Investment highlights

For the first time, Daishanlin (603233) was given a rating of outperforming the industry. The target price was 33.60 yuan, corresponding to 29.7 times and 23.5 times P/E in 2023-24. The company is a pharmaceutical retail chain group enterprise with a leading position in the domestic pharmaceutical retail industry. The reasons are as follows:

Dashenlin: Leading the domestic drug retail industry, deeply involved in South China, and expanding across provinces is beginning to bear fruit. The company focuses on the retail/wholesale business of proprietary Chinese and Western medicines, ginseng supplements and traditional Chinese medicine tablets. On the basis of deep cultivation in the South China market, the company continued to expand to provinces and cities across the country through “direct management+mergers and acquisition+franchise”. By the end of 3Q23, it had covered 19 provinces and 12,993 stores, and maintained a leading position in the industry.

The company achieved revenue of 21.25 billion yuan in 2022, with a compound growth rate of 23.4% in 2017-2022.

Industry: There is plenty of room for concentration improvement, the outflow of prescriptions and the increase in the opening of new retail sales. There is strong certainty about the domestic retail pharmacy chain integration trend, and regulatory policies favor compliant and high-quality medium and large enterprises; compared with the concentration of the US and Japanese pharmacy industry, there is still a lot of room for improvement in the market share of leading chains in China; policies continue to encourage pharmaceutical divisions. Outpatient coordination and implementation in all provinces will proceed in an orderly manner this year, and pharmacies are expected to undertake large-scale prescription outflows; Relying on the Internet +, the contribution of the new retail business can increase significantly.

“Self-building+merger and acquisition+franchise” helps rapid expansion, and the combination of categories and channels works in a two-pronged manner. 1) Mergers and acquisitions open up the country, and direct franchise further penetrates the sinking market: the company continues to expand by entering new markets+self-built stores through mergers and acquisitions, and at the same time uses “direct franchise” with “seven unified” management to empower small and medium-sized pharmacies to sink in layout; 2) Self-owned brands create nourishing characteristics of ginseng, differentiated competition enhances profit margins: The company relies on its own industrial system to create a series of characteristic ginseng supplements with “Dongziyunxuan” as the core. Differential competition contributed to high gross profit margins in 2022 Product gross margin reached 42.3%; 3) Active layout of medical insurance stores , hospital side stores, etc. are expected to benefit from large-scale out-of-hospital prescription circulation: by the end of 1H23, the company had 8,165 medical insurance stores, and the medical insurance store coverage rate reached 91.8%; 4) New retail layout and rapid online business development: in recent years, the company's new retail business (O2O+B2C) business has maintained impressive year-on-year growth. Currently, there are more than 7,600 O2O pharmacies, which are at the forefront of the industry.

What is our biggest difference from the market? We believe that the company's expansion and development outside the province is expected to exceed expectations, mainly benefiting from the company's mature new construction, merger and acquisition model and lean management system.

Potential catalysts: The progress of store expansion has accelerated, and outpatient coordination/prescription outflow has exceeded expectations.

Profit forecasting and valuation

We expect the company's 23-24 EPS to be 1.13 yuan and 1.43 yuan, respectively, and the CAGR will be 25.4%. The current stock price is 21.8x and 17.3x for 2023-24 P/E. Considering the company's competitive advantage as a leading pharmacy company, the first coverage gave “outperforming the industry” and a target price of 33.60 yuan, corresponding to the 2023-24 P/E of 29.7x and 23.5x, with 36.0% upside compared to the present.

risks

Related policy changes, the outflow of prescriptions fell short of expectations, industry competition intensified, and cross-regional expansion fell short of expectations.