Performance is in line with expectations, and revenue and profit are growing steadily

The company released its 2024 semi-annual report: 2024H1 operating income of 11.762 billion yuan (+9.86%), net profit of 0.798 billion yuan (+13.13%), net non-net profit of 0.786 billion yuan (+15.77%), net operating cash flow of 1.822 billion yuan (+29.41%). On a quarterly basis, 2024Q1-Q2 revenue was 5.971 billion yuan (+13.39%), 5.791 billion yuan (+6.45%), net profit to mother 0.407 billion yuan (+20.89%), 0.391 billion yuan (+6.05%), after deducting non-net profit of 0.399 billion yuan (24.26%) and 0.386 billion yuan (+8.12%). The company maintained steady growth in revenue and profit in the first half of the year.

The retail sector is growing steadily, and the scale of the wholesale sector is rising rapidly

By industry, the 2024H1 retail sector's revenue was 10.398 billion yuan (+8.32%), and the wholesale sector's revenue was 0.997 billion yuan (+20.91%). By product, revenue from 2024H1 Western medicines and proprietary Chinese medicines was 8.878 billion yuan (+10.11%), revenue from non-drug products was 1.353 billion yuan (+0.40%), and revenue from traditional Chinese medicines was 1.165 billion yuan (+14.82%).

In terms of profitability, the gross margin of 2024H1 is 40.05% (+0.06pct). By industry, the gross margin of the retail sector is 40.94% (+0.06pct), and the gross margin of the wholesale industry is 9.57% (-0.61pct). By product, the gross margin of Western medicine and proprietary Chinese medicines was 34.85% (-0.22pct), the gross margin of non-pharmaceuticals was 51.10% (+0.03pct), and the gross margin of traditional Chinese medicine was 48.74% (+0.15pct). 2024H1 net margin was 7.31% (-0.15pct).

Judging from the cost ratio, the 2024H1 sales expense ratio is 25.55% (-0.15pct), the management expense ratio is 4.09% (-0.20pct), the R&D expense ratio is 0.14% (+0.05pct), and the financial cost ratio is 0.62% (+0.25pct).

Adhere to the regional focus strategy and continue to expand the store steadily

The company continues to adhere to the development strategy of “regional focus and steady expansion” and the business policy of “focused penetration and in-depth marketing”. As of June 30, 2024, the company had 14,736 stores (including 3,426 franchised stores). From January to June 2024, the company added 1,575 new stores, including 842 self-built stores, acquired 293 stores, and added 440 new affiliate stores. Another 17 stores were relocated, and 72 stores were closed, a net increase of 1,486 compared to the end of 2023.

Profit forecasts and investment advice

The estimated revenue for 2024-2026 is 24.921, 28.816, and 33.342 billion yuan, respectively, and net profit to mother is 1.599, 1.923, and 2.318 billion yuan, respectively. The PE corresponding to the current stock price is 15.29, 12.71, and 10.55 times, respectively, maintaining a “buy” rating.

Risk warning:

The speed of store expansion and late integration is lower than the expected risk, and the implementation of the outpatient coordination policy falls short of the expected risk.