Revenue and Profit Growth: GusuTang's (2273.HK) Momentum Continues

Recently, Gusuntang released its financial report for the first half of 2024, achieving a revenue of approximately 1.365 billion yuan, a year-on-year increase of 38.4%.

In terms of profitability, the company achieved a gross profit of about 401 million yuan in the first half of the year, a year-on-year increase of 41.8%; the adjusted net profit was about 148 million yuan, a year-on-year increase of 45.3%; the net cash flow from operating activities was 140 million yuan, a year-on-year increase of 50%. It can be seen that over the past few years, Gusuntang's adjusted net profit and operating cash inflow have shown a continuous growth trend, which not only indicates the continuous strengthening of the company's profitability, but also reflects the optimization of its operational management and capital utilization efficiency.

At the same time, as of the first half of the year, Gusuntang's cash and cash equivalents and financial products totaled 1.171 billion yuan. The abundant cash reserves and continuous growth in cash flow provide more abundant internal funds, and also lay a solid foundation for the company's future expansion and investment, indicating that the company's profitability may continue to be released.

The continuous and strong growth momentum reflects the company's competitiveness in the current market environment, and also provides us with a window to deeply understand the logic behind its continuous growth.

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What is the supporting logic for the steady increase in profitability?

From a business model perspective, Gusuntang is the first comprehensive Chinese medicine chain institution that spans core areas such as Beijing, Shanghai, Guangzhou, and Shenzhen. It not only integrates traditional Chinese medical treatment, teaching, and promotion but also innovates in business models, successfully building an "online + offline" linked OMO business model, effectively solving many challenges in the traditional Chinese medical diagnosis and treatment process.

This model can enhance service convenience and personalized experience while increasing customer stickiness through digital fine services, driving steady growth in revenue and profits.

Relying on fully self-developed HIS prescription systems, store digital management systems, CRM management systems, internet hospitals, and operational backend support systems, the company uses big data and AI technologies to deeply analyze and mine user needs, customize personalized health management plans, and greatly improve user satisfaction.

In addition, Gusuntang has also increased investment to promote the innovative research and development of Chinese patent medicines to meet the diverse medical needs of patients and achieve the productization and standardization of medical and health solutions. In the first half of the year, the company added 3 new records for in-hospital preparations, namely, Gangju Qingyin Granules, Xiangtao Granules, and Shenqi Guben Ointment, and has currently completed the records for a total of 10 in-hospital preparations.

From a market perspective, Gusuntang's business model caters to the current consumer demand for convenient, efficient, and personalized medical services, and also conforms to the national policy trend of promoting the improvement and enhancement of the traditional Chinese medicine service system, promoting stable consumption growth, and fostering new types of consumption. Gusuntang's development model highly fits the policy orientation.In the first half of the year, the increase in outpatient visits, the number of doctors, and the number of offline stores has once again confirmed the feasibility and sustainability of the Gusu Tang business model.

On the user side, the company continues to provide comprehensive and high-quality traditional Chinese medical health services, which have been widely recognized by customers. The brand influence continues to expand, driving a rapid increase in the return rate and average spending per customer of offline medical institutions. In the first half of the year, outpatient visits increased by 31.9%, the number of people served increased by 26.4%, membership revenue increased by 52.5%, and the number of visits by members increased by 51.1%.

On the doctor side, relying on the continuous expansion of influence, more doctors are attracted to choose. In the first half of the year, the number of physicians on the company's online medical health platform and offline medical institutions increased by 1,794 compared to the beginning of the year, with 48% of senior-level doctors offline and 38% online.

On the institutional side, the company is also continuously expanding the number and geographical coverage of offline medical institutions. In the first half of the year, the company entered four new cities: Singapore, Changsha, Xuzhou, and Changshu, adding 16 new stores. It is expected that 15 to 20 new stores will be added throughout the year, and 3 to 5 new cities will be entered to capture more market share. As of July 2024, Gusu Tang has an offline traditional Chinese medicine service network consisting of 74 stores across 19 cities in China and Singapore.

The mutual empowerment of all ends, the development of online medical health services, helps Gusu Tang to use medical resources more effectively and expand customer coverage. At the same time, with the activity of online doctors and customers, the company can strategically choose regions with potential for offline expansion.

This not only enhances the company's market competitiveness but also further meets the medical needs of patients in different regions, achieving comprehensive optimization of medical services and continuous expansion of brand influence.

Trillion-dollar market size, multiple measures to strengthen growth potential.

As investors, after thoroughly understanding the internal logic of Gusu Tang's performance growth, they will naturally turn their attention to the company's future development potential and growth space.

At the policy level, the state's support for the traditional Chinese medicine industry has always been clear and lasting, which has become a consensus and needs no further elaboration.

At the market level, as the public's pursuit of a healthy lifestyle becomes increasingly strong, the unique value of traditional Chinese medicine in chronic disease management and body conditioning is becoming more prominent. This treatment philosophy, which is centered on conditioning, not only caters to the modern pursuit of a healthy lifestyle but also heralds a new trend in future medical development.The growth data of market size provides strong evidence for this trend.

Data from the China Business Industry Research Institute shows that with the intensification of population aging, the market size of China's traditional Chinese medicine (TCM) medical service industry is expected to break through the trillion yuan mark by 2025 and reach a market size of over 2 trillion yuan by 2032. This significant growth not only reflects the urgent market demand for TCM services but also indicates the broad prospects of the industry.

It is not difficult to judge that the steady rise in the market size of China's TCM medical service industry has provided a huge development opportunity for grassroots TCM service leading enterprises like Gusengtang.

Under this growth trend, Gusengtang, with its deep industry accumulation and advantages, has taken multiple measures. While continuing to deepen its layout in the domestic market, it has also demonstrated the unique value of TCM services on the international stage.

Looking at the timeline:

In March, the company announced its intention to acquire 100% of the equity of Bao Zhongtang Singapore, a milestone action marking the company's first step in its globalization strategy. Choosing Singapore as a bridgehead, Gusengtang not only promoted the internationalization of TCM services but also stimulated the company's internal growth potential through this opportunity.

In May, the company signed a strategic cooperation agreement with Ningbo Guyuantang, acquiring three stores under Guyuantang, further deepening Gusengtang's penetration in the regional market. Through the continuous improvement of scale effects, it has consolidated and expanded its leading position in the field of TCM services.

In July, the company's strategic cooperation with Jiangyin City Traditional Chinese Medicine Hospital and the establishment of the Gusengtang Jiangyin Expert Committee marked another important progress in the construction of medical alliances. Currently, Gusengtang has offline outpatient institutions in several key cities in Jiangsu, and this cooperation has expanded its service network to Jiangyin for the first time. This is not only a positive response to the policy of tiered diagnosis and treatment but also a下沉 of high-quality medical resources to the grassroots level, greatly meeting the medical needs of the public.

In August, the official unveiling of the strategic cooperation between Gusengtang and Hunan University of Traditional Chinese Medicine and its first affiliated hospital. This is based on the medical alliance cooperation reached by both parties in October last year, further deepening the strategic layout of下沉 famous doctor resources to the grassroots level. While bringing richer medical resources to itself, it also injects new momentum into the improvement of grassroots medical services.

ConclusionIt is evident that Gusu Tang has already achieved a virtuous cycle of the flywheel effect.

In an environment supported by policy and driven by market demand, Gusu Tang will have the opportunity to benefit from economies of scale in the future, capturing more market share and resources, and accelerating the rotation of the growth flywheel.

On one hand, the company's stores have strong replicability, with rapid construction of new stores and a short payback period on investment. It densifies existing cities through "self-building + mergers and acquisitions" and expands into new cities, thereby expanding its business map. On the other hand, the company has gathered many renowned medical experts, which will continuously enhance patient loyalty and the company's reputation, strengthening its competitiveness in the field of traditional Chinese medicine services.

From an investment perspective, the management of Gusu Tang has demonstrated strong confidence in the company's future development through share buybacks and dividend distributions. As of July 2024, Gusu Tang has cumulatively repurchased 35 times, totaling 3.67 million shares, at a cost of approximately HKD 143 million. At the same time, it declared and distributed an interim dividend of HKD 0.13 per ordinary share, totaling HKD 31.54 million (based on the total number of shares issued by the company as of the financial report date).

At the same time, professional investment institutions also believe that Gusu Tang has shown strong development momentum and a good market outlook. For example, Bank of Communications International suggests paying attention to innovation, service, traditional Chinese medicine, and circulation sectors under the deepening medical reform and support of medical insurance policies. Morgan Stanley upgraded its rating for Gusu Tang to overweight, with a target price of HKD 62; China Merchants Securities first gave Gusu Tang a "strong recommendation" rating, emphasizing the replicability of the company's stores and the short investment payback period.

With the in-depth implementation of the strategy and the gradual release of market potential, it is not difficult to expect that Gusu Tang is expected to achieve higher value in the capital market.