Key points of investment

The company disclosed the 2024 semi-annual report. 2024H1 revenue was 10.94 billion yuan, up 1.2% year on year; net profit to mother was 0.5 billion yuan, down 2.1% year on year. Among them, Q2 revenue was 5.4 billion yuan, up 0.6% year on year, and net profit to mother was 0.18 billion yuan, down 18.2% year on year. Under the influence of pharmacy price comparisons and the macro environment, the company's Q2 revenue and profit all declined month-on-month, but under the influence of commercial procurement optimization, etc., the company's gross margin maintained an upward trend. We believe that as the company sinks and expands and product management continues to be optimized, it is expected to hedge against the downward impact of the industry's profit margins and maintain a high profit growth rate.

Growth: Franchise store growth, integrated implementation accelerated, driving revenue growth (1) The number of stores maintained high growth, and the share of franchisees continued to rise. In the first half of 2024, the company added 1,625 stores, including 868 new direct-run stores and 757 new franchise stores. By 2024H1, the total number of the company's stores was 14,969, including 9923 direct-run stores and 5046 franchise stores (the total number of company stores at the end of 2023 was 13,574, including 9180 direct-run stores and 4,394 franchised stores), and the number of stores continued to grow rapidly. The proportion of 2024H1 franchise stores is 33.7% (32.4% at the end of 2023), and the share of franchise stores is still growing rapidly. We believe that the franchise business has always been an important driver of the company's profit growth. As the industry clears out one after another, the company's share of franchises continues to increase, which is expected to lead to long-term profit growth. (2) The decline and expansion are accelerating, and it is expected that better profit growth will be maintained. Of the new stores added in the first half of 2024, stores in prefecture-level cities and below accounted for 79%. As of 2024H1, stores in prefecture-level cities and below accounted for 76%. The decline was high, and store expansion continued to accelerate. We believe that the sinking market, such as counties, towns, etc., has a larger elderly population (more in line with the drugstore customer profile), the online share is relatively low, and the cost of rent personnel is lower. The expansion of the sinking market is expected to bring about better profit growth; (3) Coordinate the continuous improvement of stores and the ability of reserves to handle the outflow of prescriptions. With 2024H1, the company has 5028 outpatient co-ordinated stores, of which direct-run stores account for 40.84% of outpatient clinics, and 3,720 stores include outpatient co-ordinated medical insurance management and can use Internet prescriptions (interchangeable). Of these, direct-managed stores account for 32.42% (2024Q1 accounts for 30.67%), and co-ordinated stores continue to grow.

We believe that with the gradual implementation of co-ordinated stores, well-prepared pharmacy leaders are expected to handle more outflows of prescriptions, leading to a significant increase in customer traffic and sales.

Profitability: continuous optimization of management, increase in gross margin

(1) The commercial procurement system has been optimized, the share of private brands has increased, and gross margin has continued to increase. 2024H1's total procurement sales accounted for 70.4% (+2.8pct); private brand sales accounted for 21.5% (+1.6pct), driving the company's 2024H1 gross profit margin of 34.3%, up 1.6 pct year on year, of which the Q2 gross profit margin was 33.4%, up 0.97 pct year on year. We believe that in the long run, the increase in the share of prescription drugs and the increase in O-to-O share may lead to a decline in the industry's gross margin, but in 2024, the company's gross margin is expected to increase through measures such as increasing the share of total procurement and adjusting the product structure; (2) with an increase in the cost ratio, the net interest rate is expected to remain at a good level throughout the year. 2024H1's net interest rate was 5.4%, down 0.29pct year on year. Among them, the Q2 net interest rate was 4.1%, down 1.02 pct year on year, mainly due to the increase in sales expenses and management expenses due to store growth, etc. We believe that although the cost rate may rise under pressure from the macroeconomic environment, etc., the company's net interest rate is expected to remain at a good level throughout the year due to the effects of the increase in the company's gross margin and the decline in amortization of equity incentive expenses.

Profit forecasting and valuation

Based on the above analysis, we expect the company's total revenue for 2024-2026 to be 23.69/27.6/32.019 billion yuan, respectively, up 5.58%, 16.51%, and 16.01% year-on-year; net profit to mother of 0.981/1.149/1.347 billion yuan, up 5.59%, 17.20% year-on-year respectively. The corresponding EPS is 1.29/1.51/1.77 yuan/share, corresponding to 13 times PE in 2024, maintaining “increased holdings” ” Ratings.

Risk warning

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