Core views

On the evening of May 15, the company announced a plan to issue convertible corporate bonds to unspecified targets. The bond period is 6 years. The total amount to be raised is expected to be no more than RMB 1.5 billion (including RMB 1.5 billion), of which RMB 72 million will be used for the new pharmacy chain project, RMB 330 million will be used for the first phase logistics center project of the Yixintang (Sichuan) Health Smart Pharmaceutical Base, and 450 million yuan will be used to supplement working capital. We believe that this convertible bond plan is expected to accelerate the expansion of the company's stores and help long-term steady growth in performance.

occurrences

The company announced a plan to issue convertible corporate bonds to unspecified targets On the evening of May 15, the company announced a plan to issue convertible corporate bonds to unspecified targets. The bond period is 6 years, and the total amount to be raised is expected to not exceed RMB 1.5 billion (including 1.5 billion yuan), of which RMB 72 million will be used for the new pharmacy chain project, RMB 330 million will be used for the first phase logistics center project of the Yixintang (Sichuan) Health Smart Pharmaceutical Base, and 450 million yuan will be used to supplement working capital.

Brief review

Accelerate store expansion, and there is plenty of momentum for long-term performance growth

This convertible bond plan is of great strategic importance. It is expected to accelerate the expansion of the company's stores and help long-term steady growth in performance: 1) This time, the capital raised is mostly used for new store construction and expansion. We believe that the company's stores have a strong foundation for replication and expansion. If the project is implemented, it will help the company expand its business scale, accelerate the layout of stores in key regions such as Sichuan and Chongqing, and further enhance profitability through business scale effects; 2) The plan promotes the construction of a logistics center for the Sichuan Health Smart Pharmaceutical Base, which will facilitate the construction of a logistics center for the Sichuan Health Smart Pharmaceutical Base, which will help the company improve the supply chain layout in Sichuan and Chongqing for the future. shop Expansion provided strong support.

Transient factors influence the expansion of Q1 stores. I am optimistic that transient factors will cause the growth rate of Q1 stores to slow as a result of the acceleration of new store construction throughout the year, and I am optimistic that store expansion will advance steadily throughout the year. In the first quarter of 2023, the company began adjusting its business strategy to accelerate store expansion, but due to transient factors such as the peak number of people infected with COVID-19, the return of employees to their hometowns during the Spring Festival, and insufficient reserves for mergers and acquisitions projects, the company opened a total of 215 new stores in the first quarter, closed 27 stores, and relocated 50 stores, a net increase of 138 stores. We believe that in the first quarter, the company actively implemented site selection for self-built stores and due diligence of mergers and acquisitions projects. Existing stores had sufficient resource reserves, laying the foundation for subsequent accelerated expansion of stores. At the same time, the influence of other transient factors has basically subsided. It is expected that the company will open 1,900 new stores throughout the year.

Accelerate the expansion of the size of stores outside the province to steadily provide increased performance. As of the first quarter of 2023, the company currently has 9344 stores, of which the number of stores in Yunnan Province, Sichuan and Chongqing and other regions was 5,253, 1,685 and 2,406 respectively. The number of stores accounted for 56.22%, 18.03% and 25.75% respectively. Looking at incremental stores, the net increase in stores in Yunnan Province, Sichuan and Chongqing and other regions in 23Q1 was 29, 77 and 32 respectively. The proportion of new stores added was 21.01%, 55.80% and 23.19% respectively. The expansion of stores outside the province further accelerated. We believe that the market outside the province will be an important contributor to the company's future performance. The company may continue to expand the size of its stores in markets outside the province this year, enhance its ability to bargain upstream, thereby achieving simultaneous improvements in performance and competitiveness.

Profit forecasting and investment ratings

Looking ahead to 2023, the company's store operations will gradually return to normal. We expect the company to accelerate store expansion, further adjust the product structure, enhance employee service capabilities, optimize the membership management model, and continue to fully implement fine management. We are optimistic that the company's performance will grow steadily over the long term. We expect the company to achieve operating income of 20.064 billion yuan, 23.334 billion yuan and 27.417 billion yuan respectively from 2023 to 2025, up 15.1%, 16.3% and 17.5%, respectively. The net profit of the mother returned to the mother was 1,207 million yuan, 1,409 million yuan and 1,656 million yuan respectively, up 19.5%, 16.7% and 17.5% year-on-year respectively, equivalent to EPS of 2.03 yuan/share, 2.36 yuan/share and 2.78 yuan/share, respectively, corresponding to the valuation 13.8X, respectively, 11.8X and 10.0X maintain buy ratings.

Risk analysis

1) Stricter health insurance policies: if health insurance policies become stricter and fee control requirements are higher, overall drug prices may fall further, and the company's profit margins may face greater pressure;

2) 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 there may be an adverse effect on the company's long-term revenue growth;

3) Decline in store profitability: If the company's detailed management is not implemented in the later stages, it may reduce the profitability of stores, which will adversely affect the company's long-term profit margins;

4) The progress of the outflow of prescriptions is lower than expected: If the progress of the outflow of prescriptions falls short of expectations, the business growth brought about by the outflow of prescriptions on the store-side will decrease, affecting the release of performance.