Core views

On April 25, the company released its performance report for the first quarter of 2024. In 24Q1, it achieved operating income of 19.090 billion yuan, a year-on-year increase of 2.16%, achieved net profit of 389 million yuan, an increase of 7.33% over the previous year, and realized net profit of 370 million yuan after deduction, an increase of 5.10% over the previous year. The performance was in line with our expectations. In 2024, the company's distribution business is expected to achieve steady growth. The transformation of the NUS pharmacy headquarters is gradually completed, the category structure continues to be adjusted, and the integrated outpatient policy continues to be implemented. The operating efficiency of the retail sector may improve. Considering that the company continues to promote cost reduction and efficiency, I am optimistic about the long-term steady growth of the company's performance.

occurrences

The company released its performance report for the first quarter of 2024. The results were in line with our expectations. On April 25, the company released the first quarter results report of 2024, achieving operating income of 19.090 billion yuan, up 2.16% year on year; achieving net profit of 389 million yuan, up 7.33% year on year; achieving net profit without deduction of 370 million yuan, up 5.10% year on year; achieving basic earnings per share of 0.70 yuan.

Brief review

The distribution sector is growing steadily, and the retail business has a high base impact

In the first quarter of 2024, the company achieved 2.16% revenue growth, mainly due to:

1) The revenue of the distribution sector grew steadily by 6.77% to reach 13.954 billion yuan; 2) The retail sales base was under high pressure, and retail business revenue fell 8.30% year on year to 5.387 billion yuan. Net profit to mother increased 7.33% year on year, and net profit after deduction increased 5.10% year on year, faster than revenue growth, mainly due to: 1) the company continued to reduce costs and increase efficiency, and the fee control effect was obvious. The management fee ratio decreased 0.1 percentage points in the first quarter and the sales expenses ratio decreased by 0.14 percentage points; 2) the company's cumulative investment income in joint ventures was 110 million yuan, an increase of 42.41% year on year.

The impact of in-hospital compliance sales stabilized, and the base figure briefly affected the performance of the retail sector. In-hospital compliance sales stabilized, and distribution business grew steadily. In the first quarter of 2024, the company's distribution sector achieved revenue of 13.954 billion yuan, an increase of 6.77% over the previous year, mainly due to stable in-hospital compliance sales, the gradual release of demand for medication, and an increase in the number of terminals covered outside the hospital, which continued to contribute additional growth in performance. In the first quarter of 2024, the company's distribution sector achieved net profit of 240 million yuan, an increase of 10.07% over the previous year, and a slight increase of 0.05 percentage points to 1.72%, mainly due to the company continuing to promote business innovation and transformation and obtaining additional value-added revenue through the provision of diversified service systems. We believe that the company is currently a leading pharmaceutical distribution enterprise in the Liangguang region. As the impact of in-hospital compliance sales stabilizes and the number of terminals covered outside the hospital increases, the company's distribution business is expected to maintain a steady growth trend.

The base figure affects the retail sector's performance and is optimistic that the retail business will improve quarter by quarter. In the first quarter of 2024, the company's retail sector achieved operating income of 5.387 billion yuan, a year-on-year decrease of 8.30%, mainly due to a high base, net profit of 77 million yuan, a year-on-year decrease of 49.94%, and a 1.2 percentage point year-on-year decrease of 1.43%, mainly due to sales of more emergency supplies products such as physico-chemical diagnosis and masks in the same period last year. At the same time, some regions were affected by policies such as outpatient coordination, and the gross margin of outflow of prescriptions was relatively low, which led to a decrease in overall net profit margin. We believe that at this stage, the company's retail business is gradually being transformed and improved, the scale of stores is steadily expanding, and the product system continues to be optimized. Subsequent base pressure is weakening, and we are optimistic that the company's retail sector's performance will improve quarter by quarter.

The distribution business is growing steadily, and we are optimistic that the profitability of the retail sector will continue to improve in 2024. We believe that the impact of in-hospital compliance sales in the Liangguang region may stabilize, demand for in-hospital medication is expected to be released steadily, and superimposed companies will continue to promote in-hospital business transformation and increase the coverage of outpatient terminals. We are optimistic about the steady growth of the company's distribution business. At the same time, with the gradual implementation of outpatient coordination policies in various regions, the company is expected to take the lead in obtaining consolidated funding, and the steady expansion of the company's store size and continuous adjustments in product and organizational structure. We are optimistic that the company's retail business revenue and profitability will continue to improve. Furthermore, the company continues to reduce costs and increase efficiency, and the company's long-term performance potential is expected to be gradually unleashed.

The revenue structure affects gross profit margin, and fee control performance is better

In the first quarter of 2024, the company's gross sales margin was 10.86%, down 0.56 percentage points year on year, mainly due to a decrease in retail revenue share and a decrease in retail business gross margin; sales expenses ratio was 6.61%, down 0.14 percentage points year on year, with obvious cost control effect; management expenses ratio was 1.32%, down 0.10 percentage points year on year, the fee control effect was good; financial expense ratio was 0.24%, up 0.01 percentage points year on year, and remained stable. Net cash flow from operating activities decreased by 402% year over year, mainly due to the relatively large share of retail business in the same period last year, and repayments were relatively good.

The number of inventory turnover days was 42.98 days, down 1.9 days from the previous year, and remained stable; the number of accounts receivable turnover days was 97 days, an increase of 17.37 days over the previous year, mainly due to the slowdown in downstream payments; and the number of accounts payable turnover days was 57.82 days, an increase of 4.01 days over the previous year, mainly due to the expansion of the company's size. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

The company is expected to achieve operating income of RMB 80.844 billion, RMB 86.649 billion and RMB 92,932 billion respectively in 2024 to 2026, up 7.1%, 7.2% and 7.3% year-on-year net profit of RMB 1,786 billion, RMB 2.000 billion and RMB 2,245 billion respectively, up 11.7%, 12.0% and 12.2% year-on-year respectively. Equivalent EPS is 3.21 yuan/share, 3.59 yuan/share, and 4.03 yuan/share, respectively, corresponding to valuations of 10.9X, 9.8X and 9.8X, respectively 8.7X, maintaining a “buy” rating.

Risk analysis

1) Drug collection risk: The gradual expansion of the scope of centralized drug procurement may cause a certain price reduction risk to the company and affect some of the company's business profits. Moreover, as the number of products won bids for volume procurement increases, its excessive scale may have a great impact on the company's operating income and profits.

2) Increased market competition: Major competitors or new entrants in the market may weaken the company's comparative advantage and sustainable development ability, thereby affecting the company's long-term development;

3) The progress of store expansion is lower than expected: if the expansion of store size falls short of expectations, the company's long-term performance growth potential may not be unleashed, or it may adversely affect the company's long-term revenue growth;

4) Accounts receivable turnover risk: If the company's accounts receivable cycle is extended or cannot be recovered, it may cause time and economic losses to the company.

5) Capital occupation risk: Sinopharm Group Zhijun (Suzhou) Pharmaceutical Co., Ltd. is a joint venture of the company. Its entrustment loan took up a total of 35.21,38 million yuan of the company's capital. On May 11, 2021, the court ruled that Sinopharm Group Zhijun (Suzhou) Pharmaceutical Co., Ltd. went bankrupt. The company has already fully calculated bad debt provisions for the entrustment loan. If there is any remaining capital usage in the future, it may adversely affect the company's cash flow.

6) Policy risk: The pharmaceutical industry is a highly regulated industry. Stringent policies may adversely affect the company's operations.