In 1H23, Dashenlin's revenue and profits grew steadily, meeting expectations. While maintaining high growth rates in the sales of Chinese and Western medicines, the Company significantly improved its control over expense ratios. Dashenlin has quickly expanded from its base in South China to regions across the country thanks to growing numbers of company-operated and franchise stores. We retain our 2023E/24E/25E attributable net profit (ANP) forecasts of Rmb1,324mn/1,662mn/2,062mn, corresponding to EPS of Rmb1.16/1.46/1.81, respectively. We apply 30x 2023 PE to arrive at a target price of Rmb35 and reiterate the "BUY" rating.

1H23 revenue and profits grew steadily, meeting expectations.

Dashenlin announced that its 1H23 revenue/ANP/recurring ANP came in at Rmb11,992mn/917mn/898mn (+23.37%/28.46%/27.48% YoY); its 1H23 operating cash flow totaled Rmb1,478mn (+ 4.11% YoY). In 2Q23 alone, the Company achieved revenue/ANP/recurring ANP of Rmb6,045mn/421mn/401mn (+19.85%/27.49%/29.82% YoY). The high growth rates in Dashenlin's 1H23 revenue and profits were mainly contributed by the endogenous growth of existing stores and the earnings of new stores, as well as improvement in the Company's management efficiency and good cost control, which demonstrate its excellent operational capabilities.

High growth rates in the sales of Chinese and Western medicines, and significantly improved control over expense ratios.

According to Dashenlin's announcement, the Company's 1H23 GPM decreased by 1.85ppts YoY to 35.90%, mainly dragged down by the higher proportions of franchise stores and wholesales. The Company's 1H23 revenues from Chinese and Western medicines/Chinese ginseng medicinal materials/non-medicinal materials grew by 23.92%/19.81%/23.56% respectively. The high sales growth rates of Chinese and Western medicines were mainly attributed to the rapid growth of sales of prescription drugs and direct to patient (DTP) varieties brought about by the outflow of prescriptions.

The increased sales of Chinese ginseng medicinal materials were mainly underpinned by a higher demand of residents for healthcare products. The Company's selling/administrative/financial expense ratios declined by 2.34ppts/0.42ppts/0.23ppts to 21.53%/4.39%/0.81% respectively, thanks to the Company's cost control and optimization efforts. Dashenlin has kept developing its product supply and logistics system. The Company has established logistics & delivery centers in Guangzhou, Maoming, Yulin, Dongguan, Luohe and Nanchang. The Company's inventory turnover rate and procurement & operation costs may be further optimized under the nationwide trend of business concentration.

Rapid business expansion from South China to across the country thanks to growing numbers of company-operated and franchise stores.

Dashenlin's announcements show that as of Jun 2023, the Company had stores in 19 provinces across China. In 1H23, the Company has built/franchised/acquired/closed 610/1080/362/108 stores; its total store number increased by 1,944 (net) to 11,989 (incl 3,078 franchised stores). This shows that Company has maintained a rapid pace of business expansion.

With an active nationwide business expansion strategy, Dashenlin has achieved rapid growth in Central China, East China, Northeast China, North China, Southwest China and Northwest China. In 1H23, the Company forayed into Shanxi Province, Anhui Province and Xinjiang Uygur Autonomous Region; its combined revenue from Northeast China, North China, Northwest China and Southwest China achieved a high growth rate of 71.35%. With denser business footprints in all regions, Dashenlin's profitability outside Guangdong Province may improve continuously. In 1H23, the Company conducted 10 intra-industry M&As (120 stores were not handed over). To cope with uncertainties in the external environment, Dashenlin took the initiative to slow down business expansion in 1H22 (only 194 company-operated stores were built). However, the Company's business expansion has recovered to a relatively fast level (610 company-operated stores were built and 1,080 franchise stores were approved) in 1H23. Dashenlin's accelerating business expansion is worth attention.

Potential risks: Disappointing progress in the Company's M&As; declining GPM due to fiercer-than-expected competition; and policies on medical insurance qualifications for outpatient clinics falling short of expectations.

Investment recommendation: Dashenlin has been expanding from South China to the national markets.

Considering the rapid expansion of the Company's stores in and outside Guangdong Province and the prospects of quick cash-in, we retain our 2023E/24E/25E ANP forecasts of Rmb1,324mn/1,662mn/2,062mn, corresponding to EPS of Rmb1.16/1.46/1.81, respectively. With the valuation of 20x 2023E PE (Wind consensus estimates) for comparable companies Yifeng Pharmacy (002382.SZ) and LBX Pharmacy (603883.SH) as a reference, and considering the rapid business expansion of Dashenlin outside Guangdong Province and the large headroom for growth, and the Company's valuation center of 37x PE from 2018 to present, we assign 30x 2023E PE to arrive at the target price of Rmb35, and reiterate the "BUY" rating.