Key points of investment

Incident: The company achieved revenue of 4.485 billion yuan (+3.40%, YoY, same below), net profit to mother 0.063 billion yuan (-60.23%), and net operating cash flow of 0.292 billion yuan (-47.18%) in the first half of 2024. In Q2 alone, the company achieved revenue of 2.171 billion yuan (+0.01%) and net profit of 0.011 billion yuan (-87.02%) to mother.

Overview of operating data: 2024H1, the company achieved pharmaceutical retail revenue of 4.035 billion yuan (+2.58%), gross profit margin of 34.92% (+1.25pp), due to weak consumption intentions, increased market and industry competition, continued promotion of pharmaceutical reform policies, reduction in health insurance accounts and delayed implementation of coordinated health insurance, strong health insurance supervision, etc.; convenience retail business 0.189 billion yuan (-4.38%), gross profit margin 18.47% (+0.05pp); providing professional service business revenue for pharmaceutical and convenience suppliers 0.261 billion yuan (+26.45%), gross profit margin 63.50% (-8.71pp).

Pay attention to major trends in the outside hospital market and actively adjust the category structure. 2024H1, the company achieved revenue of 3.27 billion yuan (+5.75%) of proprietary Chinese medicines and a gross profit margin of 32.92% (+2.44pp), due to the company actively taking on the increase in business caused by the outflow of in-hospital customers and the introduction of hospital varieties; Chinese herbal medicines 0.165 billion yuan (-12.82%), gross profit margin of 47.02% (+1.01pp); health food 0.214 billion yuan (-8.46%), gross profit margin of 32.48% (-10.50pp). The company actively implemented market-based competition to gain more share; personal care products 0.049 billion yuan (+12.09%), gross profit margin 29.17% (+2.42pp); medical devices 0.315 billion yuan (-14.95%), gross profit margin 48.29% (+4.78pp); convenience goods 0.207 billion yuan (+4.83%), gross profit margin 25.44% (-3.11pp); medical examination services 0.004 billion yuan (-4.52%), Gross profit margin 29.96% (-4.04pp).

The scale of the business has expanded, and the cost rate has increased. 2024H1, the company achieved a gross profit margin of 35.89% (+1.08pp) and a net profit margin of 1.40% (-2.24pp) to mother. Looking at the cost ratio, the company's 24H1 sales expense ratio is 28.93% (+3.21pp), due to the expansion of the company's store size and increased operating costs; the management expense ratio is 2.67% (+0.64pp), due to the increase in business scale, the increase in management costs, the decline in epidemic inventory prices, and daily operating loss processing; the financial expense ratio is 1.52% (+0.03pp). The reason is that capital requirements have increased due to the increase in scale, and the corresponding increase in financing interest expenses.

2024H1 increased the net number of stores by 328, and actively promoted the construction of a chain store service network. As of 2024H1, the total number of the company's stores was 5,444, a net increase of 328 stores from the beginning of the year, including 254 self-built stores and acquired 81 stores. The company implemented the expansion strategy of “penetrating downward with central cities as the core” and continued to promote the construction of a chain store service network.

Profit forecast and investment rating: Considering that the company is actively promoting the construction of a chain store chain, the Yunnan outpatient coordination policy is expected to continue to advance in the second half of the year, and business structure improvements will drive higher profit margins. We adjusted the company's net profit to mother from 0.48/0.57/0.69 billion yuan to 0.26/0.32/0.37 billion yuan. The PE valuation corresponding to the current market value is 11/9/8 times, respectively, maintaining the “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.