Core views

The company achieved revenue of 4.208 billion yuan in Q1, a year-on-year decrease of -4.96%; realized net profit of 247 million yuan, an increase of 5.05% over the previous year; realized net profit without deduction of 218 million yuan, a year-on-year decrease of 8.47%. Judging from the Q1 performance, we believe that the growth rate of the company's core products slowed down during the same period last year, compounded by some chemical products and commercial sectors, which put pressure on the company's performance in the short term. It is expected that other varieties of traditional Chinese medicine will still achieve steady growth, and the overall performance is in line with our previous expectations. Looking ahead to the whole year, as the company's industrial sector strengthens category development and channel construction, the profitability of the commercial sector will further improve, superimpose the company's industrialization of Chinese herbal medicine resources, actively explore a second growth curve, and look forward to long-term growth space.

occurrences

The company released its report for the first quarter of 2024

On the evening of April 25, the company released its report for the first quarter of 2024, achieving total revenue of 4.208 billion yuan, a year-on-year decrease of -4.96%; realized net profit of 247 million yuan, an increase of 5.05%; realized net profit deducted from non-return to mother of 218 million yuan, a year-on-year decrease of 8.47%; and achieved earnings of 0.44 yuan per share. The results were in line with our previous expectations.

Brief review

Core categories were under pressure from a high base. The Q1 performance was in line with previous expectations for Q1 in '24. The company achieved revenue of 4.208 billion yuan, down 4.96% year on year; realized net profit without return to mother of 218 million yuan, down 8.47% year on year, and the main business growth rate slowed, mainly due to: ① The growth rate of the core single product Agastache Zhengqi Oral Liquid slowed under high base during the same period last year; ② sales of chemical pharmaceutical products continued to be under pressure; achieved net profit of 0.64 million yuan, an apparent increase of 5.05% year on year Profit growth was mainly due to the government ③ Subsidies have increased compared to the same period last year. Judging from the Q1 performance, we believe that the growth rate of the company's core products slowed down during the same period last year, compounded by some chemical products and commercial sectors, which put pressure on the company's performance in the short term. It is expected that other varieties of traditional Chinese medicine will still achieve steady growth, and the overall performance is in line with our previous expectations.

Core products in the industrial sector are under pressure, and the health sector experienced rapid year-on-year growth in Q1 sub-sectors: ① Pharmaceutical industry: achieved revenue of 2,693 billion yuan, a year-on-year decrease of 15.62%, gross profit margin of 64.90%, a year-on-year decrease of 0.27 percentage points; among them, modern traditional Chinese medicine is expected to achieve steady growth, and the chemical sector experienced a year-on-year decline under external environmental pressure; by category, the company's digestive system (represented by Agastache Zhengqi oral liquid), respiratory system (represented by emergency syrup), anti-infection (represented by Yibao Shiling), and the three core categories Realize revenue 682 million yuan, 1,005 million yuan, and 397 million yuan, year-on-year increases of -28.04%, 6.10%, and -29.63%, respectively. Looking at large varieties, Agastache Zhengqi Oral Liquid is expected to be under year-on-year pressure at a high base; emergency syrup continues to grow well under the catalytic demand of terminals; and traditional Chinese medicines such as Tongtian Oral Liquid and Sinusitis Oral Liquid are all expected to achieve good growth. Overall, the company's industrial sector is under pressure in the short term due to the slowdown in the growth rate of core single products, and it is expected that other Chinese medicine varieties will still achieve steady growth.

② Other sectors: Among them, the pharmaceutical business achieved revenue of 1.911 billion yuan, a year-on-year decrease of 9.21%, a gross profit margin of 8.62%, and the commercial sector continued to be under pressure; Chinese herbal medicine resources achieved revenue of 246 million yuan, down 21.47% year on year, gross profit margin 6.81%, up 0.61 percentage points year on year, revenue side declined under high base, and profitability increased steadily; Big Health achieved revenue of 126 million yuan, up 60.15% year on year, gross profit margin 4.67%, up 0.35 percent year on year In percentage points, the scale achieved rapid year-on-year growth.

Looking forward to the whole year: Continue to promote digital transformation and actively explore the second growth curve in 2024. The company will continue to promote digital transformation, use data to empower production, operation and organizational transformation, build a modern pharmaceutical industry cluster, develop the industrialization of Chinese herbal medicine resources, and actively explore the second growth curve:

1) Pharmaceutical industry: The company will strengthen category development and channel construction, make every effort to sell strategic main products, and build a multi-variety, omni-channel, and integrated digital marketing platform; in terms of variety, the company will do a good job of planning and supplementing new products, and the Agastache series will achieve full category marketing. It is expected that in the future, under the impetus of increased penetration rate of Agastache in regions other than Sichuan and Chongqing and the addition of a new “moisture removal” positioning, there is still room for growth. Emergency support is expected to maintain good growth on the basis of the company's focus on key markets to achieve integrated development of online and offline sales. The sector continues its steady growth trend .

2) Pharmaceutical business: In the distribution sector, the company will further promote integration and collaboration to actually raise the overall profit level; in the distribution sector, the company will continue to promote supply chain construction, target at least 50 new first-level distribution accounts for key suppliers, and vigorously develop medical terminals, actively develop grade hospitals, transform from collection and distribution to all categories and business formats to seek new growth points; in the retail sector, the company plans to vigorously develop direct-run franchise pharmacies. The target is to add no less than 100 franchised pharmacies and standardize pharmacy operations with direct management policies and management systems; Featured TCM The museum will increase sales of Taiji brand Chinese medicine tablets; it is expected that they will jointly promote the restoration of healthy growth in the company's commercial sector.

3) Chinese herbal medicine resources: The company will continue to deeply cultivate Chinese herbal medicine resources, continuously expand the scale of the planting base, plan to standardize the planting area of 250,000 mu, and simultaneously launch the construction of 14 GAP bases for Chinese herbal medicine varieties to form the unique management of Chinese herbal medicines and tablets with Taiji characteristics. At the same time, the company will accelerate the industrialization of Cordyceps sinensis, promote the construction of Cordyceps sinensis seed source bases and processing bases, and promote the processing of production standards, digitalization of management and local standard setting for the nurturing of Cordyceps sinensis in Chongqing, and is expected to jointly promote the rapid growth trend of the company's Chinese herbal medicine resource business.

Overall, it is expected that the company's industrial sector will strengthen category development and channel construction in '24, and the profitability of the commercial sector is expected to further improve. Combined with the company's development of the industrialization of Chinese herbal medicine resources, actively developing a second growth curve, and optimistic about the company's long-term growth space.

Gross margin is under pressure in the short term, and the cost structure continues to be optimized

In Q1 2024, the company's comprehensive gross margin was 46.47%, a year-on-year decrease of 4.53pp. It is estimated that the sales expenses ratio reached 33.08%, a year-on-year decrease of 4.40pp, and the management expenses ratio reached 4.00%, a year-on-year decrease of 0.20 pp. The cost settlement continued to be optimized, and the cost control effect was ideal; the R&D expense ratio reached 1.33%, an increase of 0.47pp year-on-year, mainly due to the company's increased R&D investment. Net cash flow from operating activities - $167 million, is expected to be mainly affected by the fiscal period at the beginning of the year and the year-on-year decrease in cash inflows from operating activities. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

Over the past two years, the company's high growth in performance and continuous improvement in management are in line with our judgment in early 2022 that the company's “difficult situation is reversed and growth can be expected”; we believe that the company's current valuation fully reflects short-term fluctuations in operations, and short-term operating fluctuations will not change our long-term judgment on the company's operations. We expect the company to achieve operating income of 17.760 billion yuan, 19.072 billion yuan and 22.468 billion yuan respectively, and net profit to mother of 1,069 billion yuan, 1,392 billion yuan and 1,811 billion yuan respectively, equivalent to EPS (diluted) of 1.92 yuan/share, 2.50 yuan/share, and 3.25 yuan/share, respectively, with year-on-year increases of 30.1%, 30.2% and 30.1%, respectively. Corresponding PE is 18.9x, 14.5x and 11.2x respectively. Maintain a “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment has increased. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profit; 2) the risk of collection and price reduction, the company's core products may further enter the collection list, reduce product prices and reduce product profits, which in turn affects the company's profit expectations; 3) Risk of price increases in raw materials and power costs: the increase in the price of the company's raw materials will cause cost pressure to rise, which in turn affects the company's profit performance; 4) Hospital diagnosis and treatment volume will fall short of expectations: after the epidemic, home diagnosis and treatment volume may be affected. This affects the sales of prescription drugs, which in turn affects the company's overall profit.