Event: The company released its 2023 annual report and 2024 quarterly report. The company achieved revenue of 22.588 billion yuan in 2023, an increase of 13.59% over the previous year, and achieved net profit of 1,412 billion yuan to mother, an increase of 11.90% over the previous year.

In Q4 2023, we achieved revenue of 6.70 billion yuan, an increase of 2.47% year on year, and realized net profit of 413 million yuan to mother, a year-on-year decrease of 5.81%. In Q1 2024, we achieved revenue of 5.971 billion yuan, up 13.39% year on year, and realized net profit to mother of 407 million yuan, an increase of 20.89% year on year.

Comment:

The scale of stores continued to expand, and the number of directly-managed stores exceeded 10,000. The company adheres to the development strategy of “regional focus+steady expansion”, promotes store expansion through various forms of “new opening+mergers and acquisitions+franchises”, and is deeply involved in the Central and South China East China markets. In 2023, the company added 3196 stores, including 1,613 self-built stores, 559 mergers and acquisitions, and 1,024 franchise stores. By the end of Q1 2024, the total number of company stores reached 13,920, including 3157 franchised stores. The company is expected to maintain a rapid pace of expansion in 2024, and plans to add 4,000 new stores, including 1,800 self-built stores, 700 mergers and acquisitions, and 1500 franchises. We believe the company will continue to drive store size growth through endogenous outreach.

Outpatient coordination policies continue to advance, and leading pharmacy chains are expected to benefit. Since 2023, the national outpatient coordination policy has been promoted one after another. By the end of 2023, the company had opened more than 4,200 outpatient co-ordinated stores, accounting for more than 30% of the total number of stores. Currently, there are differences in the implementation and implementation of the pharmacy outpatient coordination policy in various provinces.

As an industry leader, the company has advantages in store operations, drug supply, and integrated system integration. In the future, as more stores are included in outpatient coordination, it is expected to bring marginal growth to the company's performance.

The main business improved steadily, and the wholesale business grew rapidly. In 2023, the company achieved retail revenue of 20.085 billion yuan, an increase of 12.00% over the previous year, and the pharmaceutical wholesale business of 1,892 billion yuan, an increase of 39.23% over the previous year.

Revenue from proprietary Chinese and Western medicines was 17.095 billion yuan, up 15.93% year on year, revenue from traditional Chinese medicine was 2.80 billion yuan, up 23.30% year on year, and revenue from non-drug products was 2,803 billion yuan, down 2.30% year on year.

The cost rate was continuously optimized during the period, and the ability to refine operations was outstanding. In 2023, the company's gross sales margin was 38.21%, down 1.32pp year on year, and net sales profit was 7.00%, down 0.18pp year on year; the period expense ratio was 29.08%, down 0.65pp year on year, of which the sales expense ratio was 24.29%, down 0.24pp year on year, management expense ratio was 4.26%, down 0.29pp year on year, financial expense ratio 0.38%, down 0.15pp year on year. We believe that the company has outstanding refined operation capabilities, which effectively promotes the continuous optimization of cost ratio levels.

Profit forecast and investment advice: The company's performance has improved steadily, and the size of the store continues to expand. We expect the company's net profit to be 1.77 billion yuan, 21.77 billion yuan, and 2.67 billion yuan, respectively. As a leader in the pharmacy industry, the company should be given a valuation premium. Based on comparable company valuations, the company should be given 25-30 times PE in 2024, with a reasonable value range of 43.75-52.50 yuan, maintaining the “superior to the market” rating.

Risk warning: Risk of tightening health insurance policies, risk of store expansion falling short of expectations, implementation of outpatient coordination policies falling short of expectations.