Investment advice
As the pharmaceutical distribution industry enters an era of intensive development, we believe that the company hopes to: 1) focus on product exploration and introduction of value products to create new profit growth points; 2) promote pharmacists' “ten thousand store franchise” business and help the digital transformation of stores to enhance retail pharmacy brand competitiveness; 3) promote the application and distribution of publicly funded REITs, diversify financing channels, and further enhance asset management capabilities.
rationales
Pharmaceutical wholesale and related services: China's leading out-of-hospital digital medicine distribution platform. In 2022, the company's pharmaceutical wholesale and related services business achieved revenue of 135.23 billion yuan, an increase of 14.3% over the previous year.
The effects of the digital transformation of the distribution platform are obvious. As of the end of the third quarter of 2023, the Pharmaceutical 99 B2B platform had more than 400,000 registered users and more than 350,000 active users, covering 99% of the country's administrative regions. In addition, the contribution to overall brand promotion business performance continues to increase. There were 1,312 agent regulations in the first three quarters of 2023, and the company expects 19 total drug substitute regulations to exceed 100 million in the whole year. We believe that as policy-driven prescriptions flow to social pharmacies and drugs for chronic diseases to the third terminal, the company will usher in greater development opportunities.
Pharmaceutical retail: deep integration of online and offline to create a retail ecosystem. In 2022, the company's retail business achieved revenue of 2.54 billion yuan, an increase of 37.9% over the previous year. By the end of the third quarter of 2023, Good Pharmacist had 17,272 self-operated and franchised pharmacies, with stores all over the country. The company expects more than 30,000 in 2025. In the first three quarters of 2023, HaoPharmacist's B2C e-commerce general sales business increased by 40.7% year on year, and the new e-commerce channels on Douyin and Kuaishou grew rapidly. We believe that the company is expected to better handle the outflow of prescriptions and use the advantages of “batch zero integration” and a combination of online and offline services to provide one-stop services.
Pharmaceutical industry: Continuously enriching its own varieties to enhance competitiveness. In 2022, the company's pharmaceutical industry business achieved revenue of 2.31 billion yuan, an increase of 22.5% over the previous year. The Western medicine business focuses on the development and production of generic drugs. Metformin hydrochloride tablets, furosemide injections, and atropine sulphate injections have won bids in national procurement; the traditional Chinese medicine business is deeply involved in the entire industry chain, and has formed products with advantages and characteristics such as crystal refining research, premium health, and traceability. We expect that the pharmaceutical industry is an important high-margin business segment of the company, and its own categories are expected to develop in clusters and enhance product competitiveness.
Healthcare and technical services: Continued expansion of service areas. In the first three quarters of 2023, the revenue of the company's healthcare and technical services business increased by 23.2% year-on-year. The “Power Health” platform has achieved a total of more than 630,000 doctors who can provide online consultation and basic diagnosis and treatment services, and has served more than 1.56 million patients.
Profit forecasting and valuation
We kept the 2023/2024 EPS forecast of 0.57 yuan/0.66 yuan unchanged, corresponding to a net profit increase of 7.3%/15.0% year-on-year, respectively. The current stock price corresponds to a price-earnings ratio of 13.1 times /11.4 times in 2023/2024. We maintain an outperforming industry rating and target price of 9.70 yuan, corresponding to 17.0 times the 2023 price-earnings ratio and 14.7 times the 2024 price-earnings ratio, which is 29.9% higher than the current stock price.
risks
The implementation progress of the new business fell short of expectations, the negative impact of collection was greater than expected, and there was a risk of bad debts on accounts receivable.