Introduction to this report:

Revenue in 2023 and 2024Q1 maintained a rapid growth trend. Stores are expanding rapidly, and the national layout is increasing. Gross margin is low due to changes in product structure and expansion outside the province, and it is expected to remain relatively stable in the future.

Key points of investment:

Maintain an increase in holdings rating. Considering the pressure on gross margin, the 2024-2025 EPS forecast was lowered to 1.25/1.53 yuan (originally 1.43/1.76 yuan), the 2026 EPS forecast was added by 1.84 yuan, and the target price was maintained at 31.46 yuan, corresponding to PE25X in 2024, maintaining an increase rating.

Revenue growth is accelerating, and profits are under pressure in the short term. In 2023, it achieved revenue of 24.531 billion yuan (+15.45%), net profit of 1,166 billion yuan, net profit of non-return to mother of 1,141 million yuan (+13.56%); of these, 23Q4 achieved revenue of 6.808 billion yuan (+5.87%), net profit to mother of -0.08 billion yuan (-106.99%), net profit after deducting net profit of 23 million yuan (-125.11%); 2024Q1 achieved revenue of 6.752 billion yuan (+13.5%), net profit to mother of 398 million yuan (-20%) ), net profit not attributable to mother of 396 million yuan (-20%).

Declining gross margins are putting pressure on profits. The company's gross margin fluctuated, mainly due to ① the increase in the share of the wholesale business with low gross margin; ② due to differences in product structure and sales scale advantages not yet reflected, gross margin was low. The gross profit margin in South China was 36.64% in 2023, while the gross profit margin in central China/East China/other regions was 28.56%/30.58%/28.91%; ③ high demand for Chinese ginseng and non-pharmaceutical products with high gross margins after the pandemic. The overall gross margin declined due to falling demand from 2023H2. At the same time, inventory depreciation for materials related to the epidemic also had an impact on 2023Q4 profits. In the future, the company is expected to gradually introduce superior varieties to stores outside the province and increase the proportion of high-margin varieties, thereby maintaining a relatively stable gross margin.

Stores are expanding rapidly, and the national layout is being strengthened. As of 2024Q1, the number of stores reached 14,915 (10305/4610 direct-operated/franchised respectively), of which 4290/909 stores were opened in 2023/2024Q1, respectively. The growth rate of general stores reached 40%/37%, respectively, and the opening rate was rapid. The company has stepped up mergers and acquisitions and franchises outside the province. It has already opened stores in 19 provinces, and the pace of expansion is accelerating across the country.

Risk warning: Market competition increases risk, and the outflow of prescriptions falls short of expectations.