Out-of-hospital pharmaceutical business leader, with a marked improvement in cash flow, unleashing dividend potential. The company is the leading commercial outpatient medicine in China. It has built a scarce “100 billion” pharmaceutical supply chain service platform, and completed the business layout of all categories of procurement, omni-channel coverage and full-scenario services. Since 2018, with collection and the implementation of the two-vote system, the company's cash flow has improved markedly, and business expansion has escaped the constraints of past share dilution. At the same time, the company plans to distribute real estate investment trusts (REITs) in the infrastructure sector in batches using its approximately 3.3 million square meters of pharmaceutical logistics storage assets and supporting facilities as underlying assets, which is expected to help the company transform into a “high dividend” with abundant cash.
The trend of drug outflow is clear, and trillions of dollars of space are piling up and running out. With the normalization and institutionalization of volume procurement and the deepening implementation of “dual channel” + “outpatient coordination”, the trend of in-hospital drug retail has become quite clear. The share of drugs in the out-of-hospital market (terminals 2 and 3) increased by a total of 5.6 pcts during 2018-2022; during the 2017-2023Q1-3 period, the share of prescription drugs in retail pharmacies also increased by a total of 5.6 pcts; by 2022, the size of the out-of-hospital drug market had exceeded trillion dollars.
After 40 years of accumulation, the company has formed a significant competitive advantage and strong business barriers in the out-of-hospital market. 1) It has covered nearly 600,000 pharmacies+primary care institutions and built a relatively complete out-of-hospital channel distribution network; 2) The pharmacy franchise business is rapidly developing, with an estimated number of stores exceeding 18,000 in 23 and 30,000 in 25; 3) building a nationally leading “integrated batch and distribution” pharmaceutical logistics supply chain service system, including 141 warehouses and operating and supporting facilities with a total construction area of over 4.2 million square meters.
The CSO outside the hospital welcomed the blue ocean, and the second curve of the general generation grew rapidly. Along with the advancement of a series of medical policy reforms such as the cancellation of drug bonuses, separation of pharmaceuticals, two-ticket system, and volume procurement, the trend of retail and branding of in-hospital drugs has become quite clear, spawning a large demand for brand operation services (i.e. CSO) in the out-of-hospital market. According to our forecast, the scale of China's pharmaceutical brand operation industry is expected to exceed 100 billion yuan in 2023.
Relying on competitive advantages and business barriers in the out-of-hospital market, the company's general agent business revenue is expected to exceed 16 billion yuan in 2023 (of which total pharmaceutical generation exceeds 8 billion yuan), and the subsequent growth rate is expected to remain around 20%, establishing the leading position of CSO outside the hospital. By variety, in recent years, the company has successfully operated Dongyang Kewei, Bayer Kangwang, Huahai Pharmaceutical's irbesartan, etc., and the operating capabilities of brands and varieties have been continuously verified. Considering that the general generation CSO business is the company's second growth curve, has good growth potential and high net interest rates, it will drive the company's overall performance even more significantly in the future. Furthermore, as the pharmaceutical industry's self-production and OEM business, healthcare and technology value-added services, digital logistics technology and supply chain solutions go hand in hand, the company's high-gross business continues to expand.
CSO profits are expected to account for nearly 30%. Continued high growth drives value revaluation, and key recommendations. In view of the clear trend of drug outflow, the company has successfully gained a competitive advantage and business barriers. We expect net profit to be 23.9, 27.6, and 3.21 billion yuan in 23-25 years, with a year-on-year growth rate of 14.8%, 15.3%, and 16.5%. Currently, the CSO business is expected to account for close to 30% of the company's net profit to the mother, which will continue to increase or drive value revaluation; at the same time, along with the significant improvement in the company's cash flow and the steady progress of REITs projects, dividend potential is expected to be fully unleashed; in addition, social financing costs are declining. The channel helps save financial costs and improve performance flexibility; overall, we refer to comparable companies and combine factors such as valuation changes to give the company a target PE of 15 times in 24 years, corresponding to a target price of 10.6 yuan, with room for 54% improvement; the first coverage gave it a “recommended” rating.
Risk warning: policy risk, market competition risk, bad debt risk of accounts receivable, etc.