China Resources Sanjiu (.SZ)_ Results_ Mild growth in 3Q24

Summary of China Resources Sanjiu (000999.SZ) Conference Call Company Overview - Company: China Resources Sanjiu (CR999) - Industry: Traditional Chinese Medicine (TCM) and pharmaceutical sector Key Financial Performance - 3Q24 Revenue: Rmb5,634 million, representing a 3% year-over-year increase [1] - 3Q24 Net Profit: Rmb561 million, a 7% year-over-year increase, or a 7% decrease when excluding one-off items [1] - Gross Margin: Slight decline to 50.5% from 50.8% in 3Q23 [1] - Net Margin: Increased to 10.0% from 9.6% in 3Q23 [1] - KPC Revenue: Rmb1.9 billion, a 3% year-over-year increase [1] - KPC Net Profit: Rmb158 million, a 3% year-over-year decrease [1] Management Insights - Cost Management: Management expects a decrease in selling cost ratio, with SG&A and R&D expense ratio decreasing to 35.4% from 36.7% in 3Q23 [1] - Acquisition Update: The acquisition of Tasly is expected to be completed in 1Q25 [1] Segment Performance - Cold Medicines: Achieved management's full-year target by 3Q24 [2] - Prescription Drugs: Stable growth observed in 3Q24 [2] - TCM Granules: Sales showed steady growth in 3Q24 [2] - TCM Decoction: Business optimization is ongoing [2] TCM GPO Update - Anhui TCM GPO: Announced to conduct TCM GPO in 2024, impacting OTC drugs with minimal sales for CR999 [3] - Hubei TCM GPO: Related products include brucea javanica seed oil, which is not a key product for CR999 [3] KPC Performance - Manufacturing Revenue: Slight decline in 9M24 [4] - Distribution Revenue: Improved by more than 5% year-over-year [4] - Sales Recovery Expectation: Management expects sales recovery for Xuesaitong injection in 2025 [4] Investment Strategy - Rating: Buy rating maintained for CR Sanjiu [5] - Target Price: Rmb52, based on a DCF model [5] - Market Cap: Rmb61,775 million (approximately US$8,545 million) [7] Risks - Sales Growth Risks: Slower-than-expected growth in great health sales and TCM granules [19] - Cost Risks: Higher costs of TCM herbs could negatively affect gross margins [19] - KPC Consolidation Risks: Potential challenges in the consolidation of KPC [19] Valuation Metrics - 2024E Net Profit: Rmb3,337 million, with a diluted EPS of Rmb2.598 [6] - 2025E Net Profit: Rmb3,790 million, with a diluted EPS of Rmb2.950 [6] - 2026E Net Profit: Rmb4,305 million, with a diluted EPS of Rmb3.351 [6] Conclusion - China Resources Sanjiu shows mild growth in 3Q24 with stable performance across its segments. The management's focus on cost reduction and the upcoming acquisition of Tasly are expected to support future growth. However, potential risks related to sales growth and cost pressures remain significant considerations for investors.