Incident: Yifeng Pharmacy released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 22.588 billion yuan (YoY +13.59%); net profit of 1,412 billion yuan (YoY +11.90%); net profit without return to mother of 1,362 million yuan (YoY +10.92%); 2024Q1 achieved operating income of 5.971 billion yuan (YoY +13.39%), net profit of 407 million yuan (YoY +20.89%), net profit of 399 million yuan (YoY) (+24.26% YoY), the performance growth rate was in line with expectations.

The pharmaceutical business is growing steadily. In 2023, the company's proprietary Chinese and Western pharmaceuticals/traditional Chinese medicine/non-pharmaceutical businesses achieved revenue of 170.95/21.80/2.03 billion yuan respectively, +15.93%/+23.30%/-2.3%, respectively, and the pharmaceutical business grew steadily. The gross margin of the company's main business in 2023 was 37% (-1.27pcts year on year). The main reason was the increase in the share of wholesale revenue, which lowered the overall gross profit margin.

The strategy of “regional focus and steady expansion” is progressing steadily. In 2023, through the “new opening+merger and acquisition+franchise” store expansion model, the company was deeply involved in the Central South, East China and North China markets, adding 3,196 new stores, including 1,613 self-built stores, 559 mergers and acquisitions, and 1,024 franchise stores, a net increase of 2,982 stores over the same period. 2024Q1 added 701 new stores, including 364 self-built stores, 166 mergers and acquisitions, and 171 new affiliate stores, a net increase of 670 over the end of the same period.

We accept the outflow of hospital prescriptions online and offline. 1) In the offline sector, in 2023, the company had 675 hospital side stores and 305 pharmacies specializing in DTP, including 246 dual-channel medical insurance stores, opened more than 4,200 outpatient co-ordinated medical insurance pharmacies, and operated more than 800 kinds of hospital prescriptions. 2) In the online field, the company has deployed electronic prescription circulation services. Currently, it connects with more than 10 provincial and municipal medical insurance and health prescription distribution platforms, and directly or indirectly undertakes prescription circulation services for more than 100 tertiary hospitals and Internet hospitals.

Give it an “gain” rating. The company's net profit for 24-26 is estimated to be 1,729/21.23/2,616 billion yuan, respectively, up 22.5%/22.8%/23.2% year-on-year, and EPS is 1.71/2.10/2.59 yuan respectively. Currently, the corresponding stock price valuation is 25.7x/20.9x/17.0x, respectively. Considering that the company is a leading pharmacy, the expansion strategy is progressing steadily, and a “gain” rating is given.

Risk warning: industry policy risks, risk of prescription outflow falling short of expectations, etc.