Key points of investment

The company disclosed the 2024 semi-annual report. 2024H1 revenue was 13.35 billion yuan, up 11.3% year on year; net profit to mother was 0.66 billion yuan, down 28.3% year on year. Among them, Q2 revenue was 6.59 billion yuan, up 9.1% year on year, and net profit to mother was 0.26 billion yuan, down 38.4% year on year. 2024H1 has opened 2,295 new stores (4290 new stores opened in 2023), and 2023-2024H1 maintains high growth. Short-term or profitable pressure due to changes in store structure, but it is expected to drive revenue and long-term profit growth.

Growth: Continued high store growth is expected to drive continued high revenue growth (1) Continued high growth in the number of stores, which is expected to drive revenue growth. 2024H1, the company opened 2,295 new stores, including 797 self-built, 1214 joined, and 284 mergers and acquisitions (the company opened 4290 new stores in 2023, including 1,382 self-built stores, 2158 franchise stores, and 750 mergers and acquisitions). 2023-2024H1 stores continued to expand rapidly, driving revenue growth in 2024 and bringing long-term revenue and profit contributions. We believe that under the clear trend of the industry, increasing concentration is still the core logic of pharmacy chains. The rapid growth in the number of the company's stores is expected to lead to revenue growth in 2024 and long-term revenue and profit contributions.

(2) Coordinating the increase in the number of pharmacies, it is expected to accept more outflow prescriptions. 2024H1 has 248 DTP specialty pharmacies (227 at the end of 2023), 9914 designated medical insurance stores (9100 at the end of 2023), and 2586 designated stores for various types of consolidated reimbursement (1985 at the end of 2023), including 1,782 outpatient co-ordinated stores, 602 dual-channel designated stores, 1,165 designated stores with slow doors, and rapid growth in specialty pharmacies and co-ordinated stores. We believe that the co-ordinated stores in the region where the company is located may gradually be launched in 2024. As a well-prepared pharmacy leader, the company is expected to handle the outflow of more prescriptions, leading to a continuous increase in revenue ceilings.

Profitability: gross margin or slight decline

(1) As the share of Chinese and Western proprietary medicines increases, gross margin may slow down. 2024H1's gross profit margin was 34.9%, down 2.5 pct year on year; of these, Q2 company's gross profit margin was 34.3%, down 2.4 pct year on year. We believe that with the company's regional expansion and the increase in the share of revenue from prescription drugs, etc., the company's gross margin may slow down; (2) the net profit margin will be under pressure in the short term, and the second half of the year may improve as stores enter a profit period in 2023. 2024H1's net interest rate was 5.25%, down 2.71 pct year on year. Among them, Q2 company's net interest rate was 3.75%, down 3.36 pct year on year. Q2 net interest rate dropped a lot as investment in new stores continued. We believe that as the profitability of the company's new stores gradually improved in Q3 in 2023, profitability may have improved compared to Q2.

Operating capacity: There is a clear upward trend in inventory turnover

2024H1's inventory turnover ratio (wind calculation value) was 2.05 times, which is a significant increase compared to 1.87 times in 2023H1. In 2021-2023, the company's inventory turnover ratio was 3.28/3.52/3.90 (times), respectively. Driven by the strengthening of refined management and the increase in the share of franchised stores, etc., the inventory turnover ratio continued to rise. We believe that the company's continued digital investment is expected to bring about a steady improvement in SKU's refined management capabilities and drive an increase in inventory turnover.

Profit forecasting and valuation

Based on the above analysis, we expect the company's total revenue for 2024-2026 to be 27.627/32.975/39.649 billion yuan, respectively, up 12.62%, 19.36%, and 20.24% year on year; net profit to mother of 1.201/1.445/1.782 billion yuan, up 2.98%, 20.26%, and 23.38% year-on-year respectively, corresponding EPS of 1.05/1.27/1.57 yuan, corresponding to 13 times PE in 2024, maintaining” “Gain” rating.

Risk warning

The risk of increased competition in the industry; the risk of policy changes; the risk of demand fluctuations.