Core views
On April 28, the company released its 2023 annual results report. In 2023, it achieved operating income of 22.588 billion yuan, an increase of 13.59% over the previous year, achieved net profit of 1,412 billion yuan, an increase of 11.90% over the previous year, achieved net profit after deduction of 1,362 billion yuan, an increase of 10.92% over the previous year, and achieved basic earnings of 1.40 yuan per share. The performance was in line with our expectations. Looking ahead to 2024, the outpatient coordination policy will be implemented steadily, and the size of the company's stores will continue to expand. Considering that the pressure on the performance base decreases from quarter to quarter, I am optimistic that the company's performance growth will accelerate month-on-month.
occurrences
The company released its 2023 annual report and 2024 quarterly report. The performance is in line with our expectations. On April 28, the company released the 2023 annual report and the 2024 quarterly report. In 2023, the company achieved operating income, net profit attributable to mother and net profit after deduction of $22.588 billion, $1,412 billion and $1,362 billion respectively, up 13.59%, 11.90% and 10.92% year-on-year respectively. In the first quarter of 2024, the company achieved operating income, net profit attributable to mother, and net profit not attributable to mother of $5.971 billion, $407 million and $399 million respectively, up 13.39%, 20.89% and 24.26% year-on-year respectively. The results were in line with our expectations.
Yifeng Pharmacy plans to distribute a cash dividend of 0.50 yuan (tax included) to all shareholders based on the total share capital on the 2023 equity distribution registration date, and transfer 0.20 shares per share to all shareholders by transferring share capital from the capital reserve fund, without bonus shares.
Brief review
The scale of revenue has increased steadily, and performance potential has been unleashed at an accelerated pace
In 2023, the company's revenue side grew by 13.59%, mainly due to: 1) the steady expansion of the store scale, adding 3,196 new stores throughout the year; 2) the retail business continued to grow steadily by 12% based on the high base in the fourth quarter. Net profit attributable to mother increased 11.90% year on year, and net profit after deduction of 10.92% year on year, slightly slower than revenue growth, mainly due to: 1) the increase in the share of wholesale business revenue, which led to a slight decrease in overall gross margin; 2) the acceleration of prescription outflow, the share of Chinese and Western proprietary pharmaceutical sales increased, and the gross margin of the retail business declined slightly; 3) the company continued to promote cost control, and the expense ratio declined during the period.
In the first quarter of 2024, the company's revenue increased 13.39% year on year, and the growth rate slowed slightly, mainly due to the high base for the same period of the previous year; net profit to mother increased 20.89% year on year, and net profit after deducting 24.26% year on year, faster than revenue growth, mainly due to: 1) the lower profit base; 2) the sales expense ratio for the single quarter decreased by 1.2 percentage points.
The scale of stores is steadily expanding, and regional advantages are becoming more obvious
Improve the regional layout and enhance the scale advantage. In 2023, the company continued to implement the development strategy of “regional focus, steady expansion” and the business policy of “key penetration and in-depth marketing”. By the end of the first quarter of 2024, the company added a total of 3196 stores, including 1,613 self-built stores, 559 mergers and acquisitions, and 1024 franchise stores. In the first quarter of 2024, the company added 701 stores, including 364 self-built stores, 166 mergers and acquisitions, and 171 franchise stores. By the end of the first quarter of 2024, the company had a total of 13,920 franchised stores, of which the total number of franchised stores was 13,920. shop 3157 Home, 10,763 directly-managed stores. We believe that the company continues to pursue a “regional focus” strategy. As the scale of stores gradually expands and regional density continues to deepen, the company is expected to achieve high sales growth rates and higher profit levels than the industry average in key regions. Furthermore, the company has continued to expand the breadth of store layout and deepen the depth of store layout for 24 years. The number of new stores opened throughout the year is expected to reach a historic high level, and the market leading edge will gradually expand.
M&A projects continue to be implemented, and regional density continues to be encrypted. In the first quarter of 2024, the company had 5 mergers and acquisitions, involving 166 stores, and still maintained a rapid expansion trend. We believe that as the market environment stabilizes, the asset prices of small and medium-sized chains and individual pharmacies may become more reasonable. Through mergers and acquisitions, companies can encrypt the layout of advantageous stores or lower the entry threshold for empty regions, and can continue to consolidate their competitive advantage within the business region.
Professional store network layout is perfect, and user stickiness continues to increase
Improve the variety layout in the hospital to attract outbound customers, and enhance consumer stickiness with specialized services. By the end of 2023, the company had a total of 675 hospital side stores and 305 DTP specialty pharmacies, including 246 dual-channel medical insurance stores and opened more than 4,200 outpatient co-ordinated medical insurance pharmacies. The number of co-ordinated stores remained at a high level, and specialized service capabilities continued to improve. In addition, the company actively adjusted product categories, operated more than 250 drugs negotiated under national health insurance agreements, and prescribed more than 800 kinds of drugs from hospitals. We believe that the company's single-store product system is relatively rich and the specialized store layout is perfect, which is expected to continue to attract outflow from the hospital in the context of prescription outflow, consolidate user stickiness through specialized services, and obtain additional performance gains.
New retail accelerates revenue growth, and product system optimization+digitalization enhances profitability. In 2023, the company continued to accelerate the development of new retail business. O2O launched more than 9,000 direct-run stores, and the annual online business revenue reached 1,818 billion yuan. In addition, the company continues to promote the product boutique strategy and vigorously introduce collection varieties. By the end of 2023, the company had established boutique strategic partnerships with nearly 600 manufacturers, and selected more than 1,800 varieties to be included in the company's product boutique library. The results of superimposed digital transformation are gradually reflected, and the profitability of single stores is expected to continue to improve.
Outpatient coordination continues to contribute, and the performance is expected to improve quarter by quarter
Looking ahead to 2024, we believe that local outpatient coordination policies may be implemented at an accelerated pace, which is expected to accelerate the prescription outflow process. The company's regional coordination policy is relatively relaxed at this stage, and based on the company's excellent specialized service capabilities and Internet medical layout, the company is expected to obtain more traffic during the prescription outflow process. In addition, the company has obvious advantages in specialized services, and the category structure is reasonable. It is expected to obtain a larger customer unit price through related transactions, and single store revenue may grow steadily. The company's store addition rate is expected to remain above 30% throughout the year. Subsequent performance base pressure will decline quarterly, and the company's performance growth rate may show a positive trend from quarter to quarter.
Franchise business affects gross profit margin, and fee control continues to advance
In 2023, the company's comprehensive gross margin was 38.21%, down 1.32 percentage points year on year, mainly due to the increase in the share of wholesale business with low gross margin; the sales expense ratio was 24.29%, a decrease of 0.24 percentage points year on year, with obvious fee control effect; the management expense ratio was 4.26%, a decrease of 0.29 percentage points year on year, the control effect was obvious; the financial expense ratio was 0.38%, down 0.15 percentage points year on year, and the fee control effect was obvious. Net cash flow from operating activities increased 17.94% year over year, mainly due to increased sales volume. The number of inventory turnover days was 95.72 days, down 3.9 days year on year, and remained stable; the number of accounts receivable turnover days was 31.73 days, an increase of 5.29 days year on year, mainly due to the expansion of sales scale; the number of accounts payable turnover days was 46.86 days, an increase of 2.79 days year on year, which remained stable. The rest of the financial indicators are generally normal.
In the first quarter of 2024, the company's comprehensive gross margin was 39.25%, down 0.41 percentage points year on year, mainly due to the increase in the share of wholesale business with low gross margin; the sales expense ratio was 24.40%, a decrease of 1.20 percentage points year on year, and the fee control effect was obvious; the management expense ratio was 4.17%, up 0.10 percentage points year on year, basically stable; and the financial expenses ratio was 0.47%, up 0.09 percentage points year on year, basically stable. Net cash flow from operating activities decreased by 49.56% year over year, mainly due to the high base for the same period last year. The number of inventory turnover days was 93.61 days, down 6.99 days from the previous year, mainly due to the high base for the same period last year; the number of accounts receivable turnover days was 33.87 days, an increase of 7.13 days over the previous year, mainly due to the increase in sales scale; and the number of payables turnover days was 53.28 days, an increase of 7.1 days over the previous year, mainly due to the increase in sales scale. The rest of the financial indicators are generally normal.
Profit forecasting and investment ratings
We expect the company to achieve operating income of 27.575 billion yuan, 33.859 billion yuan and 41,688 billion yuan respectively, up 22.1%, 22.8% and 23.1% year-on-year respectively, with net profit attributable to mother being 1,766 billion yuan, 2.210 billion yuan and 2,770 billion yuan respectively, up 25.1%, 25.2% and 25.3% year-on-year respectively, equivalent to EPS of 1.75 yuan/share, 2.19 yuan/share and 2.74 yuan/share, corresponding to a valuation of 25.1X, 20.1X and 16.0X maintain buy ratings.
Risk analysis
1) Risk of changes in industry policies: If a country or locality introduces measures favorable to drug sales in medical institutions or policies restricting the development of the retail pharmacy industry in the process of medical system reform, it may adversely affect the company's operations; 2) Market competition intensifies: the concentration of the industry gradually increases, and competition may become more intense, which may adversely affect the company's operations; 3) The progress of scale expansion falls short of expectations: If the expansion of store size falls short of expectations, the company's long-term performance growth potential may not be unleashed, or has an adverse effect on the company's long-term performance growth 4) The integration of mergers and acquisitions stores does not meet expectations: Purchase Projects, if the company does not meet expectations in terms of subsequent business integration, personnel integration, performance improvement, etc., may affect the company's operating performance; 5) Goodwill impairment calculation:
The company's merger and acquisition assets have a certain amount of goodwill. If subsequent operations fall short of expectations, or there is a risk of impairment, which affects profit growth; 6) Short-term transactions of the company's supervisors are convertible bonds: Short-term trading behavior is caused by misoperation, there is no purpose of using short-term transactions to seek profit, there is no subjective intention of short-term trading, and the seriousness of this short-term transaction has been deeply understood. The company will strengthen the study of relevant laws, regulations and regulatory documents by corresponding personnel in the future.