Key points of investment

Incident: The company achieved revenue of 13.345 billion yuan (+ 11.29%, same ratio, same below), net profit to mother 0.658 billion yuan (-28.24%), and net operating cash flow of 1.767 billion yuan (+ 19.61%) in the first half of 2024. In the Q2 quarter, the company achieved revenue of 6.593 billion yuan (+ 9.07%) and net profit of 0.26 billion yuan (-38.10%) to mother.

The franchise business is growing rapidly. By business, 2024H1 achieved retail revenue of 11.065 billion yuan (+ 8.20%), gross profit margin of 37.22% (-2.17pp); franchise and distribution business of 1.973 billion yuan (+33.85%), gross profit margin of 11.76% (+0.09pp). The company used the characteristics and advantages of direct-run franchisees to quickly lay out direct franchisees in vulnerable regions, driving rapid growth in franchise and distribution business revenue. By product, 2024H1 achieved revenue of 9.959 billion yuan (+ 15.48%) of proprietary Chinese medicines, with a gross profit margin of 30.64% (-1.88pp); 1.515 billion yuan of Chinese ginseng medicinal herbs, with a gross profit margin of 42.28% (-1.22pp); and 1.564 billion yuan for non-pharmaceuticals, with a gross profit margin of 42.10% (-4.83pp).

Profits were slightly pressured by the internal nurturing of new stores and the external consumer environment. With 2024H1, the company achieved a gross profit margin of 33.36% (-2.54pp) and a net profit margin of 4.93% (-3.03pp). The reason is that new stores that are still being cultivated, such as new stores and sub-new stores, are still climbing and the external consumption environment is declining. Looking at the cost ratio, the company's 2024H1 sales expense ratio was 22.67% (+1.14pp), the administrative expenses ratio was 4.30% (+0.09pp), and the financial expenses ratio was 0.77% (-0.04pp), due to the increase in interest expenses on loans.

The “self-building+merger and acquisition+franchise” troika is advancing, continuously expanding the empty provinces. As of 2024H1, the company's total number of stores in 21 provinces including Guangdong, Guangxi, Henan, Hubei, Sichuan and Heilongjiang was 16,151 (2077 more than at the beginning of the year), including 10,772 direct-run stores (863 more than at the beginning of the year) and 5,379 franchise stores (1214 more than at the beginning of the year). The company is making joint efforts through the “self-building+merger and acquisition+franchise” troika, and the scale effect is expected to be further highlighted.

Profit forecast and investment rating: Considering cultivating new stores within the company and gradually reversing gaps in provinces, we adjusted the company's net profit from 1.428/1.739/2.106 billion yuan to 1.352/1.689/2.046 billion yuan. The PE valuation corresponding to the current market value was 11/9/7 times, respectively, to maintain a “buy” rating.

Risk warning: Risk of increased market competition, risk of store expansion or failure to meet expectations, risk of franchise store development or failure to meet expectations.