Incidents:
The company achieved operating income of 80.119 billion yuan in 2023, +18.12% year on year; net profit to mother of 655 million yuan, or -31.22% year on year; net profit after deducting non-return to mother of 583 million yuan, or -33.45% year on year.
The company's 2024Q1 revenue was 19.624 billion yuan, +0.02% year on year; net profit to mother was 103 million yuan, -37.99% year on year; net profit without return to mother was 92 million yuan, or -37.94% year on year.
Analytical reviews
Revenue grew strongly in 2023, and net profit was disrupted by the industry. Overall financial data was stable 23Q4: In a single quarter, the company's 2023Q4 revenue was RMB 21.735 billion, +25.65% year on year; net profit to mother was RMB 137 million, -20.38% year on year; net profit after deducting non-return to mother was RMB 114 million, or -29.02% year over year.
23 Annual financial data: The company's overall gross margin in 2023 was 7.87%, -0.71 percentage points year on year; the period expense ratio was 6.24%, -0.26 percentage points year on year; of which the sales expenses ratio was 2.76%, -0.24 percentage points year on year; management expense ratio (including R&D expenses) was 1.86%, -0.04 percentage points year on year; financial expenses ratio was 1.63%, +0.01 percentage points year on year; net operating cash flow was 509 million yuan, +77.92% year on year.
Segment: The three major business formats of pure sales, distribution, and retail achieved strong growth. The company achieved significant growth in the three channels of pure sales, distribution, and retail in the first half of 2023.
Pure sales: The pure sales business achieved revenue of 63.594 billion yuan, an increase of 16.63% over the previous year. Under the influence of factors such as the downturn in the general environment and volume procurement, it has maintained a good growth trend. The number of pure sales customers at level 2 and above exceeds 7,800. Pharmaceutical e-commerce businesses such as B2B, B2C, and O2O were launched. During the reporting period, the e-commerce sector's online platform transaction volume exceeded 1.5 billion yuan, an increase of 52% over the previous year.
Distribution: The distribution business achieved revenue of 13.224 billion yuan, an increase of 26.09% over the previous year. Sales customers spread across 31 provinces, municipalities and autonomous regions across the country. The number of customers was about 31,000, and sales increased steadily during the reporting period.
Retail: The company continued to advance in accordance with the “wholesale and retail integration” strategy. Through a business model combining DTP specialty pharmacies and community pharmacies, the retail sector achieved revenue of 3,034 billion yuan during the reporting period, an increase of 14.80% over the previous year. The company has 818 direct-run community pharmacies and 57 franchised community pharmacies. The revenue of community pharmacies during the reporting period was 1,106 billion yuan. It also has 147 direct DTP specialty pharmacies and 12 participating DTP pharmacies.
The company actively expanded its business scope and market layout, completed nearly 20 equity investment projects during the reporting period, with incremental sales of nearly 2.5 billion yuan, especially in Heilongjiang, Hebei, Guangxi and other regions to fill market gaps. On the retail side, the company's net increase in retail pharmacies was 228, and the total number exceeded 1,000, indicating the rapid expansion of the company's retail business and increase in market share.
By product: Multiple business formats are booming, and fine narcotics & devices are worth looking forward to. Western medicine achieved operating revenue of 61,674 billion yuan during the reporting period, an increase of 13.95% over the previous year.
More than 700 new upstream customers, 6000 varieties, and 40 new products were added throughout the year.
The emerging business achieved a total revenue of 202 million yuan, an increase of 105% over the previous year. At the same time, service innovation was vigorously promoted, and a total of 220 contract sales projects were signed with 79 manufacturers throughout the year.
Hemp essence: The company's hemp essence sector achieved revenue of 2,681 billion yuan, an increase of 27.29% over the previous year. Currently, there are 3 national wholesale enterprises for narcotic drugs and class 1 psychotropic drugs. The company is one of the national wholesale enterprises for narcotic drugs, and also has regional wholesale enterprises in 14 provinces and cities. The company is the second-largest wholesaler of narcotic drugs. It currently operates nearly 50 types of narcotic drugs, more than 110 types of narcotic drugs, 40 second-class psychotropic drugs, 2 imported general-generation drugs, and more than 400 commercial cooperative customers. The sales network covers 31 provinces, municipalities and autonomous regions across the country. Among them, it has distribution advantages in 5 regions including Sichuan, Chongqing, Guizhou, Qinghai and Tibet.
Traditional Chinese medicine: During the reporting period, the company's revenue in the Chinese medicine segment reached 1,279 billion yuan, an increase of 45.72% over the previous year. Among them, sales of Chinese medicine tablets were 819 million yuan, accounting for 64.06% of the sector's revenue.
The company has obtained the license to operate Chinese herbal medicines and Chinese medicine tablets from 146 subsidiary companies, and about 102 companies have started the traditional Chinese medicine business. The Chinese medicine tablet manufacturer in Hangzhou was put into operation in 2023, achieving full coverage of public hospitals above level 2 in Hangzhou, Jiaxing, Huzhou and Shaoxing regions. The company plans to further expand the provincial network and achieve full coverage of the commercial network in Zhejiang Province by 2024, with the goal of becoming a leading enterprise in the sale of Chinese herbal medicine tablets in Zhejiang. At the same time, the Chinese medicine formula granule manufacturers participating in the company's shares in Chongqing will strengthen cooperation to enhance the company's comprehensive strength in the Chinese medicine sector, and plan to officially start production in 2024.
Equipment: The company's equipment sector achieved revenue of 12.478 billion yuan, an increase of 31.16% over the previous year. The company has established long-term and stable commercial distribution relationships with well-known international medical device manufacturers, and is a designated distributor for well-known domestic brands. Six device franchises were added through mergers and acquisitions, new establishment, etc., to fill the empty device markets in Guangxi and Jiangsu provinces, and add a segmented business segment layout for blood collection and supply systems. By the end of the reporting period, the establishment of device platform companies in 16 provinces and cities had been completed.
Shareholding industry: The subsidiary Chongqing Yaoyou achieved operating income of 5.498 billion yuan and net profit of 735 million yuan to mother during the reporting period.
The Chongqing headquarters region and overseas performance continued to grow, and the overall financial performance was steady in 24Q1. The subregion achieved operating revenue of 27.409 billion yuan, accounting for 34.21% of the company's revenue. The Chongqing headquarters includes 86 independent accounting subsidiaries; it has 805 direct-run DTP specialty pharmacies and community pharmacies; covering about 23,000 customers. Outside of Chongqing, revenue of 52.71 billion yuan was achieved, accounting for 65.79% of the company's revenue. Outside the city, there are 131 independent accounting subsidiaries in 31 provinces, cities, autonomous regions and special administrative regions; it has 161 direct DTP specialty pharmacies and community pharmacies; covering nearly 200,000 customers.
24Q1 financial data: The overall gross margin of the 24Q1 company was 7.75%, -0.53 percentage points year on year; the period expense ratio was 6.31%, -0.01 percentage points year on year; among them, sales expenses and management expenses increased slightly year on year, while financial expenses showed a downward trend, indicating that the company achieved certain results in controlling financial costs. According to the company's financial budget, the company expects to achieve revenue of 85-90 billion yuan in 2024.
State-owned enterprise reform continues to advance, which is conducive to the long-term development of the company
On February 6, 2024, Heavy Pharmaceutical Holdings and China Pharmaceutical announced that Chongqing Chemical Holdings (Group) Company, the indirect controlling shareholder of Heavy Pharmaceutical Holdings, is carrying out strategic integration matters with China General Technology (Group) Holdings Co., Ltd., the controlling shareholder of China Pharmaceutical. According to China Pharmaceutical's announcement, this integration may result in the change of the controlling shareholder and actual controller of Chongqing Pharmaceutical to General Technology Group. China's pharmaceutical business involves the entire medical and health industry chain. Currently, it has established an integrated trade, industry, technology, and service industry pattern with international trade as the lead, the pharmaceutical industry as the support, and the pharmaceutical business as the link. The reform may be beneficial to the continuous optimal development of the company's main business.
Investment advice
We expect the company's revenue for 2024-2026 to be 906.0/1016.5/114.53 billion yuan, respectively, up 13.1%/12.2%/12.7% year on year, and net profit to mother will be 10.8/12.4/1.42 billion yuan, respectively, up 65.6%/14.2%/14.2% year on year, respectively, and the corresponding valuation is 9X/8X/7X. Maintain a “buy” investment rating.
Risk warning
The risk of deepening health care reform, the risk of increasing capital requirements, the risk of expanding the size of accounts receivable, and the risk of increasing management difficulties