Incidents:
1) The company released its 2023 annual report, achieving operating income, net profit attributable to mother, and net profit excluding non-return to mother of RMB 224.37/9.29/844 million yuan respectively, +11.21%/18.35%/14.68% compared with the same period last year. Net cash flow from operating activities was $2,730 million, +17.95% YoY; EPS (basic) $1.59. The results are in line with market expectations.
2) The company issued a profit distribution plan for 2023, distributed a cash dividend of 0.66 yuan (tax included) per share to all shareholders, no bonus shares, and transferred 0.3 shares per share from the capital reserve fund to all shareholders. The dividend payout ratio is 41.55%.
3) The company released its 2024 quarterly report, achieving operating income, net profit attributable to mother, and net profit after deducting non-return to mother of $55.39/3.21/311 billion, respectively, or +1.81%/10.27%/10.35% over the same period last year. Net cash flow from operating activities was $417 million, or -50.89% YoY; EPS (basic) $0.55. The results are in line with market expectations.
Comment:
Revenue grew steadily under a high base, and the Torch Project effectively increased gross profit margin. 4Q23 operating income, net profit attributable to mother, and net profit excluding non-return to mother were 63.96 billion yuan/2.12/198 million, respectively, or -0.05%/21%/18% year-on-year. The performance developed steadily under a high base. The gross profit margin of sales in 2023 was 32.55%, +0.67pp; the net sales margin was 5.01%, +0.17pp, and profitability was steady; the expense ratio rebounded slightly during the period, +0.47pp. Among them, the sales/management/finance expense ratio was +1.03/-0.20/-0.36pp, respectively. The 1Q24 revenue side achieved positive growth under a high base, and profitability improved. Related to the implementation of the Torch Project, efforts were made to increase gross profit margin through the entire procurement and marketing process. The gross profit margin of 1Q24 sales was 35.20%, +2.20pp; the net margin was 6.61%, +0.41pp.
In terms of product structure, 1Q24 revenue of proprietary Chinese and Western medicines, traditional Chinese medicines, and non-pharmaceuticals was +7.83%/-3.24%/-24.66% year-on-year, and gross margin was +3.14/0.55/0.79pp year-on-year, and the gross margin of proprietary Chinese and Western medicines increased significantly.
Crypto dominates the market, expands the sinking market, and empowers digitalization to improve the efficiency of new stores. In 2023, the company took advantage of the national market layout and used endogenous epitaxial capabilities to further focus on dominant markets and expand the sinking market, and rapidly increase regional market share. The company's store network covers 18 provinces, with a year-on-year reduction of 2 provinces. Among them, the province with the highest city share reached 4 and the top 3 provinces with a city share ratio of 11. By the end of 2023, the company had a total of 13,574 stores (including 9180 direct-run stores, up 20% year on year; 4394 franchise stores, up 40% year on year), adding 3,388 new stores compared to the beginning of the year (1802 new direct-run stores and 1,586 new franchised stores), of which the number of stores in prefecture-level cities and below accounted for 78%. In 2023, the franchise business achieved distribution revenue of about 2.2 billion yuan, +20% over the same period last year. The company has built a new store preparation and operation management system, and digitalization enables new stores to improve the efficiency of new stores. The average preparation cycle for new direct-run stores in 2023 is 40 days, which is 9 days shorter than in 2022.
The new retail ecosystem is gaining strength throughout the region, focusing on promoting outpatient coordination projects. Online channel sales in 2023 were around $2 billion, +38% year-on-year. By the end of 2023, the company's O2O stores had reached 10,663, and the number of 24-hour stores had increased to 626. In terms of public domain, the company ranked fifth and third in the market for O2O and B2C sales in 2023, respectively. In terms of private domain, sales in 2023 are about 100 million yuan, and the annual service is over 400,000 users. On the offline side, the company continues to strengthen the construction of high-standard hospital side stores, enhance pharmacists' service capabilities, and actively accept the outflow of prescriptions. By the end of 2023, there were 8,186 directly-managed Chinese medicine insurance stores (+1195), accounting for 89.17% of the total number of directly-managed stores; 1,584 stores were eligible for “outpatient special chronic diseases” (+531), 176 DTP pharmacies (+14), 280 dual-channel stores (+53); there were 4,262 outpatient co-ordinated stores (including 740 franchised stores), accounting for 31.40%, of which 3,0 stores can use Internet prescriptions (can be used for mutual use) 59 (of which (303 franchised stores). The interchangeable stores showed a significant increase in the number of visitors and sales.
Profit forecasting, valuation and rating: The company's franchise business is growing rapidly, focusing on the markets of advantageous provinces, actively expanding the sinking market, and a number of forward-looking strategic layouts to ensure the company's long-term steady growth. We maintained the 24-25 net profit forecast of 1,122/1,358 million yuan, and added a 26-year net profit forecast of 1,642 billion yuan, an increase of 21%/21%/21% year-on-year. The current price corresponds to the 24-26 PE of 17/14/12 times. Maintain a “buy” rating.
Risk warning: procurement and health insurance policy risks; franchise store operations fall short of expectations; store expansion falls short of expectations, etc.