1Q24 revenue is in line with market expectations
The company announced 1Q24 results: revenue of 13.267 billion yuan (-4.9% YoY); non-IFRS operating profit of 754 million yuan (-34.8% YoY). The revenue side was in line with market expectations, and the profit side was lower than market expectations. We expect a year-on-year increase in 1Q24 expenses.
Development trends
Revenue declined in 1Q24 due to a high base, and 2Q is expected to usher in an improvement. The company achieved revenue of 13.267 billion yuan (-4.9% YoY) in 1Q24. The decline in revenue was mainly due to adjustments in epidemic prevention and control measures during the previous 4Q22-1Q23 period, and residents' demand for medical supplies increased rapidly, boosting the year-on-year base.
Considering that downstream demand has basically returned to normal levels since 2Q23, and the impact of the high base figure is nearing its end, we expect that 2Q24 may see an improvement on the revenue side of the company and return to normal growth. Furthermore, we expect that as the competitive pattern of the industry gradually stabilizes and various competitors on the industrial side slow down their investment in resources in the pharmaceutical sector, the company may be expected to gain more market share and drive continued revenue growth.
After adjustment, operating profit declined, and the overall profit margin level was relatively healthy. We believe that during the 4Q22-1Q23 period, residents' demand for healthcare product procurement surged, and the gross profit level declined due to the return of market demand to normalization during the 1Q24 period; on the other hand, we believe that pharmaceutical e-commerce channels had organic traffic. Previously, 1Q23 market demand was high but the company's marketing activities and expenses were relatively low. 1Q24 company's market activity returned to normal levels, and marketing expenses increased. Combined, the operating profit side (excluding interest income) declined more year-on-year. Although it is a year-on-year decline compared to 1Q23, we estimate that the adjusted operating profit margins for the 1Q23-1Q24 period were 8.3%/4.0%/6.4%/0.4%/5.7%, respectively. Excluding the special period of 1Q23, the adjusted operating profit level of the company is in a high range since 2Q23, and overall it is relatively healthy.
Strengthen the layout of medical products and optimize the profit system of the pharmaceutical sector. According to the announcement, a number of new specialty drug products were launched in JD Pharmacies in 1Q24, including Loctec (remegipan sulphate tablets), a new drug for targeted migraine treatment by Pfizer, and Xilida (rosevastatin ezetimib tablets), a new combined fat-reducing drug under Sanofi. We anticipate that the company is trying to integrate terminal retail functions and the supply of medical service capabilities based on an increasingly strengthened supply chain system, and use this to increase cooperation with pharmaceutical companies to obtain initial launch rights, sales share and profit margins in some new specialty pharmacies outside the hospital market, thereby achieving a steady increase in profit margins and output benefits in the traditional low-margin pharmaceutical sector.
Profit forecasting and valuation
As the impact of the high base gradually clears up in 1Q24, we recommend focusing on the recovery of endogenous growth quarterly in 2024. We have kept our 2024/2025 profit forecast unchanged for the time being, maintaining our target price of HK$41.2 (based on SOTP valuation), implying room for a 36% increase, and maintaining an outperforming industry rating.
risks
The competitive landscape has deteriorated, the recovery in terminal demand has fallen short of expectations, and exploration of new businesses has fallen short of expectations.