Incident: The company released its annual report for the year 20223 and the quarterly report for 2024. In 2023, it achieved operating income of 24.531 billion yuan (yoy +15.45%), net profit attributable to mother of 1,166 billion yuan (yoy +12.63%), after deducting net profit of 1,141 billion yuan (yoy +13.56%). The first quarter of 2024 achieved operating income of 6.752 billion yuan (yoy +13.54%), net profit of 398 million yuan (yoy -19.79%), and net profit of non-return to mother of 396 million yuan (yoy -20.4%).
Comment:
The franchise and distribution business doubled in 2023, and 2024Q1 revenue continued to grow steadily and the profit side was under pressure in the short term. ① The company's operating income and net profit to mother achieved steady growth in 2023. In terms of business structure, the company's pharmaceutical retail business revenue in 2023 was 20.508 billion yuan (accounting for 85.70% of total revenue), up 6.58% year on year, mainly due to the increasing number of direct-run stores and endogenous growth of new and old stores; while the franchise and distribution business revenue was 3.423 billion yuan, up 122.46% year over year, the franchise and distribution business achieved rapid growth mainly due to the company's rapid layout in weak regions using direct-run franchisees. In terms of regional distribution, the company is deeply involved in South China and maintained steady sales growth through mature brand market effects. In 2023, South China's revenue was 16.412 billion yuan, up 7.86% year on year; Central China and East China had revenue of 2,288 billion yuan and 1,788 billion yuan respectively, with growth rates of 12.84% and 21.38%; Northeast China, North China, Southwest China and Northwest China had revenue of 3.444 billion yuan, a growth rate of 66.84%. The rapid growth in this region was mainly due to store mergers and acquisitions in this region. ② The company's revenue continued to grow in the first quarter of 2024, while net profit without return to mother and net profit declined year on year. On the one hand, the company's gross margin fell 2.68 percentage points year on year in 2024Q1 (the gross margin of the company in 2024Q1 was 35.46%), and on the other hand, the company's expense ratio increased 0.74 percentage points year on year during the 2024Q1 period (the 2024Q1 company's expense ratio was 26.87%).
The nationwide layout of stores continues, with a net increase of 841 stores due to 2024Q1. ① At the end of 2023, the company's stores covered 19 provinces (autonomous regions and municipalities directly under the Central Government) across the country, and the number of stores reached 14074 (net increase of 4029 stores), including 9909 directly-managed stores and 4165 franchised stores. Judging from the composition of incremental stores, the company added 1,382 self-built stores in 2023, including 924 in South China, 136 in East China, 110 in Central China, and 212 in Northeast China, North China, Northwest China and Southwest China. In terms of mergers and acquisitions, the company consolidated a total of 750 stores in 2023, including 60 in East China and 690 in Northeast China, North China, Northwest China and Southwest China. In terms of franchise store layout, the company opened 2158 new franchise stores in 2023, including 1129 in South China, 224 in East China, 264 in Central China, and 541 in Northeast China, North China, Northwest China and Southwest China. ② The subsidiary of 2024Q1 has 14,915 stores (including 4610 franchisees), a net increase of 841 stores compared to the end of 2023. Judging from the composition of incremental stores, 2024Q1 opened 396 new stores, acquired 68 stores, 445 franchised stores, and closed 68 stores.
Profit forecast: We expect the company's revenue for 2024-2026 to be 29.73 billion yuan, 36.189 billion yuan, and 44.078 billion yuan respectively, with year-on-year growth rates of 21%, 22%, and 22%, respectively, and realized net profit to mother of 1,431 billion yuan, 17.66 yuan, and 2.197 billion yuan, respectively, up 23%, 23%, and 24% year-on-year respectively, corresponding to the current stock price PE, which is 18 times, 14 times, and 12 times, respectively.
Risk factors: Increased competition in the retail pharmacy market, risk of changes in health insurance policies, risk of changes in tax policies, falling short of expectations in store expansion, poor integration of mergers and acquisitions, and risk of impairment of goodwill.