Core views

On August 30, the company released its 2024 semi-annual performance report. The first half of 2024 achieved operating income of 13.345 billion yuan, a year-on-year increase of 11.29%, achieved net profit of 0.658 billion yuan, a year-on-year decrease of 28.32%, and realized net profit of 0.659 billion yuan after deduction, a year-on-year decrease of 26.37%, achieving basic earnings per share of 0.58 yuan. The performance was lower than our expectations.

Looking ahead to the second half of the year, the size of the company's stores is expected to continue to expand. Combined with the gradual deepening of treatment of out-of-hospital drugs in various regions, the implementation of outpatient coordination policies may be accelerated. The company will still actively accept the outflow of prescriptions, obtain additional increases, and at the same time improve profitability by optimizing the product structure, and is optimistic that the company will operate steadily throughout the year.

occurrences

The company released its 2024 semi-annual report, and the performance fell short of expectations

The company released its 2024 semi-annual report. The first half of 2024 achieved operating income of 13.345 billion yuan, a year-on-year increase of 11.29%, achieved net profit of 0.658 billion yuan, a year-on-year decrease of 28.32%, and realized net profit of 0.659 billion yuan after deduction, a year-on-year decrease of 26.37%, achieving basic earnings per share of 0.58 yuan. The performance was lower than our expectations.

Dashenlin plans to distribute a cash dividend of 0.31 yuan (tax included) to all shareholders, and a discovery dividend of 0.351 billion yuan (tax included) after excluding the repurchased portion of the shares. The total cash dividend to be distributed this time accounts for 53.43% of net profit attributable to mother in 2024.

Brief review

Store expansion is progressing steadily, and the franchise business is performing well

In the first half of 2024, the company's operating income increased 11.29% year on year, net profit to mother decreased by 28.32% year on year, and net profit after deduction decreased by 26.37% year on year. In the second quarter of 2024, the company achieved revenue of 6.593 billion yuan, an increase of 9.07% over the previous year. The slowdown in growth in the second quarter was mainly due to factors such as consumption power, and the decline in customer unit prices led to a decline in same-store growth. In 24Q2, the company achieved net profit of 0.259 billion yuan, a year-on-year decrease of 38.40%, and realized net profit of 0.263 billion yuan without return to mother, a year-on-year decrease of 34.43%, mainly due to: 1) the accelerated expansion of stores in 23 and 24H1, which had a significant impact on cost side rigid expenses; 2) the company closed some less efficient stores in the first half of the year, and there were additional expenses on the cost side.

Dashenlin plans to distribute a cash dividend of 0.31 yuan (tax included) to all shareholders, and a discovery dividend of 0.351 billion yuan (tax included) after excluding the repurchased portion of the shares. The total cash dividend to be distributed this time accounts for 53.43% of net profit attributable to mother in 2024.

The national layout has basically been completed, and the stores continue to cultivate

The national layout has basically been completed, and the stage of deepening market cultivation has begun. In the first half of 2024, the company continued to promote mergers and acquisitions, entering Shanghai, Inner Mongolia and other regions. It now has a net increase of 2,077 stores in the first half of the year, with a net increase of 2,077 stores in the first half of the year, including 797 self-built, 284 acquired, and 1,214 joined.

By the end of June 2024, the company had a total of 16,151 stores, including 5,379 franchised stores and 10,772 direct-run stores. We believe that the company's national layout has basically been completed at this stage, and that it may not enter new provinces in the future. The focus of operations will focus on the selected “6+8” key regions, continue to deepen the density of stores in core regions, gradually achieve regional scale advantages, and profitability is expected to increase at an accelerated pace.

The network of professional stores is improved, and customer stickiness continues to increase

Continue to promote specialized capacity building and improve the network of professional stores. By the end of June 2024, the company had a total of 9914 medical insurance stores, accounting for 92.03% of the total number of directly managed stores. In addition, the company had 248 DTP specialty pharmacies and 2,586 designated stores for various types of consolidated reimbursement, including 1,782 outpatient co-ordinated stores, 602 dual-channel designated stores, and 1,165 slow door designated stores. The professional service network continues to improve. We believe that as the outflow of prescriptions continues to advance, specialized service capabilities may significantly affect patients' consumption choices. The company has obvious advantages in the specialized store network at this stage, and it is expected to obtain additional incremental traffic in the future.

The product structure is continuously optimized, and customer stickiness continues to increase. In the first half of 2024, the company continued to update and iterate product categories, introduced new products and eliminated unsold products. At the same time, it continued to explore diversification of the product structure. The introduced categories such as cosmetics, personal care, food and beverage all achieved rapid growth.

In addition, the company actively promotes digital construction, greatly improves operating efficiency while improving customer member profiles, forming an accurate marketing system, and enhancing customer stickiness. As of the end of June 2024, the company had 0.103 billion members, including 55.02 million active members (within 2 years), adding 7.1 million members during the reporting period. We believe that the company's full-life cycle management model is superior and is expected to accelerate the release of the company's performance potential.

Outpatient coordination is expected to make additional contributions, and performance may stabilize and improve

Looking ahead to the second half of 2024, we believe that all regions may actively promote control measures such as out-of-hospital price comparison, but the pricing system of leading pharmacies is relatively reasonable, the impact is relatively small, and market concentration may increase at an accelerated pace with the implementation of policies. Furthermore, Guangdong Province's outpatient coordination policy may be implemented, which is expected to accelerate the prescription outflow process, and the revenue side growth rate is expected to increase. At the same time, the company continues to optimize its product structure to increase consumer stickiness, and retail business gross profit growth may accelerate. Considering that the company continues to reduce costs and increase efficiency, and the performance base for the second half of '24 is low, the company's performance may stabilize and improve in the second half of the year.

The franchise business affects gross profit margin, and the rest of the indicators are basically normal

In the first half of 2024, the company's comprehensive gross margin was 34.89%, down 2.55 percentage points year on year, mainly due to an increase in the share of wholesale business with low gross margin and a decrease in sales of high-margin products; the sales expenses ratio was 22.67%, up 1.14 percentage points year on year, mainly due to the increase in the size of new stores and sub-new stores; the management fee ratio was 4.30%, a decrease of 0.09 percentage points year on year, and remained stable; the financial expense ratio was 0.77%, down 0.04 percentage points year on year, basically stable. Net cash flow from operating activities increased 19.61% year over year. The number of inventory turnover days was 87.69 days, down 8.37 days from year on year, mainly due to the company's optimized inventory management; the number of accounts receivable turnover days was 15.96 days, an increase of 0.17 days over the previous year, which remained stable; and the number of accounts payable turnover days was 60.92 days, a decrease of 5.71 days year on year, mainly due to the expansion of sales scale. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 27.862 billion yuan, 31.899 billion yuan and 36.848 billion yuan respectively, up 13.58%, 14.49% and 15.52% year on year, respectively, and net profit to mother of 1.178 billion yuan, 1.362 billion yuan and 1,583 billion yuan respectively, up 1.02%, 15.58% and 16.25% year over year, respectively, equivalent to EPS of 1.03 yuan/share and 1.20, respectively Yuan/share and 1.39 yuan/share correspond to valuations of 13.0X, 11.2X, and 9.7X, respectively, maintaining the purchase rating.

Risk analysis

1) Risk of changes in industry policies: If a country or locality introduces measures favorable to drug sales in medical institutions or policies restricting the development of the retail pharmacy industry in the process of medical system reform, it may adversely affect the company's operations; 2) Market competition intensifies: the concentration of the industry gradually increases, and competition may become more intense, which may adversely affect the company's operations; 3) The progress of scale expansion falls short of expectations: If the expansion of store size falls short of expectations, the company's long-term performance growth potential may not be unleashed, or has an adverse effect on the company's long-term performance growth 4) The integration of mergers and acquisitions stores does not meet expectations: Purchase Projects, if the company does not meet expectations in terms of subsequent business integration, personnel integration, performance improvement, etc., may affect the company's operating performance; 5) Goodwill impairment calculation:

The company's merger and acquisition assets have a certain amount of goodwill. If subsequent operations fall short of expectations, or there is a risk of impairment, affecting profit growth; 6) There is a risk that one of the company's actual controllers will be detained: Ke Jinlong, one of the company's actual controllers, but the actual controller is less involved in the company's operations, and the subsidiary involved has little impact on the company's overall business, and subsequent risks are relatively manageable; 7) Maoming Dashenlin Chain Pharmacy Co., Ltd., a wholly-owned subsidiary of the company, received a “Notice of Case Filing” issued by the Maoming Municipal Supervisory Commission on August 18, 2023. The company's historical wholesale business, The company's main business focuses on the retail business of pharmacy chains. In the period 2020-2022, the company's sales to the customers involved in the case accounted for 0.25%, 0.20% and 0.15% of the company's revenue, which was relatively low, and had little impact on subsequent operations; 8) The company received a “Criminal Judgment” issued by the People's Court of Dianbai District, Maoming City, Guangdong Province. The specific verdict was as follows: 1. The defendant unit, Maoming Dashenlin Pharmacy Chain Co., Ltd. committed the crime of bribery by the unit and was fined RMB 4 million yuan. 2. Defendant Ke Jinlong committed the crime of corporate bribery and was sentenced to three years and six months in prison and a fine of RMB 500,000 yuan. The company received the “Criminal Ruling” on the second trial of this case from the Maoming Intermediate People's Court of Guangdong Province on around July 10. The ruling was as follows: the appeal was rejected and the original judgment was upheld. This ruling is final. The relevant subsidiary accounts for a relatively small share of business revenue. Ke Jinlong himself is not currently holding any position in Dashenlin and is not involved in any management affairs of Dashenlin. The matters involving Ke Jinlong's lawsuit will not have a significant adverse impact on Dashenlin's normal production and operation. Furthermore, the results of the second trial ruling of this lawsuit had little impact on the company's profit and loss, and will not affect the company's normal production and operation.