Revenue for the first quarter of 2024 was in line with our expectations, and net profit was slightly lower than our expectations for the first quarter of 2024: revenue of RMB 147.27 billion, up 1.2% year on year, net profit attributable to the parent company of RMB 1.42 billion, a year-on-year decrease of 10.7%, corresponding to earnings per share of RMB 0.46. Revenue was in line with our expectations, and net profit was slightly lower than our expectations, mainly due to price rebates not yet in place due to medical insurance catalogue negotiations.

Development trends

The main business continues to grow. In the first quarter of 2024, the company's overall revenue increased 1.2% year over year. The core subsidiary Sinopharm shares had revenue of 12.12 billion yuan in the first quarter, up 7.98% year on year; Sinopharm's revenue for the first quarter was 19.09 billion yuan, up 2.16% year on year. We believe that in the future, the company's pharmaceutical distribution business is expected to continue to optimize the network layout, increase stickiness through extended services, and further improve the comprehensive service capabilities of the pharmaceutical logistics network.

The sales expense ratio and management expense ratio were basically the same as compared to the same period last year. In the first quarter of 2024, the company's gross margin was 7.2%, down 0.3 percentage points year over year. We believe that the company is expected to maintain a relatively stable gross margin by optimizing its business structure in the future. In the first quarter of 2024, the company's sales expenses ratio was 2.9%, and the management expenses ratio was 1.2%, which was basically the same as the previous year. We believe that in the future, the company can further control costs and improve efficiency through centralized management and digital transformation.

Transformation and innovation continue to advance. According to the announcement, the company plans to accelerate the development of strategic emerging industries such as equipment manufacturing and industrial research and development, and build new profit growth points and competitive advantages. According to the company's announcement, in early 2023, the company signed a joint venture agreement with GE Healthcare, and the “Sinopharm Imaging/Sino Imaging” brand was officially released in November 2023; the 4K endoscopic camera system independently developed by Sinopharm Xinguang has obtained marketing approval. We expect the company's medical device sector to maintain a steady growth trend in the future, and its contribution to the company's profit is expected to continue to increase.

Profit forecasting and valuation

We keep the 2024/2025 EPS forecast unchanged at 3.13 yuan/3.39 yuan. The current stock price corresponds to 2024/2025 5.7x/5.1x price-earnings ratio. We maintain our industry rating and target price of HK$26, corresponding to a price-earnings ratio of 7.4 times/6.5 times in 2024/2025, with 28.7% upside compared to the current stock price.

risks

Due to the pressure of centralized drug procurement, the growth of pharmaceutical retail and medical device distribution business fell short of expectations.