Key points of investment
Incident: Tong Ren Tang released its 2023 annual report. During the reporting period, it achieved revenue of 17.861 billion yuan (YoY +16.19%), net profit of 1,669 million yuan (YoY +16.92%, corresponding to the 2022 adjustment), net profit after deducting non-attributable net profit of 1,657 billion yuan (YoY +18.32%, corresponding to 2022 adjustments); Single Q4 achieved revenue of 4.140 billion yuan (YoY -7.44%), net profit of 2.79 billion yuan (YoY) -31.83%); performance is in line with expectations.
Focusing on the steady development of the main business, the pharmaceutical industry achieved revenue of 11.079 billion yuan in 2023, +12.60% over the same period last year. By treatment area, cardiovascular, and cerebrovascular class/supplement category/heat clearing/gynecology/others achieved revenue of 43.88/17.30/6.15/3.77/3,970 billion yuan respectively, an increase of 8.02%/10.41%/16.10%/8.16%/19.12% over the previous year. By product, the top five series were Angong Beef Huang Series, Tongren Niuhuang Qingxin Series, Wuzi Yanzong Series, Liuwei Dihuang Series, and Jinqu Renqi Series, which achieved total revenue of 4.953 billion yuan, an increase of 9.97% over the previous year. Their central cerebrovascular and supplement sales volume was 1684.71/36.118,900 boxes, respectively, -0.94%/+24.16%.
The pharmaceutical business performed well, achieving revenue of 10.246 billion yuan in 2023, +20.82% year-on-year. By the end of 2023, Tong Ren Tang Commercial had established a total of 1,001 Tong Ren Tang pharmacies, with a net increase of 59 stores in 2023, including 62 new stores and 3 closed stores. By region, the number of stores in North China/East China/South China/Others was 416/230/133/222, respectively, with a net increase of 22/12/9/16. Looking at the category structure, Chinese and Western proprietary medicines, drinks/health products, food/medical devices, and others accounted for 81.75%/17.25%/1.00% of total retail revenue, respectively, up to +2.63/-2.02/-0.61 pct. Among retail pharmacies, 630 have set up traditional Chinese medicine clinics, accounting for 62.94%; 783 have obtained the “Designated Medical Insurance Retail Pharmacy” qualification, accounting for 78.22%.
In terms of major controlling participating companies, Tong Ren Tang Technology/Tong Ren Tang Sinopharm and Tong Ren Tang Commercial achieved revenue of 67.73/13.77/10.345 billion yuan respectively, +13.04%/-7.94%/+20.94% YoY; net profit of 9.92/5.32/550 billion yuan, or -0.93%/-10.78%/+51.97% YoY. The parent company achieved revenue of 4.109 billion yuan, +11.21% year over year; net profit of 1,249 billion yuan, +14.49% year over year.
The level of profit has been rising steadily. The gross margin in 2023 was 47.29%, -1.51 pct. Among them, the gross margin of the pharmaceutical industry/pharmaceutical business was 46.97%/31.11%, respectively, -1.98/+0.16pct. By field of treatment, gross margins of cardiovascular and cerebrovascular class/supplement category/heat cleaning/gynecology/other categories were 57.62%/37.39%/34.97%/42.38%/41.65%, respectively, -3.58/-5.60/+0.58/+4.26/+1.40pct. By product, the gross margin of the top five series was 54.82%, down 5.44% year on year. The sales cost rate/management cost rate/R&D expense ratio were 19.24%/8.53%/1.57%, respectively, -0.74/-0.20/+0.15pct. Net interest rate without return to mother was 9.28%, +0.17pct year on year; weighted average ROE was 13.42%, +0.71pct year on year, increasing for 4 consecutive years.
Maintain a “buy” rating. We anticipate 2024-2026 net profit of 19.03/22.05/25.37 billion yuan, an increase of 14.01%/15.90%/15.04% year-on-year, and EPS of 1.39/1.61/1.85 yuan, corresponding to PE30.13x/26.00x/22.60x. Considering that the company is a leader in the traditional Chinese medicine industry, its core products have the ability to rise rapidly in volume and price, maintaining a “buy” rating.
Risk warning: risk of policy adjustments, risk of cost fluctuations, increased market competition