Investment suggestion
The company announced that it intends to invest 10.5 billion yuan to build a "smart pharmacy + smart medicine cabinet" project, which will infiltrate from end B to end C and enter the new retail of medicine. We are optimistic about the new retail model for a long time, but considering that the construction of the 10 billion project requires high cash flow and takes time to land, the company may face some pressure to downgrade its rating to "neutral" in the short term for the following reasons:
"Wisdom pharmacy + smart medicine cabinet" mode, from B to C. In June 2015, the company pioneered the smart pharmacy model, which uses a "one-to-many" network of urban central pharmacies to provide patients with services such as decoction and distribution. Recently, the company has launched a smart medicine cabinet model to further provide 24-hour self-help medicine purchase, to achieve pre-purchase, online consultation, traditional Chinese medicine on behalf of distribution and other one-stop health management services.
National investment layout, project scale of more than 10 billion. In order to increase the pace of national expansion, the company has invested more than 10 billion yuan this time: it plans to invest 7.7 billion yuan to build 15 wisdom pharmacies, 48 central pharmacies and 5 satellite pharmacies across the country within three years; it plans to invest 2.8 billion yuan to build 50,000 wisdom medicine cabinets within three years.
Cash flow is under pressure and profitability remains to be seen. The large scale of this investment is expected to cause pressure on the company's short-term cash flow, and it will take some time for the project to land. The response ability of the landing city to the "Internet +" model is uncertain, and the profitability needs to be observed. the company's short-term operation may be affected to a certain extent.
What is the biggest difference between us and the market? We believe that the large-scale investment, high requirements for cash flow and landing time, the company's short-term operation may face some pressure.
Potential catalyst: the mode of "wisdom pharmacy + wisdom medicine cabinet" is launched all over the country.
Profit forecast and valuation
We keep 2018 EPS 1.16 yuan unchanged in 2019, and the corresponding E for 23X/19X, an increase of 18.9% over the same period last year. We are optimistic about the development space of the whole industry chain of the company in the traditional Chinese medicine industry for a long time. In the short term, considering that it will take time for the C-end strategy to advance, we will lower the target price by 14.3% to 24 yuan, corresponding to 24 times the target price in 2018. The current stock price has 7.0% upward space from the target price, and we will downgrade the rating from "recommended" to "neutral".
Risk
The expansion progress of wisdom pharmacy is lower than expected, and the landing effect of government strategic cooperation is lower than expected.
