Core views

On October 28, the company released its results report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 442.423 billion yuan, a year-on-year decrease of 0.78%, and realized net profit of 5.279 billion yuan, a year-on-year decrease of 13.41%. The performance was lower than our expectations, mainly due to pressure on the equipment distribution business. Looking ahead to 24Q4 and 25, the company's pharmaceutical distribution business may maintain steady growth, device upgrading is expected to release growth, 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 that the company's long-term performance potential will be steadily released.

occurrences

The company announced its results for the third quarter of 2024. The results were lower than our expectations. On October 28, the company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 442.423 billion yuan, a year-on-year decrease of 0.78%, and realized net profit of 5.279 billion yuan, a year-on-year decrease of 13.41%. The performance was lower than our expectations.

Brief review

The equipment sector is under pressure, optimistic about 25 years of steady operation

In the first three quarters of 2024, the company's revenue fell 0.78% year on year, mainly due to pressure on the revenue of the subsidiary Sinopharm Devices, which fell 6.94% to 56.046 billion yuan in the first three quarters; 2) The pharmaceutical retail sector was affected by policies and competition, and sales were also under pressure; net profit to mother fell 13.41% year on year, mainly due to the impact of the category structure, the share of revenue from the high-margin device distribution business and gross margin declined simultaneously.

In the third quarter of 2024, the company achieved operating income of 147.696 billion yuan, up 1.88% year on year, mainly due to steady growth in the pharmaceutical distribution business; achieving net profit of 1.575 billion yuan, down 20.94% year on year, slower than revenue side growth. It is estimated that the overall gross margin decreased by 0.68 percentage points to 7.55% year on year, mainly due to the simultaneous decline in revenue share and gross margin of the device distribution business.

Key drug distribution regions grew steadily, and device distribution briefly came under pressure in the first three quarters of 2024. The company continued to increase the scale of key regions. The pharmaceutical distribution business performance in Jiangsu, Zhejiang, Shanghai, Central China, North China and Liangguang regions was relatively good. Furthermore, 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, and the business structure continued to be adjusted. In terms of device distribution, due to changes in the terminal demand structure, the share of revenue in categories with high gross margins such as medical equipment and IVD test reagents declined, and medical consumables remained relatively stable. The subsidiary Sinopharm's revenue in the first three quarters was 56.046 billion yuan, a decrease of 6.94% year on year; operating profit was 1.073 billion yuan, a decrease of 36.33% year on year. We believe that 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 gradually advance superimposed medical equipment upgrades, and the 25-year performance is expected to grow steadily.

We expect the equipment to gradually improve, and the 25-year performance is expected to grow steadily

Looking ahead to 24Q4 and 2025, 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 grow steadily along with the upgrading of devices. 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 three quarters of 2024, the company's comprehensive gross margin was 7.48%, down 0.41 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 2.89%, up 0.06 percentage points from the previous year, and remained stable; the management expense ratio was 1.20%, down 0.03 percentage points from the previous year, remaining relatively stable; the financial expense ratio was 0.34%, down 0.11 percentage points from the previous year, and the fee control effect was good. Net cash flow from operating activities was -47.718 billion yuan compared to -39.67 billion yuan in the same period last year, which remained stable. The number of inventory turnover days was 42.57 days, an increase of 0.75 days over the previous year, and remained stable; the number of accounts receivable turnover days was 132.33 days, an increase of 7.59 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 600.808 billion yuan, 633.876 billion yuan and 669.203 billion yuan respectively from 2024 to 2026, up 0.71%, 5.50% and 5.57% year on year, and realized net profit to mother of 8.155 billion yuan, 8.763 billion yuan and 9.398 billion yuan, respectively, up -9.92%, 7.46% and 7.24% year on year, equivalent to EPS of 2.61 yuan/share, respectively. 2.81 yuan/share and 3.01 yuan/share, corresponding PE is 6.9X, 6.4X, 6.0X, 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. Stringent policies may adversely affect the company's operations.