Core views

In Q1 2014, the company achieved revenue of 1,227 billion yuan, a year-on-year decrease of 8.74% (after adjustment); realized net profit of 267 million yuan, an increase of 9.99% (after adjustment); and realized net profit without return to mother of 264 million yuan, an increase of 16.64% over the previous year (adjusted). Overall, the company's Q1 quarterly revenue base was under short-term pressure. Revenue structure and cost optimization drove profits to achieve steady growth, and profit growth in the main business exceeded expectations. Looking ahead to 24 years, as the company's OTC division continues to build a four-category layout around its core strengths, while actively developing health products, consolidating the prescription drug inventory business, and improving operational capabilities, the annual performance is expected to achieve healthy growth.

occurrences

Company releases report for the first quarter of 2024

On the evening of April 26, the company released its report for the first quarter of 2024, achieving total revenue of 1,227 billion yuan, a year-on-year decrease of 8.74% (adjusted); realized net profit of 267 million yuan, an increase of 9.99% (adjusted); realized net profit withheld from non-return to mother of 264 million yuan, an increase of 16.64% (adjusted); and profit growth in the main business exceeded our previous expectations.

Brief review

Under short-term pressure from a high revenue base, profit growth in the main business exceeded expectations

In Q1 2024, the company achieved revenue of 1,227 billion yuan, down 8.74% year on year (after adjustment). The short-term pressure on the revenue side was mainly due to the high base of core categories in the same period last year, compounding prescription drugs and Big Health declining revenue scale due to changes in product structure, etc.; achieving net profit to mother of 267 million yuan, an increase of 9.99% (adjusted) over the previous year (after adjustment). The profit side achieved rapid growth mainly due to the steady increase in the company's profitability and superposition of expenses such as brand promotion Caused by changes in rhythm. Overall, the company's Q1 quarterly revenue base was under short-term pressure. Revenue structure and cost optimization drove profits to achieve steady growth, and profit growth in the main business exceeded our previous expectations.

OTC stabilizes under high base, and prescription drugs and health are under pressure in the short term

Looking at the 2024 Q1 segment: 1) OTC business: achieved operating revenue of 1.07 billion yuan, an increase of 4.40% year on year. The revenue side of the growth rate of some products such as spleen, stomach, throat, cough, and asthma slowed slightly from a high base in the same period last year. The gross margin was 74.04%, an increase of 1.26 percentage points over the previous year, and profitability was steadily improved; by product, it is expected that products such as stomach health tablets and compound fresh bamboo extract will achieve good growth. 2) Big Health Business: Achieved operating income of 110 million yuan, down 40.33% year on year, gross margin of 40.69%, up 8.41 percentage points year on year. The revenue side decline was mainly due to the slowdown in product business development compared to the same period last year, compounding the company's focus on business, leading to a decline in revenue scale, but with changes in the business structure, the company's profitability improved significantly. 3) Prescription drug business: Achieved revenue of 105 million yuan, a year-on-year decrease of 43.97%, gross margin of 48.69%, a year-on-year decrease of 23.76 percentage points. The sharp decline in revenue and profit was mainly due to the fact that some product collection did not win the bid, and revenue scale and profitability were affected to a certain extent.

Looking forward to 24 years: The old two-wheel drive OTC brand has been revitalized, which is expected to drive steady growth in annual performance. Looking ahead to 24, the company will focus on the development of “large single products and strong categories” to enhance core competitiveness. In terms of OTC business, the company will continue to build the four categories of “spleen, stomach, intestines, cough, and mineral supplementation” to promote brand rejuvenation. As the company strengthens its core business and ensures endogenous growth, it is expected to continue to grow steadily in 24 years, driven by core products such as stomach health tablets, lactobacillins, and compound herbal coral tablets. In terms of the health business, the company will continue to explore innovative marketing models, strengthen product echelon construction, optimize positioning and strategies, initially promote brand image upgrading, and optimize the category layout of the probiotic series. As the company continues to sort out development positions and accelerate online transformation and new media promotion in exploration, it is expected to maintain a good growth trend in 24 years. In terms of prescription drugs, the company will consolidate the foundation for compliance development and steadily improve operational capabilities; as the company continues to improve the quality of coverage of the original prescription drug business, strengthen product promotion, actively cultivate new categories, and strengthen integrated development with Hayes Pharmaceuticals to actively respond to external risks such as collection, etc., it is expected that it will gradually recover in 24 years.

Overall, as the impact of the company's marketing organization restructuring gradually weakens, the OTC sector continues to build four major categories around its core advantages, while actively promoting health products, consolidating the prescription drug inventory business and improving operational capacity. The annual performance is expected to achieve healthy growth.

Gross profit margin has increased steadily, and the quality of operations has remained healthy

According to retrospectively adjusted data: in 2024 Q1, the company's comprehensive gross margin was 68.77%, up 1.56pp year on year, estimated mainly due to changes in revenue structure; sales expense ratio reached 36.76%, a decrease of 3.25pp year on year, mainly affected by the pace of brand promotion and other expenses; management expenses reached 3.25%, a decrease of 0.50pp year on year, ideal cost control effect; R&D cost ratio reached 2.33%, up 0.35pp year on year, mainly due to the company's continuous increase in R&D investment layout and innovative R&D; resulting from business activities Net cash flow increased 10.38% year over year, and generally maintained steady growth. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

As an established OTC enterprise of China Resources Pharmaceutical Holdings, the company has focused on the three key business layouts of OTC, Big Health, and Prescription Drugs for many years; we believe that as the company's OTC sector focuses on core advantages, adheres to the development path of large categories and single products, consolidates the “practitioner of regular medicines at home” business position, while actively promoting health products and strengthening clinical lines, “endogenous+epitaxial” dual-wheel drive development can be expected to grow in the future, and established OTC companies are expected to flourish. We expect the company to achieve operating income of 5,045 billion yuan, 5.766 billion yuan and 6.573 billion yuan respectively, and net profit to mother of 810 million yuan, 922 million yuan and 1,047 million yuan respectively, equivalent to EPS (diluted) of 1.29 yuan/share, 1.46 yuan/share and 1.66 yuan/share, respectively, with year-on-year increases of 14.3%, 13.8% and 13.6%, respectively. Corresponding PE is 20.7x, 18.2x and 16.0x respectively, maintaining the “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment increases. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profits; 2) the risk of collection and price reduction, the company's core products may further enter the collection list, reduce product prices, and thereby affect the company's profit expectations; 3) Risk of fluctuations in raw material prices: the price of Chinese herbal medicines will be affected by various factors such as the macro environment, natural disasters, and planting conditions. It is likely to fluctuate greatly. If the price of traditional Chinese medicine raw materials rises, the company's production costs may rise sharply, which in turn affects the company's production costs. Profit; 4) Reform falls short of expectations: If the effect of the reform falls short of expectations, it may affect the company's profit expectations.