Incidents:
The company recently released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 9.19 billion yuan (+17.49%), net profit of 133 million yuan (-42.01%), net profit after deducting non-return to mother of 126 million (-42.34%), of which Q4 in 2023 achieved operating income of 2.66 billion yuan (+3.1%), net profit due to mother of -29 million (-129.0%), and net profit without return to mother of -0.33 million (-134.4%). In Q1 2024, we achieved operating income of 2.44 billion yuan (+17.69%), net profit attributable to mother of $11 million (-83.72%), and net profit after deducting non-return to mother of 209 million (-84.25%).
Comment:
The national store network continues to expand, and the density of stores in core regions has been consolidated. In 2023, the company added 1,881 stores and closed 8 stores. By the end of 2023, the company had 7,337 stores, including 4104 direct-run stores. The increase in the number of stores was the main driving force for the company's revenue growth in 2023, but the rapid pace of store expansion and the sharp increase in mergers and acquisitions also led to a decline in the company's profit in 2023; in addition, in order to improve supply capacity, the company invested in the construction of logistics centers in Shandong, Heilongjiang, and Liaoning provinces in 2023, which brought high operating costs. We believe that the company's investment in improving logistics and distribution efficiency will lay the foundation for profit recovery, and will gradually show results in the future.
Key indicators: Achievement and operational efficiency are affected by factors such as large initial investment in the construction of logistics centers and health insurance policy adjustments, showing certain fluctuations. The average daily floor efficiency of the company was 48 yuan/square meter in 2023, and the average daily floor efficiency of the company was 55 yuan/square meter in 2022. Compared with 2022, the average daily floor efficiency of the company decreased in 2023, which was caused by a significant increase in the number of stores. In terms of labor efficiency (revenue/number of sales staff), the company achieved 527,000 yuan in 2023 and 557,000 yuan in 2022. Labor efficiency declined due to an increase in sales staff (total sales staff of 12,228 in 2022, rising to 1,5047 in 2023).
Product regulation situation: Looking at the company's business, in 2023, in terms of specific product regulations, Zhongxi Proprietary Pharmaceutical achieved revenue of 6.946 billion yuan (+21.84%), with a gross profit margin of 24.40% (-0.38% BP), due to prescription outflows compounded by the effects of influenza driving the growth of Zhongxicheng Pharmaceutical regulations; Chinese herbal medicines achieved revenue of 525 million (+18.97%); and achieved revenue of 1,308 million yuan (-3.76%). 2024Q1's gross margin was 27.3% (-1.7%). First, it was affected by the high base in the first quarter of 2023; second, changes in overall policies and personal account policies affected customer drug purchase channels and drug purchases, leading to a decline in the company's structural share of sales in health products and other categories, causing the overall gross margin level to drop by 1.7%. We believe that the company can further improve the company's profitability by exploring diversified sales channels, optimizing the product structure and optimizing the cost structure.
Profit forecast and investment advice: The company is expected to achieve revenue of 113.42/142.00/17.693 billion yuan in 2024-2026, with net profit of 2.65/3.44/444 million yuan, corresponding earnings per share of 0.65/0.85/1.10 yuan/share, corresponding PE is 20/15/12 times. Refer to the same industry valuation to maintain an “gain” rating.
Risk warning: industry policy risk, risk of consumption falling short of expectations, risk of performance falling short of expectations.