Core views

On the evening of August 29, the company released its 2024 semi-annual performance report, achieving operating income of 4.485 billion yuan, a year-on-year increase of 3.40%, a year-on-year net profit of 0.063 billion yuan, a year-on-year decrease of 60.23%, and a net profit of 0.066 billion yuan after deduction, a year-on-year decrease of 57.76%, achieving basic earnings per share of 0.41 yuan. The performance was lower than our expectations. Looking ahead to the second half of the year, the overall outpatient policy in Yunnan Province is expected to be implemented at an accelerated pace. The company's store structure will continue to be adjusted, and equity incentives will be combined to motivate core employees. We are optimistic about the steady release of the company's performance potential.

occurrences

The company released its 2024 semi-annual report. The performance was lower than our expectations. On August 29, the company released the 2024 semi-annual performance report, which achieved operating income of 4.485 billion yuan, a year-on-year increase of 3.40%, achieved net profit of 0.063 billion yuan, a year-on-year decrease of 60.23%, and realized net profit of 0.066 billion yuan without deducted return to mother, a year-on-year decrease of 57.76%, achieving basic earnings per share of 0.41 yuan. The performance was lower than our expectations.

Brief review

New store consolidation affects performance, and gross margin is improving steadily

In the first half of 2024, the company's revenue increased by 3.40% year on year, net profit to mother decreased by 60.23% year on year, and net profit after deducting net income decreased by 57.76% year on year. In the second quarter of 2024, the company achieved operating income of 2.171 billion yuan, a year-on-year increase of 0.01%, achieved net profit of 0.011 billion yuan, a year-on-year decrease of 87.02%, and realized net profit of 0.015 billion yuan after deduction, a year-on-year decrease of 81.17%, mainly due to: 1) Affected by policies and consumption power, the share of the company's health insurance revenue declined, and the overall revenue side growth rate slowed; 2) The number of new stores and the rigid growth rate on the cost side exceeded revenue growth in the second quarter. It increased 3.28 percentage points to 30.14%, and the management fee ratio increased 1.01 percentage points to 3.06%.

The store structure continues to be adjusted, and the layout is hierarchical outside of Yunnan Province

In the first half of 2024, the company built 254 stores and acquired 81 stores, a net increase of 328 stores. At the end of the period, the total number of stores reached 5,444, including 2,897 pharmacies in Yunnan, accounting for a further drop to 56.80% of the country's pharmacy stores. The number of stores in Chongqing was 602, and the scale advantage was further expanded. Considering the competitive advantages of each region, the company has now determined the development strategies of each province: 1) establishing Yunnan and Hebei as the first tier, and the Yunnan region is mainly self-built; Hebei continues to consolidate, cultivate, and intensively distribute through self-construction and acquisitions to achieve channel sinking; 2) Chongqing and Liaoning are the second tier. Among them, Chongqing continues to penetrate provincial and county markets, and the number of stores in the Liaoning region continues to increase; 3) Sichuan and Guangxi are the third tier, and will continue to encrypt and distribute locations in weak regions. Looking ahead to the second half of the year, we believe that the growth rate of the company's store size may slow down, but with the gradual improvement of the company's store layout in various regions, revenue and profit growth may accelerate.

Continue to lay out specialized stores and develop online and offline collaboratively

As of June 30, 2024, the company had a total of 631 chronic disease stores, 228 specialty stores, 147 dual-channel qualified stores, and 863 co-ordinated stores, accounting for 16.92% of the total number of pharmacies. By the end of June 2024, the company had registered 3.2 million chronic disease members, an increase of 77.38% over the same period last year, and deployed “four high” testing equipment in 2177 stores to continue improving the chronic disease professional service system. In addition, the company continues to build specialty pharmacies for dermatology, ophthalmology, respiratory diseases, diabetes, and cardiovascular diseases. By the end of June 2024, the number of specialty pharmacies in the company reached 1,448, accounting for 28.39% of the total number of pharmacies. In terms of sales channels, the company insists on building an omni-channel marketing platform. Traditional e-commerce businesses, self-operated O2O platforms, and third-party O2O platforms joined forces. The online business increased 10.27% year-on-year to 1.166 billion yuan in the first half of 2024. We believe that the company continues to focus on specialized competitive advantages, continuously optimizes its channel structure, and still has plenty of room for revenue and gross profit growth.

Outpatient coordination is expected to be implemented at an accelerated pace, and we are optimistic that business will improve in the second half of the year

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. At present, a draft for comments on the overall policy for outpatient clinics in Yunnan Province has been distributed, and implementation is expected to be accelerated in the second half of the year. Considering the relatively large reimbursement rate of retail pharmacies, it may continue to drive consumers to the out-of-hospital market, driving a steady increase in the number of store transactions of leading enterprises. Considering the continuous improvement of the company's revenue structure, the abundance of prescription drug products, the relatively perfect layout of high-margin categories, and the continuous contribution of online business development to additional growth, the performance is expected to continue to improve in the second half of the year.

Gross margin has been rising steadily, and there is plenty of room for cost savings

In the first half of 2024, the company's comprehensive gross margin was 35.89%, up 1.08 percentage points year on year, mainly due to the increase in sales share of some high margin products; the sales expense ratio was 28.93%, up 3.21 percentage points year on year, mainly due to the impact of opening new stores; the management expenses ratio was 2.67%, up 0.64 percentage points year on year, mainly due to the increase in business scale; and the financial expenses ratio was 1.52%, an increase of 0.03 percentage points year on year, which remained stable. Net cash flow from operating activities decreased by 47.18% year on year, mainly due to the high settlement amount of current futures payments. The number of inventory turnover days was 164.20 days, an increase of 27.99 days over the previous year, mainly due to the increase in the number of stores; the number of accounts receivable turnover days was 17.93 days, down 4.13 days from the previous year, mainly due to the higher base of the previous year; and the number of days of accounts payable was 117.99 days, down 3.49 days from the previous year, mainly due to the higher base of the previous year.

The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 9.401 billion yuan, 10.853 billion yuan and 12.559 billion yuan respectively from 2024 to 2026, up 3.5%, 15.4% and 15.7% year on year, and net profit to mother of 0.249 billion yuan, 0.287 billion yuan and 335 million yuan respectively, up -40.0%, 15.3% and 16.8% year on year, respectively, equivalent to EPS of 1.59 yuan/share, 1.83 yuan/share and 2.14 yuan/share, corresponding to valuations of 12.0X, 10.4X, and 8.9X, respectively. Considering that the company is greatly affected by transient factors, subsequent growth attributes are still strong, maintaining a “buy” rating.

Risk analysis

1) Stricter health insurance policies: if health insurance policies become stricter and fee control requirements are higher, overall drug prices may fall further, and the company's profit margins may face greater pressure;

2) The progress of store expansion is lower than expected: if the expansion of store size falls short of expectations, the company's long-term performance growth potential may not be unleashed, or there may be an adverse effect on the company's long-term revenue growth;

3) Decline in store profitability: If the company's detailed management is not implemented in the later stages, it may reduce the profitability of stores, which will adversely affect the company's long-term profit margins;

4) The progress of the outflow of prescriptions is lower than expected: If the progress of the outflow of prescriptions falls short of expectations, the business growth brought about by the outflow of prescriptions on the store-side will decrease, affecting the release of performance.

5) On September 3, September 4, and September 5, 2024, the daily closing price increase deviation value of Jianzhijia shares exceeded 20%. After self-inspection by the company and written confirmation with the controlling shareholder Shenzhen Changsixing Industrial Development Co., Ltd. (hereinafter referred to as “Changsixing”) and actual controllers Lan Bo and Shu Chang, as of the date of this announcement, there were no major matters affecting the abnormal fluctuations in the company's stock transactions. There were no other important information relating to the company that should be disclosed but not limited to major asset restructuring, share issuance, and acquisitions Important matters such as debt restructuring, business restructuring, asset divestment, asset injection, share repurchases, equity incentives, bankruptcy and restructuring, major business cooperation, and introduction of strategic investors. The company is currently operating normally, and there have been no major changes in the daily business conditions or external environment.