Jianzhijia: Upstart pharmacy chain, rapid growth in endogenous+epitaxial two-wheel drive performance. Jianzhijia started in Kunming, Yunnan. After more than ten years of operation and development, Jianzhijia has a total of 4,711 stores in the six regions of Yunnan, Sichuan, Guangxi, Chongqing, Hebei and Liaoning, including 4,386 pharmaceutical retail stores. In 2020-2022, the number of the company's pharmaceutical retail stores grew from 1,890 to 3,763, with a compound annual growth rate of 41.1%. The company is the second-largest pharmaceutical chain enterprise in Yunnan Province. Yunnan Province contributes the main revenue (1H23:63.5%). The store layout and market share outside the province are still at a low level. The revenue scale is small, but it has a lot of room for market development. The company completed the acquisition and settlement of Tang Ren Pharmaceutical at the end of August 2022 and officially entered the two major markets of Liaoning and Hebei, which will be a key area for future development. As the pace of expansion outside the province accelerated, the number of stores outside the province accounted for 39% of the total at the end of the 3rd quarter of '23, and revenue reached 36.5% in the first half of '23. The company's revenue and net profit continued to grow rapidly at the same time. The compound growth rate of revenue and net profit in 2018-2022 was 28.4%. In the first three quarters of 2023, revenue was 6.5 billion yuan (+38% year over year), and net profit to mother was 278 million yuan (+44.4% year over year).
The company's overall gross profit remains stable, the average daily floor efficiency (46.8 yuan/㎡) has maintained steady growth with store expansion, and there is still room for improvement in the sales expenses ratio.
Pharmacy industry: Increased concentration and the outflow of prescriptions drive continued development. Since 2019, the importance of pharmacies has continued to increase with the implementation of policies such as drug share, zero addition, collection, dual channel, and prescriptions for chronic patients. By 2022, pharmacy terminals contributed nearly 29% of sales in the overall pharmaceutical market, and retail sales of prescription drugs accounted for about 16%. The overall operation of pharmacies in 2023 was negatively affected by household inventory removal, outpatient return, and declining spending power, leading to a decline in customer unit prices, customer traffic, and order volume. We expect demand for medication to return to normal in 2024, and non-drug revenues will recover as economic expectations improve. Short-term catalysis: Since the fourth quarter of '23, with the gradual release of consumer demand for drug purchases, the high incidence of influenza, and the continuous development of outpatient co-ordinated pharmacy business, the average sales and order volume of pharmacies in November have surpassed the same period last year. Pharmacy sales in August-November showed a month-on-month improvement. This trend is expected to continue this year. Mid-term increase: The chain rate of Chinese pharmacies reached 57.8% in 2022. The annual sales of the top 100 companies account for 36.5% of the total pharmaceutical retail market. There is still plenty of room for improvement in industrial concentration and chain chain rate. The growth of the retail industry mainly depends on the chain expansion of stores. In addition to direct revenue growth and scale effects brought about by an increase in the number of stores, strong retail channels can rely on their market position and procurement scale to obtain lower prices upstream, thereby increasing the level of profit margins. Therefore, for leading retail pharmacies, increased concentration means obtaining excess profits that exceed the growth rate of the industry. Long-term trends: The implementation and application of prescription circulation centers will better help pharmacies obtain in-hospital outpatient traffic in the medium to long term. By the end of '23, more than 20 provinces and cities across the country had started/completed the construction of provincial prescription distribution platforms. Among them, prescription circulation platforms in 11 provinces and cities, including Hunan Province, Jiangxi Province, and Hubei Province, had been initially built and connected to hospitals and pharmacies, and electronic prescriptions had already been distributed from hospitals to pharmacies. We expect 24 will be the year of implementation of prescription circulation centers, and various regions will introduce more plans to further increase the usage of prescription circulation platforms. We expect the increase in the scale of prescription outflows from pharmacies to reach 251/388/53.3 billion yuan in 2024-2026, with a total increase of over 100 billion yuan.
Investment highlights: High performance flexibility, business differentiation, diversification of business formats. Jianzhijia's compound growth rate of the number of directly-managed stores reached 32.3% in 2019-2022, the highest among its peers. The company has built Yunnan and Hebei as its main profit centers, focusing on promoting two key training centers in Chongqing and Liaoning, while rapidly developing an expansion model in the Sichuan and Guangxi regions, actively catching up with first-tier pharmacy chains in terms of revenue, profit, and number of stores. Under the expectation of maintaining rapid store expansion (expected to increase by 1,000+ stores in 24 years), we believe that Jianzhijia's business performance is still expected to maintain rapid growth. Differentiated competition: Jianzhijia's share in provincial capitals and cities is significantly higher than that of Yixintang (64% vs. 54%), bringing about a relatively higher overall floor efficiency (43.2 vs. 39.3), and is still associated with the improvement of operating efficiency in continuous penetration into local, municipal, and township levels. Diversified omnichannel layout: Jianzhijia's online channel revenue ranked first among all listed chains, with a year-on-year increase of 67.9% in the first three quarters of 2023, accounting for 25% of total revenue. The company has diversified operations through convenient chains, invested heavily in health products, personal care products, functional skin care products, etc., and actively developed cross-border e-commerce business to improve the category structure through Hong Kong subsidiaries. Non-pharmaceutical sales account for the highest share in the industry (20.3%).
Profit forecasting
We expect the company's revenue for 2023-2025 to be 94.5/115.4/13.85 billion yuan, respectively, up 25.7%/22.2%/20.0% year on year, and net profit to mother will be 4.08/4.87/599 billion yuan respectively, up 12.3%/19.4%/22.9% year on year, respectively, and the corresponding valuation is 15.8X/13.3X/10.8X.
First coverage, giving a “buy” investment rating, with a target price of 68 yuan/share.
Risk warning
Outpatient co-ordinated pharmacies fell short of expectations, the scale of prescription outflows fell short of expectations, pharmacy expansion fell short of expectations, etc.