The company released its 2023 annual report and 2024 quarterly report: in 2023, it achieved operating income of 17.380 million yuan, net profit of 549 million yuan, -45.6% year on year, net profit after deduction of 733 million yuan, -25.94% year on year; of these, 2023Q4 achieved operating income of 4.567 billion yuan, -15.51% year on year, net profit to mother of 136 million yuan, -141.03% year on year, net profit without return to mother of 53 million yuan, -84.34% year on year. In 2024 Q1, we achieved operating income of 5.1 billion yuan, +14.96% year over year, net profit to mother of 242 million yuan, +1.03% year over year, net profit without return to mother of 246 million, +2.14% year over year.
The 2023 results are under pressure in the short term. We believe that the main reasons include: ① base issues caused by the outbreak of demand for drugs for concentrated respiratory diseases; ② the acceleration of store expansion in 2023, leading to an increase in related expenses; ③ the decline in gross margin due to price adjustments (the gross profit margin of the pharmaceutical retail business in 2023 was 37.97%, down 3.01% from 40.98% in 2022); ④ the one-time impact of tax supplements and tax late fees in 2023: due to the company's acceptance of the tax situation in 2020-2022 by the competent tax authorities in the region Tax guidance. Rent charges are uniformly signed by the headquarters to calculate and pay value-added tax and additional tax in accordance with relevant regulations treating sales, etc., and a late payment fee of 5/10,000 is added on a daily basis starting from the date the tax is overdue.
Subsequent companies can avoid these taxes and late payments by revising business processes, signing rent contracts with independent tax stores, and directly obtaining rent invoices from independent tax stores.
With the southwest market as the core, the proportion of stores outside the province is gradually increasing. As of Q1 2024, the total number of stores reached 10,746, including 5,455 stores in Yunnan and 5,291 stores outside Yunnan, accounting for 49.24%. In the future, the company will continue to increase the share of stores outside Yunnan Province, comprehensively increase its market share in Southwest China, and focus on the South China and North China regions, forming a market expansion pattern with Southwest China as the core business area, South China as a strategic in-depth business area, North China as a supplementary business area, and central China and East China as gradually exploring business areas.
Yunnan is coordinating the optimization of health insurance policies, and the company's gross margin is expected to gradually improve. On May 8, the Yunnan Health Insurance Administration issued the “Implementation Measures on Basic Medical Insurance Outpatient Co-operation Insurance for Employees in Yunnan Province (Draft for Comments)”, which proposed that “the sales prices of designated retail pharmacies included in the overall management of outpatient clinics shall be set by designated retail pharmacies themselves, and it is recommended that medical insurance drugs be sold with reference to the prices of centralized drug procurement platforms in the province. “Drugs included in the medical insurance catalogue of designated retail pharmacies included in the overall management of outpatient clinics implement medical insurance payment standards”. Compared with the policy implemented on July 1, 2023, which relaxed price restrictions, the company's gross margin is expected to gradually recover as a result.
Diversified operations attract traffic and increase profits: the pan-health category achieved sales of 370 million yuan in 2023, of which the beauty category accounted for 60%, personal care 23.5%, and food, milk powder, and daily chemicals 27.5%. Charity Lottery's sales volume in 2023 was 76.98 million yuan (of which 8.52 million yuan was Yixin Convenience), bringing new customer traffic growth to the store.
Investment advice and profit forecast: We are optimistic that the company will gradually strengthen its layout outside of Yunnan Province and gradually restore product prices and gross margin under the optimization of health insurance policies. We expect to achieve net profit of 9.75/11.42/1,353 billion yuan in 2024-2026, corresponding to a price-earnings ratio of 14/12/10 times.
Risk warning: The pace of overall promotion falls short of expectations, competition intensifies, store expansion falls short of expectations, etc.