Core views
On April 26, the company released its performance report for the first quarter of 2024, achieving operating income of 70.153 billion yuan, an increase of 5.93% over the previous year, a net profit of 1,542 billion yuan, an increase of 1.62% over the previous year, and net profit after deduction of 1,375 billion yuan, an increase of 1.30% over the previous year. The performance was in line with our expectations. Looking ahead to 2024, the impact of in-hospital compliance sales is stabilizing, the integration of the commercial sector is basically completed, and the distribution business is expected to achieve steady growth; cost reduction and efficiency in the industrial sector are progressing steadily, traditional Chinese medicine and innovative drug products are expected to contribute additional increases, and there is little pressure on the subsequent performance base. We expect the company's business to improve in 2024.
occurrences
The company released its performance report for the first quarter of 2024. The results are in line with our expectations. On April 26, the company released the first quarter results report, achieving operating income of 70,153 billion yuan, up 5.93% year on year, achieving net profit of 1,542 billion yuan, up 1.62% year on year, and achieving net profit without deducted from mother of 1,375 million yuan, up 1.30% year on year, and achieved earnings per share of 0.42 yuan. The performance was in line with our expectations.
Brief review
The commercial sector is growing steadily, and cost reduction and efficiency are progressing steadily
In the first quarter of 2024, the company's revenue side increased by 5.93%, mainly due to the steady growth of 8.19% in the commercial sector to 63.209 billion yuan, and the industrial sector was under slight pressure. Net profit to mother increased 1.62% year on year, and net profit without return to mother increased 1.30% year on year. The growth rate was slightly lower than on the revenue side, mainly due to: 1) high pressure on the profit side; 2) price cuts on some products in the industrial sector, which put slight pressure on the profit side in the first quarter; 3) the company continued to promote cost reduction and efficiency, and the sales expenses rate fell 1.22 percentage points in the first quarter.
The industrial sector was under pressure for a short time, and the innovation system was gradually improved
In the first quarter of 2024, the company's pharmaceutical industry sales revenue was 6.944 billion yuan, down 10.98% year on year, contributing profit of 674 million yuan, down 4.06% year on year, mainly due to price cuts for some industrial products. In recent years, the company has actively built an open and diversified innovation system of “independent research and development+merger and acquisition introduction+incubation cultivation”. Many new drug pipelines and innovative incubation and cultivation projects have made phased progress, and are expected to contribute more in the future. Furthermore, the company continues to promote the release of large varieties of traditional Chinese medicines, greatly increasing sales revenue of over 100 million varieties such as Shengmai Drink, Gastric Rejuvenation, and Rokushin Pills. We believe that as the company continues to improve terminal coverage, optimize commercial layout, and explore overseas markets and outpatient markets, etc., the company's traditional Chinese medicine business is expected to show a steady growth trend. Combined with products under development, it is expected to drive long-term steady growth in the industrial sector.
The business sector is growing steadily, and innovative businesses optimize profitability
In the first quarter of 2024, the company's commercial sector revenue increased 8.19% year on year to 63.209 billion yuan, contributing profit of 832 million yuan, up 0.50% year on year. Sales of some high-margin products declined mainly due to changes in product structure. In the first quarter of 2024, the company actively built diversified innovative businesses, contributing to the subsequent increase in profitability. 1) Continuously stabilizing the innovative drug import service business: In the first quarter of 2024, the company focused on building a life cycle service platform for innovative drugs, successfully introduced 4 imported varieties, and sales in the innovative drug sector increased by about 33% year on year; 2) Making every effort to build a CSO service system: In 2023, the company and Sanofi reached a contract sales strategy cooperation with a contract size of over 5 billion yuan. The overall drug CSO contract promotion business achieved sales volume of about 1.7 billion yuan, an increase of about 128% over the previous year; 3) Vaccine terminal promotion team: The company continued to promote imported vaccine terminals The promotion team building has now increased from 340 people in the first quarter of 2023 to more than 720 people. We believe that the company's commercial sector continues to promote structural optimization, and the profitability and growth performance of the innovative business are relatively good, which is expected to drive the high-quality development of the commercial sector.
The commercial sector is expected to grow steadily, and cost reduction and efficiency will continue to advance
Looking ahead to 2024, we believe that the impact of in-hospital compliance sales is stabilizing, the company's in-hospital distribution business revenue is expected to show a steady growth trend. Combined with a steady increase in innovative business, profitability is expected to continue to be optimized. In the industrial sector, the company continues to promote a large variety strategy. The Chinese medicine sector is expected to show a steady growth trend, and the innovative drug business may contribute additional growth, but considering that chemical stocks are under slight pressure due to price cuts, the overall revenue of the industrial sector may maintain steady growth. Furthermore, the north-south integration of the company's commercial sector has already been completed, and the results of cost reduction and efficiency may gradually be reflected. Considering that the profit side was affected more at once in 23 and the base for the next three quarters was low, the company's profit side growth is expected to accelerate markedly in 24 years.
Product price reduction affects gross profit margin, and fee control effects are gradually reflected
In 2023, the company's comprehensive gross margin was 11.44%, down 1.60 percentage points from the previous year, mainly due to price cuts for some of the company's high-margin products.
The management expense ratio was 1.98%, down 0.10 percentage points from the previous year, and the fee control effect was obvious; the sales expense ratio was 4.69%, down 1.22 percentage points from the previous year, and the fee control effect was obvious; the financial expense ratio was 0.53%, down 0.10 percentage points from the previous year, and the fee control effect was obvious. Net cash flow from operating activities was -5473 billion yuan, mainly due to an increase in preparation expenses; the number of accounts receivable turnover days increased 2.65 days to 98.90 days and remained stable; the number of inventory turnover days was 51.04 days, down 1.0 day year on year, which remained basically stable; and the number of accounts payable turnover days fell 0.9 days year on year to 71.7 days, which remained basically stable. The rest of the indicators are mostly normal.
Profit forecasting and investment ratings
We expect the company to achieve operating income of 286.395 billion yuan, 318.720 billion yuan and 355.327 billion yuan respectively from 2024 to 2026, up 10.0%, 11.3% and 11.5% year-on-year respectively, and net profit to mother of 5,057 billion yuan, 5.633 billion yuan and 6.280 billion yuan respectively, up 34.2%, 11.4% and 11.5% year-on-year respectively, equivalent to EPS of 1.37 yuan/share, 1.52 yuan/share and 1.70 yuan/share, corresponding PE is 13.1X, 11.8X, 10.6X Maintain a buy rating.
Risk analysis
1) Risk of drug price reduction: The normalization of medical insurance fee control and payment method reform will push the prices of some drugs to be further lowered, which may have a great impact on the company's earnings;
2) New drug research and development risks: Innovative drug R&D projects have a long cycle and large investment, and there is some uncertainty about the relevant progress, approval results and timing. If the progress of new drug development falls short of expectations or R&D fails, or there is an adverse effect on the company's long-term revenue growth; 3) Market competition intensifies: market competition intensifies: major competitors or newcomers in the market may weaken the company's comparative advantage and sustainable development ability, which in turn affects the company's long-term development;
4) The performance of the subject matter of epitaxial mergers and acquisitions did not meet expectations, causing significant loss of goodwill: if the integration of the company's outsourcing targets falls short of expectations, it may cause loss of goodwill, which in turn will affect the company's performance.
5) Policy risk: The pharmaceutical industry is a highly regulated industry. Stringent policies may adversely affect the company's operations.