Key points of investment
The company disclosed the 2023 annual report and the 2024 quarterly report. The revenue for 2023 was $22.439 billion, up 11.2% year on year; net profit to mother was $929 million, up 18.4% year on year. 2024Q1's revenue was 5.539 billion yuan, up 1.8% year on year, and net profit to mother was 321 million yuan, up 10.3% year on year. Influenced by commercial procurement optimization, etc., the company's profit margin increased. In 2023, the company's gross profit margin was 32.55%, up 0.67 pct year on year; net profit margin was 5.01%, up 0.17 pct year on year; 2024Q1 gross profit margin was 35.20%, up 2.20 pct year on year; and net profit margin was 6.61%, up 0.41 pct year on year. We believe that as the company sinks and expands and product management continues to be optimized, high profit growth can be expected in 2024.
Growth: Franchise store growth, acceleration of overall implementation, driving revenue growth (1) High revenue growth of franchise alliances, and acceleration of decline and expansion. In 2023, the company's franchise, alliance and distribution business revenue was 2,931 billion yuan, up 19.6% year on year, higher than the overall revenue growth rate. Looking at the number of stores, the total number of company stores in 2023 was 13,574 (10,783 in 2022), including 9180 direct stores and 4394 franchise stores, accounting for 32.4% (29.1% of franchise stores in 2022). We believe that the franchise business has always been an important driver of the company's profit growth. As the company's share of joining continues to increase, it is expected to lead to long-term profit growth. (2) Accelerated implementation is expected to bring about a recovery in passenger traffic and reserve capacity to handle the outflow of prescriptions. At the end of the first quarter of 2024, the company had 4,673 outpatient co-ordinated stores, of which direct-run stores accounted for 39.78%; the company had 3,338 interoperable stores, of which 30.67% were directly managed stores (in the third quarter of 2023, the company had 2,893 interoperable stores, accounting for 22.14% of the company's total number of stores), showing an accelerated trend of integrated implementation. We believe that integrated implementation is expected to bring about a rebound in customer traffic, drive revenue growth, and with health insurance account reforms, well-prepared pharmacy leaders are expected to accept more outflows of prescriptions and continue to open up the revenue ceiling. (3) The equity incentive plan shows confidence in high profit growth. On July 31, 2022, the company disclosed its equity incentive plan. The estimated performance target is approximately RMB770/9.37/1.04 billion yuan (excluding the impact of share payment fees) for the year 2022 to 2024, which fully demonstrates the company's confidence in future high growth, and the high growth or continuation of profit in 2024.
Profitability: continuous optimization of management, increase in gross margin
(1) Optimize the commercial procurement system to raise the level of gross margin. The company implemented the torch project to transform the commercial procurement system and key business processes. From various aspects such as product selection, product import and export control, the construction of a distribution warning system, marketing incentives, increasing the share of procurement, optimization of the commercial procurement management system, and supply chain construction, the entire procurement and commercial marketing process was strengthened to increase gross profit margin. In 2023, the company's gross profit margin was 32.55%, up 0.67 pct year on year; 2024Q1 gross profit margin was 35.20%, up 2.20 pct year on year; 2024Q1 consolidated sales accounted for 69.5%, up 1.4 pc year on year; private brand self-operated stores had sales of 8.3 billion yuan, accounting for 20.8% of sales, up 1.3 pct year on year. We believe that in the long run, an increase in the share of prescription drugs and an increase in O-to-O share may lead to a decline in the industry's gross margin, but in 2024, the company's gross margin is expected to increase through measures such as increasing the share of total procurement and adjusting the product structure; (2) net interest rate is expected to increase in 2024. In 2023, the company's net interest rate was 5.01%, up 0.17pct year on year; 2024Q1 net interest rate was 6.61%, up 0.41pct year on year. According to the company's equity incentive payment amortization plan, amortized 6.88/16.99/7.94/2.96 million yuan respectively in 2022. We believe that in 2024, the company's net interest rate is expected to increase with the effects of increasing the company's gross margin and declining amortization of equity incentive expenses.
Profit forecasting and valuation
Based on the above analysis, we expect the company's total revenue for 2024-2026 to be 260.36/313.99/37.882 billion yuan, respectively, up 16.04%, 20.65% year-on-year; net profit to mother of 11.17/13.53/16.36 billion yuan, up 20.93% year-on-year respectively. The corresponding EPS is 1.91/2.31/2.80 yuan/share, corresponding to 18 times PE in 2024, maintaining the “increase” rating.
Risk warning
The risk of increased competition in the industry; the risk of policy changes; the risk of demand fluctuations.