The latest news? We investigated the logistics center of Chuangmei Pharmaceutical Co., Ltd. in Foshan, Guangdong Province on April 24, and discussed the business with the management. Chuangmei Pharmaceutical Co., Ltd. is mainly engaged in pharmaceutical retail distribution business in Guangdong Province. The following are the main points of the research.

Focus on the pharmaceutical retail market and benefit from prescription outflow. In the same industry, Sinopharm Group (1099 HK, unrated) and Shanghai Pharmaceutical (2607 HK, unrated) mainly focused on the bidding market of public hospitals, which was greatly affected by the two-vote policy, while Chuangmei Pharmaceutical mainly focused on the drug distribution business in the non-bidding market in Guangdong Province, almost unaffected by the two-vote policy. By the end of 2017, the company's distribution network covered a total of 7355 customers, including 782 retail distributors in the middle and lower reaches, 4777 retail pharmacies, and 1796 grass-roots hospitals, clinics and medical centers, accounting for 68 per cent, 30 per cent and 2 per cent of total revenue respectively. Under the general trend of prescription outflow in public hospitals, part of the original prescription drug sales will be transferred from public hospitals to the pharmaceutical retail market. The hospital retail market is expected to expand in the future, and companies will benefit from the prescription outflow trend.

Net profit margins are expected to improve in fiscal year 18. The total revenue in fiscal year 17 was 4.095 billion yuan, an increase of 11.6% over the same period last year, and the gross profit margin increased by 0.17 percentage points to 5.12%. This is mainly due to 1) the increase of primary distribution products with high gross profit margin from 4509 to 6, 472, and 2) the elimination of products with low gross margin and low turnover. The sales expenses increased by 31.9%, and the management expenses increased by 27.2%, due to 1) the increase of sales staff and back-office managers, and 2) the acquisition of sales and management expenses of Zhuhai and Guangzhou companies. Financial costs surged 168.9% to 27.6 million yuan in fiscal year 17 because 1) the company's short-term borrowing increased by 184 million yuan for business capital turnover, mainly due to the increase in product management regulations leading to an increase in the company's advance payment. 2) a foreign exchange loss of 1.74 million yuan (net income of 5.8 million yuan in fiscal year 2016). As a result, net profit fell 21.5 per cent to 44.3 million yuan. Since most of the investments and acquisitions have already taken place in FY17, it is expected that the overall expense rate will decline slightly in FY18, and the increase in overall sales of Guangzhou and Zhuhai companies will lead to revenue growth, so we expect the net profit margin to improve in FY18.

Growth points-Guangzhou and Zhuhai companies. The company acquired two pharmaceutical distribution companies in Zhuhai and Guangzhou in the first half of fiscal year 17. Last year, Zhuhai Company recorded a combined income of 32.5 million yuan and a net profit loss of 1.4 million yuan. The net profit loss was mainly due to the relocation of new warehouses, recruitment of more staff and investment in information system upgrading. Zhuhai aims to achieve revenue of 180-200 million yuan in fiscal year 18, and is expected to turn a loss into a profit after the completion of the integration of net profit. Guangzhou Logistics Center is scheduled to be put into operation in May 2018, and the Guangzhou company aims to achieve an income of 300 million yuan in fiscal year 18. Looking to the future, the company will continue to expand its distribution network and increase the coverage of the Guangdong market.