Key points of investment
Incident: The company announced that in 2023, it achieved revenue of 22.437 billion yuan (+11.21%, indicating year-on-year growth rate, same below), net profit of 929 million yuan (+18.35%), net profit of non-return to mother of 844 million yuan (+14.68%); 2024Q1 achieved revenue of 5,539 million yuan (+1.81%), net profit due to mother of 321 million yuan (+10.27%), net operating cash flow of 417 million yuan (-49.08%) . The 23-year results were in line with expectations, and 24Q1 revenue fell short of expectations.
Interpretation of 24Q1 operating data: 1) Revenue growth is slowing down: First, fewer stores were purchased. The number of stores acquired from 23Q2 to 24Q1 was only 351, and only 6 were acquired in 24Q1. This is because the price of mergers and acquisitions in the primary market is too high. Second, the company predicted that the overall policy for outpatient clinics in Nanjing would be tightened and that some stores would be closed early. 2) The decline in the growth rate of operating cash flow was an unparalleled factor. The reason for the December 22 epidemic was that the company made early advance payments, resulting in low cash delivery and a high cash flow base in 23Q1; second, after the implementation of national outpatient coordination, the amount of medical insurance accounts receivable increased, and customer payments switched from cash to medical insurance.
The Torch Project raised gross profit, and 24Q1 gross margin increased significantly. 24Q1 The company's gross profit margin was 35.20% (+2.20pct). The reason was that the company implemented the torch project. Measures include: 1) seeking opportunities to increase gross margin starting with product selection; 2) improving new product evaluation and elimination rules to achieve effective control of product imports and exports. 3) Establish a delivery warning system and link it with an intelligent requisitioning system to improve sales efficiency. 4) Optimize marketing incentives and adjust sales structures to increase gross profit margin. 5) Increase the proportion of integrated procurement to reduce costs and increase efficiency. 24Q1 company accounted for 69.5% of total procurement (+1.4pct). 6) Optimize the commercial procurement management system to effectively enable management decisions. 7) Strengthen the construction of systems such as intelligent requisitioning and supply chain planning systems to serve greater business volume. In addition, the sales volume of the company's own brand stores reached 830 million yuan in 24Q1, accounting for 20.8% of sales, an increase of 1.3 percentage points over 23Q1.
Summary of business data highlights in 2023:1) The number of stores exceeded 13,000, adding 3,388 new stores throughout the year, with 2,913 new stores added in dominant provinces and key cities, accounting for 86%, and 76% of stores in prefecture-level cities and below. 2) The franchise business is growing rapidly. The franchise business grew rapidly in 2023.
At the end of 2023, the company's franchise stores reached 4,394, an increase of 1,586, an increase of nearly 50% over the number of new stores in '22; the franchise business achieved distribution sales of about 2.2 billion yuan, an increase of about 20% over the previous year. 3) The retail business achieved revenue of 19.349 billion yuan (+9.96%) and a gross profit margin of 35.69% (+1.13pct). 4) Zhongxi Proprietary Pharmaceutical achieved revenue of 17.627 billion yuan (+12.59%) and gross profit margin of 30.48% (+1.09pct).
Profit forecast and investment rating: Considering the implementation of the company's gross margin improvement logic, we raised the company's net profit from 2024-2025 to 11.3/1.39 billion yuan from 11.1/1.36 billion yuan to 11.3/1.39 billion yuan. It is estimated to be 1.70 billion yuan in 2026, corresponding to PE of 17/14/11X, maintaining a “buy” rating.
Risk warning: Risk of increased market competition, risk of store expansion or failure to meet expectations, risk of franchise store development or failure to meet expectations.