Key points of investment

Performance: Growth decelerates under high base, short-term pressure on profits

2024H1: Revenue 39.779 billion yuan, YOY -2.30%; net profit attributable to mother 0.238 billion yuan, YOY -53.65%; net profit not attributable to mother 0.219 billion yuan, YOY -53.86%.

2024Q2: Revenue 20.155 billion yuan, -4.46% YoY; net profit to mother 0.135 billion yuan, -61.13% YoY; net profit not attributable to mother 0.126 billion yuan, -61.17% YoY.

Growth: Pressure on the hospital side is compounded by a slowdown in its own expansion. I am optimistic that the actual controller will speed up after the change and implementation

In an environment where hospital pressure continues to be reflected, the company experienced a marked decline in its core pure sales business and the core regional Chongqing market, but it still showed good growth resilience in terms of expansion in some products and regions.

Specifically, 2024H1 has net sales revenue of 29.494 billion yuan, YOY -5.67%; distribution revenue of 8.385 billion yuan, YOY +7.97%; retail sales of 1.753 billion yuan, YOY +13.18%. By product breakdown, drug revenue was 33.031 billion yuan, YOY -0.27%, of which traditional Chinese medicine revenue was 7.35 billion yuan, YOY +10.48%; revenue from narcotic drugs was 1.458 billion yuan, YOY +3.85%; and equipment revenue was 5.944 billion yuan, YOY -10.83%. By region, the revenue from the Chongqing market was 12.673 billion yuan, YOY -4.69%; the Southern market revenue was 12.115 billion yuan, YOY +0.92%; and the Northern market revenue was 14.991 billion yuan, YOY -2.74%. We believe that on the one hand, the company's overall growth slowdown in the first half of the year was related to factors such as pressure on the hospital side and continued quality improvement and expansion of procurement. On the other hand, it was also related to the company itself, which is still at a critical point where actual controller changes are progressing. The pace of mergers and acquisitions expansion, business expansion, etc. may have some phased slowdown. Looking ahead, we expect that the company's business expansion may gradually accelerate as the actual controller change incident is implemented, the financial costs of core constraints continue to improve, and the trend of increasing concentration in the distribution industry continues to accelerate.

Profitability: Profits are under pressure in the short term due to multiple factors, and I am optimistic about the upward trend in net interest rates

2024Q2's gross profit was 7.79%, YOY-0.70pct; 2024H1 had a gross margin of 7.77%, YOY-0.62pct. When split, the gross profit margin for pharmaceuticals was 6.96%, YOY-0.54pct, equipment gross profit margin 13.18%, YOY+1.08pct, retail gross profit margin 18.60%, YOY-2.47pct. We expect that the decline in the company's gross margin is mainly related to the impact of improving the quality of collection and expanding the area. 2024Q2's net interest rate to mother was 0.67%, YOY-0.98pct; 2024H1's net interest rate to mother was 0.60%, YOY-0.66pct. The decline in net interest rate to mother was slightly larger than gross profit margin, mainly due to a large increase in minority shareholders' share of profit and loss and an increase in credit impairment losses. It is worth noting that the company's financial expense ratio for the first half of the year was 1.37%, down 0.21pct from the previous year. It may mainly be related to the decrease in new short-term loans and the continued decline in loan interest rates after completing market-based debt-for-equity fund-raising in 2023. It is expected that the optimization trend will continue in the future. In addition, 2024H1's credit impairment loss was 0.26 billion yuan, up 13% year on year. We expect that as account period changes stabilize and the company's own receivables structure improves, the impact of credit impairment losses on profits may gradually weaken; minority shareholders' profit and loss ratio to net profit was 30.6%, an increase of 12.3 pct over the previous year, mainly affected by the increase in minority shareholders' shareholding ratio after market-based debt-to-equity swaps were completed.

Analysis of business quality: Regional court pressure has led to extended account periods, and the simultaneous increase in payable days reflects the ability to bargain upstream

The 2024H1 company's payable turnaround days was 155 days, YOY+11 days, slightly optimized over the previous month; we believe that the extension of the account period is mainly related to the company's current relatively large revenue share in the western region, while the western region is under greater pressure to repay. Looking ahead, as the actual controller changes and implementation, and the company's rapid expansion in the southern market and eastern regions, we judge that changes in the company's customer structure may support the gradual optimization of account periods. On the other hand, the 2024H1 company's payables turnaround time is 70 days, YOY+10 days. While downstream repayment pressure is increasing, the company's ability to bargain upstream continues to be reflected as a leading pharmaceutical distribution company. Looking ahead, as the scale of the company continues to increase and the layout of the national sales network is improved, we believe that the company's ability to ease the pressure to advance capital by improving the number of working days will be improved or further improved, and we are optimistic about further improvements in the quality of operations.

Profit forecasting and valuation

Considering the impact of the continued deepening of health care reform in the first half of 2024 and the operating pressure on hospitals exceeded our previous expectations, we made our previous forecast (2024-2026 revenue was 91.318/104.027/117.714 billion yuan, respectively, the year-on-year growth rate reached 13.98%/13.92%/13.16%; the net profit for 2024-2026 was 0.776/0.952/1.13 billion yuan, respectively, with year-on-year growth rates of 18.47%/22.67%, respectively /18.73%) reduction. We expect the company to achieve operating income of 84.424/95.131/105.759 billion yuan in 2024-2026, up 5.37%/12.68%/11.17% year on year; achieve net profit to mother of 0.735/0.897/1.045 billion yuan, up 12.27%/22.04%/16.49% year on year, corresponding EPS of 0.43/0.52/0.60 yuan/share, August 21, 2024 The closing price was 11 times PE in 2024. Maintain an “Overweight” rating.

Risk warning

Risk of short-term fluctuations in upstream and downstream operations due to the accelerated liquidation of the industry; risk of actual controller change events falling short of expectations; risk of financial leverage and financing.