The company disclosed the 2023 annual report and the 2024 quarterly report. The revenue for 2023 was 24.531 billion yuan, up 15.5% year on year; net profit to mother was 1,167 billion yuan, up 12.6% year on year. 2024Q1's revenue was 6.752 billion yuan, up 13.5% year on year, and net profit attributable to mother was 398 million yuan. Under the influence of a high base, the year-on-year decline was 19.8%. The company opened 4290 new stores in 2023, and the total number of stores reached 14074. Store expansion accelerated markedly in 2023, which is expected to drive revenue growth in 2024.

Growth: Continued high store growth is expected to drive continued high revenue growth (1) Continued high growth in the number of stores, which is expected to drive revenue growth. In 2023, the company opened 4290 new stores, including 1,382 self-built stores, 2158 franchise stores, and 750 mergers and acquisitions. Compared with 2,071 new stores added in 2022 (including 689 self-built, 310 mergers and acquisitions, and 1,072 franchises), the pace of store opening has accelerated markedly. We believe that the high growth in the number of stores in 2023 is expected to drive revenue growth in 2024 and bring long-term revenue and profit contributions; on a quarterly basis, 2023H1 will increase by 1,944, and a net increase in 2023H2 There were 2,085 companies, and the distribution between quarters was relatively balanced, and the trend accelerated slightly in the second half of the year. We believe that increasing concentration is still the core logic of pharmacy chains, and the rapid growth in the number of company stores in 2023 is expected to lead to revenue growth in 2024 and long-term revenue and profit contributions.

(2) Coordinating the increase in the number of pharmacies, it is expected to accept more outflow prescriptions. In 2023, the company had 227 pharmacies specializing in DTP, 9100 designated stores with personal accounts, and 1985 designated stores with various types of co-ordinated reimbursement, including 1,281 outpatient co-ordinated stores, 574 dual-channel designated stores (457 at the end of 2022), and 1021 designated stores with slow doors (some stores obtained multiple designated reimbursement qualifications).

2023Q3, the implementation of co-ordinated stores in China is showing an accelerated trend. We believe that with the reform of health insurance accounts and the gradual implementation of co-ordinated stores, well-prepared pharmacy leaders are expected to take on the outflow of more prescriptions, leading to a continuous increase in revenue ceilings.

Profitability: gross margin or slight decline

(1) As the share of Chinese and Western proprietary medicines increases, gross margin may slow down. In 2023, the company's gross profit margin was 35.9%, down 1.9 pcts year on year; 2024Q1, the company's gross profit margin was 35.5%, down 2.7 pct year on year. We believe that with the company's regional expansion and the increase in the share of revenue from prescription drugs, etc., the company's gross margin may slow down; (2) rent efficiency and labor efficiency will increase. In 2023, the company's net interest rate was 5.02%, down 0.06pct from the previous year, but the sales expense ratio decreased by 1.4pct, and both rental efficiency and labor efficiency improved. We believe that as the company continues to sink and expand and the share of franchises increases, the company's leasing efficiency may still be improving, and the overall net interest rate is expected to remain relatively stable at around 5%.

Operating capacity: There is a clear upward trend in inventory turnover

In 2021-2023, the company's inventory turnover ratio (wind calculation value) was 3.28/3.52/3.90 (times), respectively. Driven by the strengthening of refined management and the increase in the share of franchised stores, etc., the inventory turnover ratio continued to rise. We believe that the company's continued digital investment is expected to bring about a steady improvement in SKU's refined management capabilities and drive an increase in inventory turnover.

Profit forecasting and valuation

Based on the above analysis, we expect the company's total revenue for 2024-2026 to be 295.27/366.52/ 44.414 billion yuan, respectively, up 20.37%, 24.13%, and 21.18% year on year; net profit to mother of 13.96/17.69/22.13 billion yuan, up 19.63%, 26.78%, and 25.10% year-on-year respectively, corresponding EPS of 1.23/1.55/1.94 yuan, corresponding to 18 times PE in 2024, maintaining the “increase in holdings” rating.

Risk warning

The risk of increased competition in the industry; the risk of policy changes; the risk of demand fluctuations.