Incident: The company's revenue for the full year of 2023 was 24.531 billion yuan, up 15.45% year on year, net profit to mother was 1,167 billion yuan, up 12.63% year on year, and net profit after deducting non-return to mother was 1,141 billion yuan, up 13.56% year on year.

Revenue for the first quarter of '24 was 6.752 billion yuan, up 13.54% year on year, net profit to mother was 398 million yuan, down 19.79% year on year. Net profit after deducting non-return to mother was 396 million yuan, down 20.40% year on year.

Comment:

In-store outreach continues to expand, and the franchise business is growing rapidly. In 2023, the company opened 1,382 new self-built stores, 2,158 franchise stores, 750 mergers and acquisitions, and entered 3 new provinces (autonomous regions and municipalities directly under the Central Government). By the end of 2023, the number of company stores reached 14074, including 9909 directly managed stores and 4,165 franchise stores. The company accelerated its expansion quarterly in advantageous regions through self-construction, developed its franchise business rapidly, and entered new regions through mergers and acquisitions. The company's store size is expected to maintain a rapid pace of expansion in the future.

The main business is growing well, and the revenue growth rate of the franchise and distribution business is high. Nakanishi Proprietary Pharmaceutical is leading a steady increase in revenue. In 2023, the company's retail business revenue was 20.509 billion yuan, up 6.58% year on year, wholesale business revenue was 3.423 billion yuan, up 122.46% year on year, and wholesale business revenue increased rapidly. By product, Chinese and Western Proprietary Medicine's revenue was 17.699 billion yuan, up 16.62% year on year, non-drug revenue was 3.259 billion yuan, up 7.93% year on year, and revenue from ginseng supplements was 2,974 billion yuan, up 15.04% year on year.

The three cost rates are continuously optimized, and the operating capacity continues to improve. In 2023, the company's sales expense ratio was 22.92% (-1.36), management expense ratio 4.83% (-0.39pp), financial expense ratio 0.78% (-0.20pp), the total three expense ratios were 28.86% (-1.97pp), and the net sales margin was 5.02% (-0.06pp). The company's cost rate level is constantly being optimized.

The scale of the new retail business is growing rapidly, and the profit margin level is rising steadily. The company actively develops new retail business models and actively integrates online and offline development. In 2023, the company's new retail business (O2O+B2C) sales increased 45.25% year-on-year, and gross margin and net margin levels increased steadily. The company increased omni-channel integrated operation, actively promoted the development of private traffic, and gradually increased the share of private traffic in online sales. In 2023, the launch rate of the company's O2O drug delivery service covered stores reached 79.17%.

Profit forecast: The company adheres to the core development strategy of “deeply cultivating South China and laying out the whole country”, adheres to the business policy of regional scale and refined management, and maintains a steady trend in the pace of expansion. We expect the company's net profit to be 14.4, 17.4, and 2.08 billion yuan in 2024-26, with growth rates of 23.0%, 20.9%, and 20.0% respectively. The company will maintain steady and high growth, with corresponding valuation premiums, giving the company 20-25 times PE in 2023, with a reasonable value range of 25.20-31.50 yuan. We believe that the company's self-construction will accelerate quarter by quarter, merger and acquisition expansion will continue to advance, and the performance is expected to continue to grow at a high rate, maintaining the “superior to the market” rating.

Risk warning: the risk of tightening health insurance policies, the risk of store expansion falling short of expectations, and the outflow of prescriptions falling short of expectations.