1H24 results are in line with our expectations

The company announced 1H24 results: operating income of 294.727 billion yuan, -2.07% year over year; net profit to mother of 3.704 billion yuan, -9.76% year over year, corresponding to earnings of 1.19 yuan per share, which is in line with our expectations.

Development trends

The distribution business continues to grow. According to the company's announcement, in the first half of 2024, the company's distribution revenue increased 0.47% year on year to 226.494 billion yuan; the operating profit margin of the distribution division was 2.75%, -0.21 percentage points year on year. According to the company announcement, the company is focusing on core key regions. The share of the pharmaceutical distribution business in related markets continues to increase, while the share of the retail direct sales business has increased. In addition, the company focuses on general distribution and general agent varieties to create a marketing service concept that faces terminals.

New business grew steadily in the first half of the year. According to the company announcement, in the first half of 2024, 1) retail revenue was 16.558 billion yuan, -6.43% year-on-year. The retail segment's operating margin was -0.28 percentage points year over year to 1.55%. The company's specialty pharmacies maintained 20% + year-on-year growth in the first half of the year, but social pharmacies were affected by the reduction in the size of individual accounts, and sales revenue declined year-on-year. As of June 2024, the total number of retail stores was 12,366, including 10,702 major pharmacies, 1,151 dual-channel pharmacies, and 5,764 co-ordinated medical insurance pharmacies; 2) Medical device distribution revenue was RMB 58.494 billion, -7.08% year over year, and operating profit margin fell 0.89 percentage points to 2.25% year on year, mainly due to factors such as price reduction in the collection of high-value consumables. According to the company announcement, judging from the device category structure, sales revenue from high gross margin device categories such as medical equipment and IVD test reagents has declined, and medical consumables have maintained relatively steady growth.

The gross margin and financial expense ratio declined year over year. According to the company announcement, in the first half of 2024, 1) comprehensive gross margin was 7.45%, -0.28 percentage points year on year, mainly due to a slight decrease in the share of high gross business; 2) sales expenses ratio was 2.88%, +0.08 percentage points year over year; 3) management expenses ratio was 1.33%, +0.01 percentage points year over year; 4) financial expenses ratio was 0.36%, -0.11 percentage points year on year.

Profit forecasting and valuation

Considering that the company's retail and equipment distribution business is affected by the policy, we lowered the 2024 and 2025 EPS forecasts by 6.5%/8.2% to 2.9 yuan/3.1 yuan, respectively, up 1.0% and 6.0% year-on-year. The current stock price corresponds to the 2024/2025 price-earnings ratio of 5.6 times/5.3 times. We maintain our outperforming industry rating. We lowered our target price by 5% to HK$24.7, corresponding to a price-earnings ratio of 7.6 times/7.2 times in 2024/2025, with 36.5% room for increase from the current stock price.

risks

Due to the pressure of centralized drug procurement, the growth of pharmaceutical retail and medical device distribution business fell short of expectations.