We forecast the company's 2023-26 revenue/net profit CAGR to be 19%/24%, respectively.
Revenue growth from emerging businesses is impressive; online sales are growing rapidly.
The buy rating was maintained, and the DCF target price was raised to $44.31.
The 2023 results are in line with our expectations: according to ordinary people's annual reports, the company achieved revenue/net profit of 224.37/929 billion yuan in 2023, an increase of 11%/18% over the previous year. The sales expense ratio and management expense ratio were 20.4%/5.3%, respectively, +1.0ppts/ -0.2ppts year-on-year. In 1Q24, the company achieved revenue/net profit of 5.539 billion yuan/321 million yuan, an increase of 2%/10% over the previous year. The company's growth rate slowed in the first quarter, mainly due to: 1. The pace of mergers and acquisitions of companies is slowing down; 2. It voluntarily withdrew from some cities and stores with low operating efficiency; 3. 1Q23 had a high base due to the pandemic.
Focus on dominant provinces and expand the sinking market: By the end of the first quarter of 2024, the total number of company stores was 14,109, including 9,470 directly managed stores and 4,639 franchise stores. In terms of opening new stores, 3,388 new stores were added in 2023, and 642 new stores were added in the first quarter of 2024. The company focuses on expanding 11 advantageous provinces and deepening the store network in the crypto-dominant market. As of the end of 2023, the company had 11 provinces with the top three market share, including 4 provinces with the highest market share.
Of the new stores added in 2023, 2,913 new stores were added in dominant provinces and key cities, accounting for 86%. The company is actively expanding the sinking market. In 2023, 78% of the new stores were added in prefecture-level cities and below. In a situation where the revenue of a single store is comparable, the rent and labor rates of stores in the third, fourth, and fifth tier markets are lower than in provincial capitals, so profitability is better. According to the company's announcement, it is planned to open 4,000 house/5,000 house/6,000 stores from 2024 to 26.
Revenue growth from emerging businesses is impressive; online sales are growing rapidly: in 2023, revenue from franchises, alliances and distribution businesses increased 20% year over year. In the first quarter of 2024, the distribution sales of the alliance business increased 99% year on year. By the end of the first quarter of 2024, the number of alliance stores exceeded 13,500 (not included in the company's total number of stores), and the total retail scale of the allied enterprises was 160+ billion yuan.
In 2023, the company's total online channel sales volume was about 2 billion yuan, an increase of 38% over the previous year. By the end of the first quarter of 2024, the company had 11,263 O2O takeout service stores and 629 24-hour stores. The 1Q24 company achieved a gross profit margin of 35.20%, an increase of 2.2 ppts over the previous year. The reason was that the company implemented the Torch Project to transform the commercial procurement system and key business processes.
In 2023, the sales volume of private brands in the company's own channels reached 2.93 billion yuan (accounting for 20.8%, an increase of 1.3 ppts over the previous year), with a gross profit margin of more than 50%.
The purchase was maintained and the target price of DCF (WACC: 8.7%) was raised to 44.31 yuan: although we lowered our profit forecast for 2024-25, we also lowered our capital expenses due to the slowdown in the pace of mergers and acquisitions. Therefore, we raised our DCF target price to 44.31 yuan (previous value was 40.44 yuan), which contains 26% upside compared to the closing price on May 6. The 2024 P/E corresponding to the target price is 23x, which is 16x higher than the industry average. We believe that ordinary people have strong growth prospects and deserve a premium.
Risk warning: 1) the risk of increased competition in the industry; 2) the impact of the Internet retail format; 3) the risk that the price reduction of collected drugs exceeds expectations; 4) the risk that the expansion of mergers and acquisitions falls short of expectations; 5) the risk that the scale of prescription outflow falls short of expectations.