The revenue-side operation is resilient, and the profit side is disrupted by multiple factors. With 2024H1, the company achieved revenue of 10.94 billion yuan (YoY +1.19%), net profit of 0.503 billion yuan (YoY -2.05%), net profit of 0.482 billion yuan (YoY -1.79%) after deducting net profit of 0.482 billion yuan (YoY -1.79%); of these, Q2 achieved revenue of 5.401 billion yuan (YoY +0.56%), net profit of 0.181 billion yuan (YoY -18.23%), net profit of 0.171 billion yuan (YoY -18.13%) The overall growth rate of the industry in the first half of 2024 was affected by multiple factors; during the reporting period, the decline in the company's profit side was mainly due to a decrease in mergers and acquisitions during the reporting period, and a drag on profits during the cultivation period of new stores.

As the Torch Project progressed, gross margin continued to rise. In 2024, the company vigorously promoted the Torch Project to improve profitability: 1) replace high-margin products; 2) focus on increasing the share of overall procurement to reduce supply chain costs; 3) commission plan reform; 4) digital upgrading empowers the sales process, promoting the introduction of new products and improving efficiency while effectively replacing products. 2024H1, the company's gross margin increased by 1.60pct to 34.32%. As the Torch Project continues to advance, it is expected that there is still room for improvement in the company's gross margin.

Focus on advantageous regions and cultivate the sinking market. 1) The number of stores is about 1.5w. As of the end of the reporting period, the total number of the company's stores was 14,969, of which 9323 and 5046 were directly managed and franchised stores, respectively. In terms of opening new stores, the company added 1,625 stores in January-June, including 868 and 757 direct-run and franchised stores respectively. 2) Self-construction led, and preparations for new stores were significantly accelerated. The number of self-built stores added by the company during the reporting period was 828, accounting for 95.39% of the new direct-run stores. The average preparation period for new 2024H1 direct-run stores was 41 days, 9 days shorter than the previous year. 3) Refining and deepening the sinking market in advantageous regions. By the end of the reporting period, the company's stores in prefecture-level cities and below accounted for 76%; of the company's new stores during the reporting period, stores in dominant provinces and key cities accounted for 88%, and stores in prefecture-level cities and below accounted for 79%. After completing extensive coverage in 18 provinces and cities, the company continued to encrypt 11 dominant provinces, and the regional market share continued to increase.

Actively promote overall implementation and include a steady increase in store sales. The company actively responds to outpatient health insurance policies, promotes the implementation of store qualifications, explores integrated business models, and strengthens medical insurance compliance control. By the end of the reporting period, the company had 5028 stores (including 975 franchisees) with integrated outpatient services, of which direct-run stores accounted for 40.84% of outpatient co-ordinated medical insurance management, and the number of stores that could use Internet prescriptions (interchangeable) reached 3,720 (including 503 franchisees), of which direct stores were interoperable accounted for 32.42%. Interchangeable stores have seen significant increases in both the number of visitors and sales.

In 2024, along with the gradual implementation and improvement of regional coordination policies, the company is expected to accelerate the acceptance of outflow prescriptions.

Investment advice: Currently, the industry is entering a period of accelerated integration. As a leading pharmacy enterprise, the company continues to encrypt advantageous regions on the basis of broad coverage, and scale effects are showing; at the same time, the company is vigorously promoting the Torch Plan, and profitability is expected to further improve.

We expect the company's net profit to be 11.03, 13.38, and 16.38 billion yuan (original value: 11.03, 13.39, 16.38) respectively, and EPS of 1.45, 1.76, and 2.15 yuan respectively, corresponding to PE 9.28, 7.65, and 6.25 times PE, respectively. Maintain a “buy” rating.

Risk warning: Risk of increased competition in the industry, risk of industry policy risk, risk of store expansion falling short of expectations, etc.