Core views

On the evening of October 29, the company released its results report for the third quarter of 2024, achieving operating income of 6.735 billion yuan, a year-on-year increase of 3.63%, achieving net profit of 0.101 billion yuan, a year-on-year decrease of 63.79%, and net profit after deduction of 0.097 billion yuan, a year-on-year decrease of 64.28%, achieving basic earnings per share of 0.65 yuan. The performance was lower than our expectations. Looking ahead to 24Q4 and '25, the Yunnan Provincial Outpatient Coordination Policy will gradually be implemented in early November, compounded by the continuous adjustment of the company's store structure and sales structure. We are optimistic about the steady release of the company's performance potential.

occurrences

The company released its report for the third quarter of 2024, and the results fell short of our expectations

On October 29, the company released its results report for the third quarter of 2024, achieving operating income of 6.735 billion yuan, a year-on-year increase of 3.63%, achieving net profit of 0.101 billion yuan, a year-on-year decrease of 63.79%, and net profit after deduction of 0.097 billion yuan, a year-on-year decrease of 64.28%, achieving basic earnings per share of 0.65 yuan. The performance was lower than our expectations.

Brief review

Improve operations month-on-month and continue to promote structural optimization

In the first three quarters of 2024, the company's revenue increased by 3.63% year on year, net profit to mother decreased by 63.79% year on year, and net profit after deducting net income to mother decreased by 64.28% year on year. In the third quarter of 2024, the company achieved operating income of 2.25 billion yuan, a year-on-year increase of 4.08%, achieved net profit of 0.038 billion yuan, a year-on-year decrease of 68.46%, and realized net profit of 0.031 billion yuan after deduction, a year-on-year decrease of 73.06%, and the decline narrowed compared to Q2.

The decline in profit was mainly due to: 1) due to policy and spending power, the share of the company's health insurance revenue declined, and the overall revenue growth rate slowed; 2) the number of new stores and the rigid cost-side growth rate exceeded the revenue growth rate. The sales expense ratio increased 2.32 percentage points to 29.98% in the third quarter, and the management expense ratio increased 0.8 percentage points to 3.03%.

The store structure continues to be adjusted, and the pace of expansion is slowing down

In the first three quarters of 2024, the company built 288 stores and acquired 122 stores, a net increase of 385 stores. At the end of the period, the total number of stores reached 5501, including 2,920 pharmacy stores in Yunnan, which further declined to 56.48%, and the number of stores in Chongqing was 601, further expanding its scale advantage. Considering competitive pressure and policy development trends in various regions, the company continues to implement the expansion strategy of “penetrating downward with central cities as the core”. On the basis of consolidating the provincial capital market, the focus is on increasing the size of prefecture-level and county-level market stores with large room for development and strengthening brand building and operation. The number of stores above the county level of the company accounts for 94.76%. We believe that with the gradual improvement of the company's store layout in various regions and the gradual completion of store restructuring, revenue and profit growth may accelerate.

The advantages of specialization are obvious, and multi-channel collaborative development

As of September 30, 2024, the company had a total of 758 chronic disease stores, 314 specialty stores, 249 dual-channel qualified stores, and 1,059 co-ordinated stores, accounting for 20.48% of the total number of pharmacies. By the end of September 2024, the company had registered a total of 3.622 million chronic disease members, an increase of 74.9% over the same period last year, and deployed “four high” testing equipment at 2207 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 September 2024, the number of specialty pharmacies in the company reached 1,512, accounting for 29.25% 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 12.50% year-on-year to 1.804 billion yuan in the first half of 2024. We believe that the company continues to focus on specialized competitive advantages, optimizes channels and product structures, and there is still plenty of room for revenue and gross profit growth.

Outpatient coordination in the Yunnan region is being implemented at an accelerated pace. We are optimistic about the 25-year business improvement outlook for 24Q4 and 25. We believe that all regions may actively promote control measures such as out-of-hospital price comparison, but the pricing system for leading pharmacies is relatively reasonable and has relatively little impact, and with the implementation of the policy, market concentration may increase at an accelerated pace. Currently, the overall policy for outpatient clinics in Yunnan Province may be implemented at an accelerated pace after November. 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. In addition, the company's revenue structure continues to improve, prescription drug products are abundant, the high-margin category layout is relatively perfect, and online business development continues to contribute additional increases, and the performance is expected to continue to improve.

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

In the first three quarters of 2024, the company's comprehensive gross margin was 36.19%, up 0.31 percentage points year on year, mainly due to the increase in sales share of some high margin products; the sales expense ratio was 29.28%, up 2.91 percentage points year on year, mainly due to the impact of opening new stores; the management fee ratio was 2.79%, up 0.70 percentage points year on year, mainly due to the increase in business scale; and the financial expense ratio was 1.55%, up 0.10 percentage points year on year, and remained stable. Net cash flow from operating activities decreased by 29.18% year-on-year and remained stable. The number of inventory turnover days was 175.18 days, an increase of 32.16 days over the previous year, mainly due to the increase in the number of stores; the number of accounts receivable turnover days was 17.75 days, down 3.98 days from the previous year, mainly due to the high base of the previous year; and the number of payable turnover days was 119.45 days, down 4.48 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 9.394 billion yuan, 10.429 billion yuan and 11.767 billion yuan respectively from 2024 to 2026, up 3.4%, 11.0% and 12.8% year on year, and net profit to mother of 0.196 billion yuan, 0.281 billion yuan and 320 million yuan respectively, up -52.7%, 43.5% and 13.8% year on year, respectively, equivalent to EPS of 1.25 yuan/share, 1.79 yuan/share and 2.04 yuan/share, corresponding to valuations of 22.1X, 15.4X, and 13.6X, 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 October 31, November 1, and November 4, 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 significant 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 and shares Important matters such as issuance, acquisition, debt restructuring, business restructuring, asset divestment, asset injection, share repurchase, 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.