2023 and 1Q24 results are in line with our expectations

The company announced 23FY and 1Q24 results: revenue of 22.588 billion yuan in '23, an increase of 13.59% year on year; net profit to mother of 1,412 billion yuan, up 11.57% year on year. 1Q24's revenue was 5.971 billion yuan, up 13.39% year on year; net profit to mother was 407 million yuan, up 20.89% year on year, in line with our expectations.

Development trends

Performance recovered well after the epidemic, and there was a marked increase in pharmaceuticals and traditional Chinese medicine. On the revenue side, 1) Chinese and Western proprietary medicines: achieved revenue of 17.095 billion yuan in 2023, up 15.9% year on year; 2) Traditional Chinese medicine: achieved revenue of 2.80 billion yuan in 2023, up 23.3% year on year; 3) Non-pharmaceuticals: achieved revenue of 2,803 billion yuan in 2023, down 2.3% year on year, mainly due to the high base in '22. On the profit side, the company deducted non-net profit of 1,362 billion yuan in 2023, an increase of 10.7% over the previous year, corresponding to the deduction of 6.02% of non-net interest.

The region-focused strategy is combined with a fleet store location model to drive steady expansion of endogenous epitaxial expansion. In 2023, the company continued to adhere to the “regional focus+chain replication” development strategy and the “new opening+merger and acquisition+franchise” store expansion model, with a net increase of 2,982 stores, bringing the total number of stores to 13,250 at the end of the year. Among them, 3,196 new stores were added in 2023, 1,613 were self-built, 559 were acquired, 1,024 joined, and 153 were closed; in 1Q24, there was a net increase of 670 stores, including 364 self-built, 166 mergers and acquisitions, 171 joined, and 23 closed. By the end of the first quarter, the total number of stores had reached 13,920.

The gross margin remains stable under the influence of the base figure, and the cost ratio is continuously optimized. The company's gross profit margin in 2023 was 38.2%, down 1.3 ppt year on year, mainly due to an increase in the company's share of wholesale revenue and a decline in retail gross margin (higher base due to the impact of the epidemic in '22); sales expenses ratio 24.3%, down 0.2ppt year on year; management expenses ratio 4.3%, down 0.2ppt year on year. 1Q24's gross profit margin was 39.2%, down 0.42ppt year on year; sales expenses ratio was 24.4%, down 1.2ppt year on year. We believe that as the base returns to normal and the company continues to strengthen fine management and scale effects, the operating indicators are expected to gradually improve in the future.

New retail businesses such as O2O are growing rapidly, and digital transformation has achieved remarkable results. By the end of 2023, the company's O2O had launched more than 9,000 direct-run stores, covering all major offline cities of the company. B2C and O2O achieved total sales revenue of 1,818 billion yuan throughout the year, of which O2O achieved sales revenue of 1,399 billion yuan and B2C achieved sales revenue of 419 million yuan, with impressive growth rates. At the same time, the company actively promotes digital transformation in the fields of membership and logistics, increases user stickiness through the membership service system, and helps the digital development of the retail business.

Profit forecasting and valuation

Considering the high base for 1Q24, endogenous growth was maintained, and the 24-25 net profit forecast was slightly raised by 4.2% and 4.5% to 17.64 billion yuan or 2.91 billion yuan. The current stock price corresponds to 25.2 times/20.3 times P/E in 24-25. Maintaining an outperforming industry rating, maintaining a target price of 58.0 yuan, corresponding to 33.1 times/26.7 times P/E in 24-25, with 32.0% upside compared to the current stock price.

risks

Changes in health insurance policies; rising labor and rent costs; changes in the competitive landscape.