Core views

On August 28, the company released its 2024 semi-annual performance report. 24H1 achieved operating income of 37.786 billion yuan, a year-on-year decrease of 1.57%, realized net profit of 0.743 billion yuan, a year-on-year decrease of 10.45%, and realized net profit of 0.711 billion yuan after deduction, a year-on-year decrease of 10.48%, achieving basic earnings per share of 1.34 yuan. The performance was lower than our expectations. In the second half of 2024, the company's distribution business is expected to achieve steady growth, the impact of retail policies is expected to gradually weaken, and the combined outpatient coordination policy will continue to be implemented. Performance may improve steadily. We expect operational improvements in the second half of the year.

occurrences

The company released its 2024 semi-annual results report. The performance was lower than our expectations. On August 28, the company released the 2024 semi-annual performance report. 24H1 achieved operating income of 37.786 billion yuan, a year-on-year decrease of 1.57%, and realized net profit to mother of 0.743 billion yuan, a year-on-year decrease of 10.45%, and realized net profit without deduction of 0.711 billion yuan, a year-on-year decrease of 10.48%, achieving basic earnings per share. The performance was lower than our expectations.

Brief review

The distribution sector is operating steadily, and the retail business is under slight pressure

In the first half of 2024, the company's revenue side grew by 1.57%, mainly due to: 1) a steady 2.11% increase in revenue in the distribution sector, reaching 27.079 billion yuan; 2) the impact of out-of-hospital retail policies was significant, and retail business revenue fell 9.30% year on year to 11.202 billion yuan. Net profit to mother fell 10.45% year on year. Net profit after deduction fell 10.48% year on year, slower than revenue growth, mainly due to: 1) delays in repayment of distribution business and increased capital costs, net profit fell 1.48% year on year; 2) retail business was affected by policies such as coordination, and net profit fell 104.81% year on year to -0.014 billion yuan.

In the second quarter of 2024, the company achieved operating income of 18.695 billion yuan, a year-on-year decrease of 5.10%, mainly due to factors such as a decrease in incremental capital in individual accounts, and realized net profit of 0.355 billion yuan, a year-on-year decrease of 24.21%, achieving net profit not deducted to mother 0.342 billion yuan, a year-on-year decrease of 22.85%. The revenue side was slow, mainly due to: 1) Increased capital costs in the distribution sector and a decrease of 9.58% in the second quarter. 0.283 billion yuan; 2) The retail sector was affected by category restructuring and competition, and net profit fell 161.9% to -0.091 billion yuan in the second quarter.

The two wings of the distribution sector are being deployed at an accelerated pace, the retail sector continues to adjust and the two wings continue to deepen, and the distribution business is expected to grow steadily. In the first half of 2024, the company's distribution sector achieved operating income of 27.079 billion yuan, a year-on-year increase of 2.11%, and achieved net profit of 0.523 billion yuan, a year-on-year decrease of 1.48%. The net interest rate decreased slightly by 0.07 percentage points to 1.93%. Mainly due to delays in payables due to the impact of the business environment, the scale of capital occupation increased, and the corresponding increase in capital costs. Looking ahead to the second half of the year: 1) In terms of traditional business, the company will still focus on increasing share and gross profit, comprehensively strengthening the integration of category planning, supplier management, entry service capabilities, import management, and purchasing and sales linkage, and the quality of operation is expected to continue to improve; 2) In terms of retail business, the advantages of integrated approval and distribution are gradually highlighted. The retail diagnosis and treatment business may accelerate contribution growth under the trend of prescription outflow. The retail direct sales business continues to promote marketing transformation, and the results of cost reduction and efficiency are expected to be reflected; 3) In terms of innovative business, the company will focus on 4D business (SPD consumables, IVD test materials business) Pharmaceutical business, MED (Equipment maintenance, CSSD decontamination business) Effectively build core service capabilities and active expansion capabilities, and are expected to accelerate the increase in contributions in the second half of the year.

The base figure affects the retail sector's performance and is optimistic that the retail business will be steady and improving. In the first half of 2024, the company's retail sector achieved revenue of 11.202 billion yuan, a year-on-year decrease of 9.30%, and realized net profit of -0.014 billion yuan, a year-on-year decrease of 104.81%, and net interest rate fell 2.57 percentage points to -0.12% year-on-year, mainly due to: 1) sales of high-margin emergency supplies such as physico-chemical diagnosis and masks in the same period last year; 2) Some regions were greatly affected by policies such as outpatient coordination. We believe that at this stage, the company's retail business is gradually being adjusted, the level of store management and marketing capabilities are constantly being strengthened, and the product system is being continuously optimized. We are optimistic that the company's retail sector will be steady and improving.

The distribution business is growing steadily, and I am optimistic about the steady improvement of the retail sector

Looking ahead to the second half of 2024, we believe that all regions may actively promote control measures such as out-of-hospital price comparison, but the pricing system of leading pharmacies is relatively reasonable, the impact is relatively small, and market concentration may increase at an accelerated pace with the implementation of policies. Overall, demand for in-hospital medication in the Liangguang region is expected to be released steadily. Combined, the company will continue to promote the transformation of in-hospital business and increase the development of out-of-hospital business and innovative business. We are optimistic about the steady growth of the company's distribution business. At the same time, as the company's retail sector continues to be adjusted, management capabilities and operational efficiency are improved, and superimposed products and organizational structures are continuously optimized, we are optimistic that the company's retail business revenue and profitability will improve steadily, and the long-term performance potential is expected to gradually be unleashed.

The revenue structure affects gross profit margin, and the rest of the indicators are basically normal

In the first half of 2024, the company's gross sales margin was 10.96%, down 0.63 percentage points year on year, mainly due to a decrease in retail revenue share and a decrease in retail business gross margin; sales expenses ratio was 6.99%, up 0.21 percentage points year on year, which remained stable; management expenses ratio was 1.35%, down 0.03 percentage points year on year, with good fee control effect; financial expenses ratio was 0.32%, up 0.13 percentage points year on year, mainly due to delays in downstream repayment. Net cash flow from operating activities decreased by 37.47% year over year, mainly due to downstream repayments. The number of inventory turnover days was 43.85 days, an increase of 0.39 days over the previous year, and remained stable; the number of accounts receivable turnover days was 96.75 days, an increase of 13.08 days over the previous year, mainly due to the slowdown in downstream payments; and the number of payable turnover days was 57.43 days, an increase of 4.02 days over the previous year, mainly due to the expansion of the company's size. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

The company is expected to achieve operating income of 79.161 billion yuan, 85.352 billion yuan and 92,075 billion yuan respectively in 2024 to 2026, up 4.9%, 7.8% and 7.9% year on year, respectively. Net profit to mother is 1.621 billion yuan, 1.727 billion yuan and 1,847 billion yuan respectively, up 1.3%, 6.6% and 6.9% year on year, respectively, equivalent to EPS of 2.91 yuan/share, 3.10 yuan/share and 3.32, respectively Yuan/share, corresponding to valuations of 8.6X, 8.1X, and 7.6X, respectively, maintains a “buy” rating.

Risk analysis

1) Drug collection risk: The gradual expansion of the scope of centralized drug procurement may cause a certain risk of price reduction for the company, affecting some of the company's business profits. Moreover, as the number of winning products in volume procurement increases, its excessive scale may have a great impact on the company's operating income and profits.

2) Increased market competition: Major competitors or new entrants in the market may weaken the company's comparative advantage and sustainable development ability, thereby affecting the company's long-term development;

3) The progress of store expansion is lower than expected: if the expansion of store size falls short of expectations, the company's long-term performance growth potential may not be unleashed, or it may adversely affect the company's long-term revenue growth;

4) Accounts receivable turnover risk: If the company's accounts receivable cycle is extended or cannot be recovered, it may cause time and financial losses to the company.

5) Capital occupation risk: Sinopharm Group Zhijun (Suzhou) Pharmaceutical Co., Ltd. is a joint venture of the company. Its entrustment loan accounts for a total of 35.2138 million yuan of the company's capital. On May 11, 2021, the court ruled that Sinopharm Group Zhijun (Suzhou) Pharmaceutical Co., Ltd. went bankrupt. The company has already fully calculated bad debt provisions for this entrustment loan. If there is any remaining capital usage in the future, it may adversely affect the company's cash flow.

6) Policy risk: The pharmaceutical industry is a highly regulated industry. Stringent policies may adversely affect the company's operations.