly build the “Kunming Traditional Chinese Medicine 1381” boutique Chinese medicine brand. 3) Sanqi Oral 777 Division: Focusing on the 377 industry chain, dedicated to chronic disease management and aging health, providing more specialized solutions to meet clinical needs; at the same time, actively respond to proprietary Chinese medicine collection policies, give full play to the combined advantages of multiple dosage forms and multiple product regulations in the Hsuxitong Oral Series, continue to strengthen brand building and academic building, build leading brands in the 37 field, actively optimize the dealer channel structure, and enhance the terminal coverage and marketing capabilities of Hessugong Oral Products.

Considering this year's cost investment and continued integration, we expect the company's operations to show a trend of low and gradual improvement in 24 years.

The cost structure is gradually optimized, and the quality of operation continues to improve

In Q1 2024, the company's comprehensive gross margin was 41.19%, a year-on-year decrease of 2.97pp, mainly affected by changes in revenue structure; the sales expense ratio reached 25.75%, a year-on-year decrease of 3.05pp, mainly due to the company's continuous optimization of the cost structure and changes in the superposition revenue structure; the management expense ratio reached 4.07%, a decrease of 0.57pp year-on-year, and the cost control effect was ideal; the R&D expense ratio reached 0.93%, an increase of 0.07pp over the previous year, which remained stable. Net cash flow from operating activities increased 81.69% year over year, mainly due to increased sales repayments and reduced payment expenses. The quality of the company's operations has been continuously improved, and the rest of the financial indicators are basically normal.

Profit forecasting and investment ratings

We believe that: 1) The company is a leading enterprise in natural botanicals. Under the “gold single product+category cluster” combination strategy, it can guarantee the company's long-term steady growth; 2) the company's product structure is becoming more and more reasonable, the operating chassis is more stable, and the revenue and channel structure are continuously optimized, which is expected to drive the sustainable growth of the company's performance; 3) With the entry of China Resources 39, the company will use 39's rich management experience and industrial resource background to further improve operating efficiency and enhance competitive advantage, and the two sides can develop collaboratively to achieve a win-win situation. The company is expected to achieve operating income of 8.786 billion yuan, 10.036 billion yuan and 11.486 billion yuan respectively, and net profit to mother of 611 million yuan, 749 million yuan and 912 million yuan respectively, equivalent to EPS (diluted) of 0.81 yuan/share, 0.99 yuan/share and 1.20 yuan/share, respectively, with year-on-year increases of 37.5%, 22.5%, and 21.8%, respectively, maintaining the “buy” rating.

Risk analysis

1. The company's reform falls short of expectations. The company is actively promoting the reform work, but there may be situations where the results of the reform fall short of expectations, which in turn affects the company's profit expectations; 2. Risk of price reduction of drugs: competitive markets such as the company's core products may intensify, which in turn affects the company's profit expectations; 3. Risk of fluctuations in raw material prices: the price of Chinese herbal medicines will be affected by various factors such as the macro environment, natural disasters, planting conditions, etc., and is prone to large fluctuations. If the price of traditional Chinese medicine raw materials rises, the company's production costs may rise sharply, which in turn affects the company's profits ; 4. Product promotion falls short of expectations: The company's investment in sales increases. If product promotion falls short of expectations, it will affect sales revenue and thus the company's profit.