Core views
On April 26, the company released its 2023 annual results report. In 2023, it achieved operating income of 15.140 billion yuan, an increase of 6.92% over the previous year, achieved net profit of 2,174 billion yuan, an increase of 4.27% over the previous year, achieved net profit after deduction of 1,960 billion yuan, an increase of 13.06% over the previous year, and achieved basic earnings of 0.55 yuan per share. The performance was lower than our expectations. Looking ahead to 2024, the company's traditional drug distribution business is expected to grow steadily. Revenue from high-margin businesses such as general brand promotion may show relatively rapid growth. Combined with the continued expansion of the rest of the innovative business, the company's performance potential is expected to gradually be unleashed.
occurrences
The company released its 2023 annual report and 2024 quarterly report. The performance was lower than our expectations. On April 26, the company released the 2023 annual results report and the 2024 first quarter results report. In 2023, the company achieved operating income, net profit to mother, and net profit after deduction of 15.140 billion yuan, 2.174 billion yuan, and 1,960 billion yuan respectively, with year-on-year increases of 6.92%, 4.27% and 13.06%, respectively. In the first quarter of 2024, the company achieved operating income, net profit attributable to mother, and net profit of 40.472 billion yuan, 538 million yuan, and 522 million yuan respectively, down 3.85%, 4.19% and 9.01% year-on-year respectively. The results were lower than our expectations.
Kyushu Express plans to distribute a cash dividend of 2.50 yuan (tax included) to all common shareholders based on the total share capital on the equity distribution registration date. At the same time, it also plans to use the Capital Provident Fund to increase 2.90 shares for every 10 shares, without bonus shares.
Brief review
Steady growth of multiple terminals, accelerated growth of innovative businesses
In 2023, the company's revenue increased 6.92% year on year, mainly due to: 1) downstream multi-terminals showed a steady growth trend, and demand from primary medical institutions was released at an accelerated pace, driving a steady increase of 2.47% in commercial distribution business to 124.042 billion yuan; 2) the general generation brand promotion business revenue increased 46.01% year over year to 19.584 billion yuan; 3) the new pharmaceutical retail business increased 10.95% to 2,815 billion yuan. In 2023, the company's net profit to mother increased 4.27% year on year, and net profit without return to mother increased 13.06% year on year. The difference in profit side growth rate was mainly due to the higher net profit base in '22, and the faster growth rate of net profit after deducting net profit was mainly due to the increase in the share of general generation brand promotion business revenue, which led to a 0.27 percentage point increase in gross margin.
In the first quarter of 2024, the company's revenue fell 3.85% year on year to 40.472 billion yuan, mainly due to seasonal disease factors such as influenza during the same period last year, sales of related products increased dramatically, and the revenue base was under high pressure. The company's net profit to mother fell 4.19% year on year to 538 million yuan, and net profit without return to mother fell 9.01% year on year to 522 million yuan. The profit side grew slower than the revenue side, mainly due to the decline in sales share of general generation brand promotion business sales in the first quarter, which was less affected by seasonal diseases and some higher gross margins declined, leading to a slight decrease of 0.37 percentage points in the first quarter, but it is expected to gradually recover later.
The distribution business grew steadily, and demand from primary medical institutions accelerated. In 2023, the company's commercial distribution business grew steadily by 2.47% to 124.042 billion yuan, and gross margin decreased by 0.11 percentage points to 6.37%. Overall, it remained relatively stable. In 2023, the company continued to improve the supply chain and product system, and the terminal coverage capacity continued to be strengthened: 1) In-hospital side: The company continued to strengthen in-hospital market expansion of grade hospitals, primary medical institutions and private medical institutions. Among them, the channel revenue volume of primary medical institutions was significant. Revenue increased 21.33% year-on-year to 7.425 billion yuan, and the revenue share increased markedly. 2) Outside the hospital: The company continues to strengthen the construction of online service channels to accelerate the empowerment of end customers such as single pharmacies and clinics. The revenue scale of digital distribution businesses such as the Pharmaceutical 99 B2B trading platform reached 11.241 billion yuan. By the end of 2023, the company's omni-channel B-side customers had grown to 505,700, the number of operating products had increased to 665,900, and the terminal coverage capacity continued to improve. We believe that in 2024, the impact of in-hospital compliance sales may stabilize, residents' demand for medication is gradually released, and the company's distribution business may show a steady growth trend. Furthermore, through digital empowerment, the company's distribution business is expected to meet more diverse customer needs and help transform the traditional distribution business in collaboration with offline business.
The general generation brand promotion business grew at an accelerated pace, and the new product strategy continued to empower in 2023. The company's general brand promotion business achieved revenue of 19.584 billion yuan, an increase of 46.01% year on year, and gross margin increased 0.6 percentage points to 14.24% year on year. Among them: 1) General Pharmaceutical Brand Promotion Business was officially upgraded to Quanqing Health's CSO brand, with a professional marketing promotion team of 3,000 people and 969 agent regulations. The sales revenue in 2023 increased 60.82% year-on-year to 10.696 billion yuan; 2) General Device Brand Promotion Business focuses on developing major surgery, cardiovascular intervention, and IVD national platform businesses, and has represented Johnson & Johnson, Abbott, Fresenius (Blood Penetrating), Roche, McMorton and other brand manufacturers with a total sales revenue of 594 (including 24 with sales exceeding 100 million product regulations) 8.888 billion yuan, up 31.44% year over year. We believe that as policies such as collection continue to be implemented, demand for CSO outside the hospital may be released steadily. The company's out-of-hospital terminal coverage rate is high and brand building capabilities are strong. In the future, it is expected to gain more market share and optimize overall gross profit margin by increasing revenue share.
Innovative business continues to gain strength and has sufficient potential for growth
1) 10,000 store franchise business: By the end of the first quarter of 2024, the number of the company's 10,000 franchise stores reached 21,192, covering 31 provinces, cities, 293 prefecture-level cities, and 1301 districts and counties across the country. The number of stores is expected to exceed 30,000 in 2025. 2) Focus on industrial self-production and OEM business: In 2023, the company actively developed the Western medicine industry, the Chinese medicine industry's own production and OEM business. Annual revenue increased 2.70% year-on-year to 2,466 billion yuan, and gross margin increased 0.66 percentage points to 23.84%. Among them, many products of Jingfeng Pharmaceutical entered collection or passed generic drug consistency evaluations, and OEM product regulations continued to be rich. 3) Develop a new “new medical” circuit: The company opens up a “new track” for new medical services, builds a comprehensive clinic service platform with digital medical services as the core and integrates the supply chain, and enhances terminal control. We believe that the company has a clear business strategy and sufficient potential for innovative business. As the scale gradually expands in the future, business profitability is expected to further improve and contribute additional growth.
Looking forward to steady growth in annual performance, the Reits project may contribute more and more in 2024. We believe that the impact of in-hospital compliance sales may stabilize. With the gradual implementation of the outpatient coordination policy, the reimbursement ratio of primary care institutions and pharmacies is relatively large, and demand for medication in the primary and out-of-hospital markets is expected to accelerate release, which in turn will bring additional growth to the company's performance, and the traditional drug distribution business is expected to grow steadily. Although the general generation brand promotion is under certain base pressure, it may maintain a relatively rapid growth rate throughout the year. The company strives to increase the overall sales revenue of the “new product” business by no less than 15% year-on-year in 2024. In addition, the company's REITs project and the first pre-REITs project may be implemented in the first three quarters, and net profit due to mother may increase significantly, which is optimistic about the steady growth of the company's business.
Structural adjustments increase comprehensive gross profit margin, and fee control continues to advance
In 2023, the company's comprehensive gross margin was 8.07%, an increase of 0.27 percentage points over the previous year, mainly due to an increase in the share of high-margin business revenue; the sales expenses ratio remained flat at 2.94%; the management expenses ratio was 1.88%, an increase of 0.06 percentage points over the previous year, which remained stable; and the financial expenses ratio was 0.79%, down 0.02 percentage points from the previous year, and remained stable. Net cash flow from operating activities increased 19.10% year over year, mainly due to the increase in scale. The number of inventory turnover days was 48.68 days, an increase of 3.18 days over the previous year, and remained stable; the number of accounts receivable turnover days was 62.70 days, a decrease of 6.5 days over the previous year, mainly due to the company's increased efforts to settle accounts receivable; the number of days payable was 40 days, an increase of 2.09 days over the previous year, and remained stable. The rest of the financial indicators are generally normal.
In the first quarter of 2024, the company's comprehensive gross margin was 7.20%, down 0.37 percentage points year on year, mainly due to a decrease in the share of high-margin business revenue; the sales expense ratio was 2.55%, down 0.28 percentage points year on year, and the fee control effect was obvious; the management expense ratio was 1.61%, up 0.03 percentage points year on year, basically stable; and the financial expenses ratio was 0.70%, down 0.02 percentage points year on year, basically stable. Net cash flow from operating activities decreased by 20.92% year over year. The number of inventory turnover days was 45.29 days, an increase of 6.44 days over the previous year, mainly due to a slight decrease in revenue; the number of accounts receivable turnover days was 68.76 days, a decrease of 1.27 days over the previous year, mainly due to the company increasing its efforts to settle accounts receivable; and the number of payables turnover days was 41.42 days, an increase of 4.47 days over the previous year, which remained stable. The rest of the financial indicators are generally normal.
Profit Forecasts and Investment Ratings
The company is expected to achieve operating income of 165.170 billion yuan, 182.100 billion yuan and 200981 billion yuan respectively, up 10.0%, 10.3% and 10.4% year-on-year respectively. Net profit after deducting non-return to mother was 2.196 billion yuan, 2,466 billion yuan and 2,786 billion yuan respectively, up 12.0%, 12.3% and 13.0% year-on-year respectively, equivalent to EPS (deducted) of 0.56 yuan/share, 0.63 yuan/share and 0.71 yuan/share, respectively, corresponding to the valuation 14.6X, 13.0X, and 11.5X, maintaining a “buy” rating.
Risk analysis
1) Drug collection risk: The scope of centralized drug procurement is gradually expanding, which may cause a certain risk of price reduction for the company, and as the number of winning products in volume procurement increases, its excessive scale may have a big 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 capacity, which in turn affects the company's long-term development;
3) Product development risk: If the company's product development progress falls short of expectations, or will damage the company's long-term business competitiveness; 4) Accounts receivable turnover risk: if the company's accounts receivable cycle is extended or cannot be recovered, which will cause time and financial losses to the company; 5) Regulatory risk: On March 2, 2023, the Shanghai Stock Exchange accepted an application from Kyushu Connect to issue preferred shares to specific targets. During the follow-up inquiry process, the company claims that the portion of the Health City project permitted to be sold by the government is not sold to internal employees to provide employee benefits It is sold by the public, but in reality, there is a situation where it is sold to the public. It is supervised and warned by the Shanghai Stock Exchange, which may adversely affect the company's operations.
6) Policy risk: The pharmaceutical industry is a highly regulated industry. Stringent policies may adversely affect the company's operations.