Incident: Shouxianggu released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 784 million yuan (-5.39% year over year); net profit of 254 million yuan (-8.39% year over year); net profit after deducting non-return to mother of 227 million yuan (-10.45% year over year); 2024Q1 achieved operating income of 221 million yuan (+7.15% year over year); net profit without return to mother of 68 million yuan (YoY +22.3%), The 2023 results are under pressure, and 2024Q1 results are in line with expectations.

The 2023 results were under pressure due to macroeconomic impacts. By product, in 2023, Ganoderma lucidum spore powder products achieved revenue of 534 million yuan (-7.92% YoY); dendrobium officinale products achieved revenue of 127 million yuan (-2.03% YoY); and other products achieved operating income of 110 million yuan (+1.07% YoY). Affected by macroeconomics, the target customer base's consumption was downgraded, but the 24Q1 revenue side improved. By region, in 2023, Zhejiang Province achieved revenue of 478 million yuan (-8.49% YoY); outside Zhejiang Province achieved revenue of 80 million yuan (-17.89% YoY); and the Internet achieved revenue of 212 million yuan (+7.35% YoY). Consumers outside the province are expected to be less sticky than those within the province and are greatly affected by the external environment.

Expansion outside the province continues to advance. The company continues to carry out the “Top 100 Thousand Stores” campaign, vigorously developing the country's top 100 OTC channels, medical channels, and FMCG channels, adding specialty stores in key markets, and increasing the number of “Shouxiangu Pharmacy+Specialty Stores” (direct management). In addition, the company actively promotes investment from outside the province, establishes new channels of cooperation with other industries such as the wine industry, opens up high-end group buying channels, and breaks through the bottleneck where the company's product sales are supported by the direct management system. Since Shou Xian Valley began setting up offline specialty stores in 2021, the company has successively entered major cities across the country such as Nanjing, Suzhou, Kunming, and Lianyungang. In January 2024, Shouxiangu opened its first store in Wuhan, “Wuhan Wuguang Store”, Shouxiangu Jinjiang flagship store, and Shouxiangu Xuhui specialty store.

Give it an “gain” rating. The company's net profit for 24-26 is estimated to be 2.74/3.12/358 million yuan, respectively, up 7.9%/13.8%/14.7% year on year, and EPS is 1.36/1.55/ 1.78 yuan respectively. Currently, the corresponding stock price valuation is 20.0x/17.6x/15.3x, respectively. Given that the company has moats such as exclusive seed sources, organic cultivation, and patented technology, and that expansion outside the province continues to advance, it was given an “increase in weight” rating.

Risk warning: The macroeconomic economy is declining, expansion outside the province falls short of expectations, and there is a risk that sales will decline due to similar competition.