Incident Overview

The company released its 2023 annual report and 2024 quarterly report. In 2023, the company's revenue was 22.437 billion yuan, up 11.21% year on year, and net profit to mother was 929 million yuan, up 18.35% year on year, after deducting net profit of 844 million yuan. Q1 revenue in 2024 was 5.539 billion yuan, up 1.81% year on year, net profit to mother was 321 million yuan, up 10.27% year on year, and net profit after deducting non-return to mother was 311 million yuan, up 10.35% year on year.

Core views

The steady growth in performance highlights management resilience. In 2023 and the first quarter of 2024, the company's overall operation was steady, and the revenue and profit sides continued to grow. By industry, retail and franchise businesses achieved revenue of 193.49 billion yuan and 2,931 billion yuan respectively in 2023, up 9.96% and 19.62% year-on-year, and the franchise business continued to grow. In Q1 2024, under the industry's high base, the company's performance showed resilience. 2024Q1 retail and franchise businesses achieved revenue of 46.83 billion yuan and 819 million yuan respectively, up 2.18% and 0.24% year-on-year.

Continue to strengthen refined management and improve profitability. The company's gross margin in 2023 was 32.55%, an increase of 0.67pct year on year. It is expected to benefit from the effects of product restructuring and the increase in the share of consolidated procurement (in 2023, total procurement sales accounted for 68.40%, up about 2.4 pct year on year, private brand sales reached 19.64%, up about 0.9 pct year on year), leading to an increase in gross margin of Nakanishi Pharmaceutical.

The company has strengthened refined management and taken a series of measures to reduce costs. At the same time, with the implementation of the company's torch project, profitability is expected to further improve. The 2024Q1 gross profit margin and net interest rate are 35.20% and 6.61%, respectively.

Actively promote the implementation of integrated funding for outpatient clinics in stores and welcome policy dividends. The company actively responds to the policy of liberalizing outpatient health insurance to retail pharmacies and promotes the implementation of store qualifications. As of 2024Q1, the company has 4,673 outpatient co-ordinated stores, of which direct-managed stores account for 39.78% of outpatient co-ordinators, and the company has 3,338 interoperable stores, of which 30.67% are direct-managed stores. Interoperable stores have significantly increased in terms of number of visitors and sales.

Investment advice

The company's performance is in line with expectations. In recent years, the refined management capabilities of stores have improved, and with the advancement of superimposed torch projects, profitability is expected to improve. In addition, the company actively promotes the implementation of outpatient coordination funding, and is expected to enjoy outpatient co-ordinated benefits. We have appropriately raised the company's profit forecast for 2024 and 2025. We expect the company's net profit to be 11.18, 13.54, and 1,632 billion yuan for 2024-2026, and EPS of 1.91, 2.32, and 2.79 yuan, corresponding PE 18, 15, and 12 times.

Risk warning

Market competition intensified; store and franchise store expansion fell short of expectations; industry policy risks.