Incident: On August 27, 2024, Kyushu Express released the 2024 semi-annual report. 2024H1 achieved operating income of 77.171 billion yuan (-2.76%); net profit due to mother of 1.208 billion yuan (-10.08%); net profit without return to mother of 1.18 billion yuan (-8.90%); and operating cash flow of 3.201 billion yuan. In 2024Q2, the company achieved operating income of 36.699 billion yuan (-1.52%); net profit due to mother of 0.67 billion yuan (-14.31%); net profit after deducting non-return to mother of 0.659 billion yuan (-8.81%); and operating cash flow of 0.453 billion yuan.

Excluding seasonal influenza factors, revenue and profit continued to grow steadily. 2023H1 was affected by seasonal diseases such as the epidemic and influenza, and sales of products related to colds and fever-reducing drugs increased dramatically, leading to a high performance base for the same period last year.

Excluding the effects of these special factors, 2024H1 revenue increased 0.15% year on year, net profit to mother increased 9.50% year on year, net profit without return to mother increased 11.84% year on year, and revenue profit will continue to grow steadily. In addition, compared to 2024Q1, the company's Q2 business performance showed a positive trend from quarter to quarter. Net profit to mother and net profit after deduction increased by 24.60% and 26.28% month-on-month, and operating cash flow turned positive; the company will increase its efforts to settle accounts receivable by the end of the year, and the operating cash flow is expected to be positive for the whole year, which matches the operating performance.

The “three new, two modernization” strategy was successfully implemented, and the innovative business developed rapidly. In order to cope with the decline in traditional distribution business, the company actively promoted the “three new and two modernizations” strategy and achieved remarkable results. In terms of new products, 2024H1's CSO business revenue was 9.862 billion yuan (+14.18%); gross profit was 1.191 billion yuan. Among them, total pharmaceutical revenue is 5.42 billion yuan, gross profit of 0.959 billion yuan, and the number of agent regulations is 828 (32 are expected to exceed 100 million product regulations for the whole year), including products collected and bid for Zhejiang Huahai and Dongyangyang, and foreign-funded products such as AstraZeneca and Bayer; total device revenue of 4.442 billion yuan, gross profit of 0.232 billion yuan, and 1,081 agent regulations (8 product lines over 100 million in half a year), including 15 product lines from 11 major manufacturers including Johnson & Johnson, Abbott, and Roche will contribute to the company's performance in the future Continual improvement. In terms of new retail, the company made full use of the advantages of the supply chain platform to expand the digital retail business through the model of “ten thousand stores to join”, “batch and zero integration”, and online and offline. By the end of July 2024, the number of self-operated and franchised pharmacies reached 24,387. 2024H1's new retail business revenue was 1.456 billion yuan (+1.02%); gross profit was 0.203 billion yuan. In terms of new medical care, the “Jiuxin Clinic” Internet medical platform independently developed by the company was officially launched to create a professional service platform integrating supply chain, operation services, and digital medical care for primary clinics. Currently, 412 “Jiuxin Clinic” member stores have been developed, with the goal of developing 800 member stores and building 50 benchmark member stores throughout the year. In terms of real estate securitization, public REITs and pre-REITs projects are progressing smoothly. The company plans to successfully issue public REITs and issue the first pre-REITs before October this year, revitalize the company's pharmaceutical warehousing and logistics assets, restructure the asset-light operating model, and enhance the value-added return on shareholders' equity.

Investment advice: As the largest private pharmaceutical distribution company in the country, Kyushu Express is actively promoting the implementation of the “three new, two modernization” strategy based on traditional distribution business to guide the rapid development of innovative businesses such as CSO and new retail.

Without considering the increase in profits brought about by the issuance of REITs, we expect the company's revenue for 2024-2026 to be 164.966/183.518/206.56 billion yuan, respectively; net profit to mother will be 2.205/2.688/3.065 billion yuan, respectively. The current stock price corresponding to 2024-2026 PE is 8 times 11/9/8 times. Covered for the first time, giving it a “Recommended” rating.

Risk warning: risk of new business not progressing as expected; risk of bad accounts receivable; risk of increased market competition; risk of policy changes.