Incident: The company released its annual report for the year 20223 and the quarterly report for 2024. In 2023, it achieved operating income of 22.588 billion yuan (yoy +13.59%), net profit attributable to mother of 1,412 billion yuan (yoy +11.90%), after deducting net profit of 1,362 billion yuan (yoy +10.92%). In the first quarter of 2024, we achieved operating income of 5.971 billion yuan (yoy +13.39%), net profit attributable to mother of 407 million yuan (yoy +20.89%), and net profit of 399 million yuan (yoy +24.26%) after deducting non-return to mother.
Comment:
Revenue continued to grow steadily in 2023, and 2024Q1 performed well. ① The company's revenue continued to grow steadily in 2023, and achieved revenue of 22.588 billion yuan in 2023, an increase of 13.59% over the previous year. In terms of category structure, the revenue of Chinese and Western proprietary medicines and traditional Chinese medicines grew rapidly, with growth rates of 15.93% and 23.30% respectively. In terms of regional distribution, the Central and South China regions are growing faster, 17% and 27% respectively, while East China's growth rate is only 7%. Due to a 0.18 percentage point year-on-year decline in net interest in 2023, net profit growth to mother was slower than the growth rate of operating income. The year-on-year decline in net profit margin was mainly due to a year-on-year decline in the company's gross margin in 2023, and a 1.32 percentage point year-on-year decline in the company's gross margin in 2023 (on the one hand, the share of the wholesale business with low gross margin increased, and on the other hand, the gross margin of the retail business declined). ② The net profit growth rate of the 2024Q1 company without return to mother was impressive, and the net profit growth rate after deducted from the mother was faster than the growth rate of operating income. This was mainly due to the 1.2 percentage point year-on-year decrease in the company's sales expenses ratio in 2024Q1 (the 2024Q1 sales expense ratio was 24.4%). The net interest rate of the 2024Q1 company increased 0.26 percentage points year on year, and the net margin of 2024Q1 reached 7.47%.
The company adheres to a region-focused development strategy, and stores continue to expand steadily. ① The company's stores are mainly distributed in Central and South China (Hunan, Hubei, Guangdong), East China (Jiangsu, Shanghai, Zhejiang, Jiangxi) and North China (Hebei, Beijing, Tianjin). At the end of 2023, the company had a total of 13,250 stores (a net increase of 2,982 stores throughout the year), including 1,0264 directly-managed stores and 2,986 franchised stores. In terms of store qualifications, 8,970 pharmacies were eligible for medical insurance at the end of 2023, accounting for 87.39% of the total number of stores directly managed by the company (an increase of 0.65 percentage points over the previous year).
② The total number of 2024Q1 company stores was 13,920 (including 3157 franchisees), a net increase of 670 over the end of the previous period. Among them, 9331 stores have obtained medical insurance eligibility, accounting for 86.70% of the total number of stores directly managed by the company.
The company complies with national policies and undertakes the outflow of hospital prescriptions through online and offline channels. ① In terms of offline layout, at the end of 2023, the company had 675 hospital side stores (within a straight line distance of 100 meters) and 305 DTP pharmacies, including 246 dual-channel medical insurance stores, opened more than 4200 outpatient co-ordinated medical insurance pharmacies (accounting for about 41% of the number of directly managed stores), negotiated more than 250 drugs under national health insurance agreements, and established deep partnerships with more than 150 specialty prescription drug suppliers. ② In the online field, the company has connected with more than 10 provincial and municipal medical insurance and health prescription distribution platforms, and directly or indirectly undertakes prescription circulation services for more than 100 tertiary hospitals and Internet hospitals. In addition, the company continues to promote the construction of a new pharmaceutical retail system. In 2023, the online business achieved sales revenue of about 1,818 billion yuan (8% of total revenue), of which O2O achieved sales revenue of 1,399 billion yuan and B2C sales revenue of 419 million yuan.
Profit forecast: We expect the company's revenue for 2024-2026 to be 27.731 billion yuan, 34.81 billion yuan, and 41.61 billion yuan respectively, with year-on-year growth rates of 23%, 23%, and 22% respectively, and realized net profit to mother of 1,766 billion yuan, 21.19 yuan, and 2,711 billion yuan, respectively, up 25%, 24% year-on-year, corresponding to the current share price PE of 26 times, 21 times, and 17 times, respectively.
Risk factors: Increased competition in the retail pharmacy market, risk of changes in health insurance policies, risk of changes in tax policies, falling short of expectations in store expansion, poor integration of mergers and acquisitions, and risk of impairment of goodwill.