Core views

On August 26, the company released its 2024 semi-annual performance report. In the first half of 2024, the company achieved operating income of 294.727 billion yuan, a year-on-year decrease of 2.07%, and realized net profit of 3.704 billion yuan, a year-on-year decrease of 9.76%. The performance was lower than our expectations, mainly due to pressure on the equipment distribution business. 24H2, the impact of in-hospital compliance sales is stabilizing. The company's drug distribution business may maintain steady growth, device upgrades are expected to release incremental increases, and the device distribution business is expected to improve month-on-month. Combined, the company continues to focus on building the advantages of batch and zero integration. We are optimistic about the steady release of the company's long-term performance potential.

occurrences

The company announced its 2024 semi-annual results announcement. The performance was lower than our expectations. On August 26, the company released the 2024 semi-annual results report. In the first half of 2024, the company achieved operating income of 294.727 billion yuan, a year-on-year decrease of 2.07%, and realized net profit to mother of 3.704 billion yuan, a year-on-year decrease of 9.76%. The performance was lower than our expectations.

Brief review

Structural adjustments affect gross profit margin, optimistic about H2 management improvements

In the first half of 2024, the company's revenue fell 2.07% year on year, mainly due to: 1) drug distribution revenue increased 0.47% year on year to 226.494 billion yuan due to changes in terminal demand structure, medical equipment and IVD test reagent revenue growth rate slowed, device distribution revenue fell 7.08% year on year to 58.494 billion yuan; 3) Pharmaceutical retail sector revenue fell 6.43% year on year to 16.558 billion yuan; net profit to mother decreased year on year 9.76%, mainly due to the impact of category structure, the share of high-margin device distribution business revenue and gross margin declined simultaneously.

In the second quarter of 2024, the company achieved operating income of 147.461 billion yuan, a year-on-year decrease of 5.13%, mainly due to a slowdown in the growth rate of the pharmaceutical distribution business and a brief pressure on the device distribution business; net profit of 2.284 billion yuan, down 9.16% year on year, slower than revenue side growth, mainly due to the simultaneous decline in revenue share and gross margin of the device distribution business, which led to a year-on-year decline of 0.22% to 7.71%.

Key drug distribution regions grew steadily, and the out-of-hospital market accelerated. In the first half of 2024, the company's drug distribution business revenue increased by 0.47% to 226.494 billion yuan, mainly due to the fact that the revenue share of Jiangsu, Zhejiang, Shanghai, Central China, North China and Liangguang regions maintained relatively rapid growth. Operating profit fell 6.75% year on year to 6.23 billion yuan, and operating profit margin fell 0.21 percentage points year on year to 2.75%. The category structure was adjusted mainly due to the impact of volume procurement and price reductions in national negotiations. In the first half of 2024, with the impact of policies such as health insurance coordination and accelerated prescription outflow, the company's share of direct sales to medical institutions declined, but the share of retail direct sales business increased. Looking ahead to the second half of the year, the company will further optimize the category structure, continue to promote business innovation and transformation, collaborate in distribution business development through innovative marketing services, and improve in-hospital diagnosis and treatment order, and the pharmaceutical distribution business is expected to maintain a steady growth trend.

The equipment sector was under pressure for a short time, and I am optimistic that H2 will improve month-on-month

In the first half of 2024, the company's equipment distribution business revenue fell 7.08% to 58.494 billion yuan, operating profit fell 33.39% year on year to 1.316 billion yuan, and operating profit margin fell 0.89 percentage points to 2.25% year on year. Mainly due to changes in terminal demand structure, the share of revenue in categories with high gross margin such as medical equipment and IVD test reagents declined, and medical consumables remained relatively stable. In the first half of 2024, the company continued to strengthen specialized service capacity building, undertaking SPD management projects for pharmaceutical consumables, etc. By the end of June 2024, the centralized distribution and SPD projects provided by the company had covered 28 provinces, adding 31 SPD projects in the first half of the year, 148 centralized distribution projects for single hospitals, and 2 centralized distribution projects for regional medical consorties/medical communities. We believe that in the second half of 2024, the company will continue to deepen terminal network coverage and cultivate device distribution service advantages. As medical equipment upgrading gradually progresses, the device sector is expected to show a positive month-on-month trend.

The retail sector accelerated its connection with outpatient coordination. The advantages of specialized services were obvious. In the first half of 2024, the company's retail business revenue fell 6.43% year on year to 16.558 billion yuan. Among them, specialized pharmacies maintained rapid growth of more than 20%, while social pharmacies saw a year-on-year decline in revenue due to the contraction of individual accounts. Operating profit fell 20.93% year on year to 0.256 billion yuan, and operating profit margin fell 0.28 percentage points year on year to 1.55%, mainly due to changes in sales structure. By the end of June 2024, the company's retail stores had a net increase of 257 to 12,366 compared to the end of 23, with a net increase of 186 pharmacies in China to 10,702, and a net increase of 71 specialty pharmacies to 1,664; the number of stores coordinated by the company increased by 1,655 to 5,764. Looking ahead to the second half of the year, the company may continue to dig deeper into the potential of specialized pharmacy services, accelerate the implementation of prescription outflow and outpatient coordination policies, and actively adjust the category structure. The profitability of the retail sector is expected to improve.

Deepening service transformation, H2 performance is expected to grow steadily

Looking ahead to the second half of 2024, the impact of hospital compliance sales will tend to be normal. Combined companies will continue to expand the coverage of terminal networks and increase the proportion of drugs collected and distributed in national negotiations, and the scale of drug distribution business revenue may show a steady growth trend. At the same time, the company is actively promoting SPD services and manufacturing business for device distribution. The consumables distribution business is expected to remain relatively stable, while large-scale medical equipment distribution is expected to accelerate with device updates. In the retail sector, the share of the company's co-ordinated stores has increased markedly. As the price comparison policy becomes clear, co-ordinated stores may accelerate their contribution to performance. Furthermore, the company is actively promoting digital transformation and improving business efficiency under the premise of strict risk control. Expense control may continue to be deepened during this period, and the state-owned enterprise reform process progresses steadily. We are optimistic that the company's performance potential will gradually be unleashed.

Structural adjustments affect gross profit margin, and other indicators are basically normal

In the first half of 2024, the company's comprehensive gross margin was 7.45%, down 0.29 percentage points from the previous year, mainly due to the share of high-margin device distribution business revenue and the year-on-year decline in gross margin. The sales expense ratio was 2.88%, up 0.08 percentage points from the previous year, and remained stable; the management expense ratio was 1.33%, up 0.01 percentage points from the previous year, remaining relatively stable; the financial expense ratio was 0.36%, down 0.11 percentage points from the previous year, and the fee control effect was good. Net cash flow from operating activities was -40.993 billion yuan compared to -43.326 billion yuan in the same period last year, which remained stable. The number of inventory turnover days was 42.52 days, an increase of 1.08 days over the previous year, and remained stable; the number of accounts receivable turnover days was 129.91 days, an increase of 7.35 days over the previous year, mainly due to delays in repayment at some terminals. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 615.269 billion yuan, 660.18 billion yuan and 713.472 billion yuan respectively from 2024 to 2026, up 3.1%, 7.3% and 8.1% year on year, and realized net profit to mother of 9.139 billion yuan, 9.772 billion yuan and 10.485 billion yuan respectively, up 0.9%, 6.9% and 7.3% year on year, respectively, equivalent to EPS of 2.93 yuan/share and 3.13 yuan/share, respectively With 3.36 yuan/share, the corresponding PE is 5.1X, 4.8X, and 4.5X, maintaining a “buy” rating.

Risk analysis

1) Drug collection risk: The gradual expansion of the scope of centralized drug procurement may cause a certain risk of price reduction for the company, affecting some of the company's business profits. Moreover, as the number of winning products in volume procurement increases, its excessive scale may have a great impact on the company's operating income and profits.

2) Risk of reform and business transformation: The company is a state-owned enterprise. If the state-owned enterprise reform falls short of expectations, the long-term incentive effect for employees is insufficient, or it may adversely affect the company's long-term revenue growth;

3) Increased market competition: Major competitors or new entrants in the market may weaken the company's comparative advantage and sustainable development ability, thereby affecting the company's long-term development;

4) Accounts receivable turnover risk: If the company's accounts receivable cycle is extended or cannot be recovered, it may cause time and financial losses to the company; 5) Policy risk: The pharmaceutical industry is a highly regulated industry, and if there are strict policies, it may adversely affect the company's operations.