Investment logic: 1) A new round of state-owned enterprise reform is coming, which is expected to help state-owned enterprises improve their operations and reshape their valuations. 2) Revenue targets have all been exceeded in recent years, and the “14th Five-Year Plan” target revenue of 100 billion dollars can be expected. 3) There is plenty of room for improvement in the company's net interest rate. With the optimization of the business structure and fee control, the net interest rate is expected to gradually increase. 4) The scale of medical device revenue continues to expand, and DTP pharmacies are expected to help the retail sector overtake the “14th Five-Year Plan” curve.
A new round of state-owned enterprise reform is coming, which is expected to help state-owned enterprises improve their operations and reshape their valuations. 1) The three-year action to reform state-owned enterprises in 20-22 came to a successful conclusion, with outstanding results: the total revenue and profit of state-owned enterprises in 2021 increased by 18.7% and 26.3%, respectively, compared to 2020, with outstanding operating improvement results; 2) There is plenty of room for improvement in the valuation of state-owned enterprises in the pharmaceutical industry, and the market capitalization share is relatively low: as of March 3, 23, the valuation of private enterprises was 26.3 times, and the valuation of state-owned enterprises was 22.9 times higher. As of the end of '22, the market value of state-owned enterprises was only 18.2%; 3) In 2023, a new round of state-owned enterprise reform began: replacing net profit indicators with return on net assets and operating cash ratio with operating income margin, guiding enterprises to pay more attention to input-output efficiency and operating cash flow.
Revenue targets have all been exceeded in recent years, and the “14th Five-Year Plan” target revenue of 100 billion dollars can be expected. 1) Exceeding the revenue target. The 14th Five-Year Plan target is just around the corner: the company's 2019 expected revenue of 285-29 billion yuan (actual 33.8 billion yuan), expected revenue of 400-44.5 billion yuan in 2020 (actual 45.2 billion yuan), expected revenue of 630-67 billion yuan in 2022 (actual 67.8 billion yuan); the company's budget revenue for 2023 is 74-80 billion. According to the 14th Five-Year Plan, the company is expected to achieve the revenue target of 100 billion yuan, and the company is expected to achieve the revenue target of 100 billion yuan in 2022 -In 2025, the CAGR for revenue and profit was 13.8% and 14.3%, respectively, and the company's profitability is expected to increase.
There is plenty of room for improvement in the company's net interest rate. With the optimization of the business structure and fee control, the net interest rate is expected to gradually increase: the company's gross margin is 8.6% in 2022, and the net profit margin for 2020-2022 is 2.5%/2.1%/1.7%. After deducting the profit contribution of Chongqing Pharmacists, the net interest rate is 1.8%/1.6%/1.3%, respectively, which is 1% lower than the average in the same industry. The main reason is that the company's financial expense ratio is high in the industry. 2) Business structure optimization and fee control help increase net interest rate: As the company gradually controls fees and expands the proportion of high-margin business, the net interest rate is expected to gradually increase.
The scale of medical device revenue continues to expand, and DTP pharmacies are expected to help the retail sector overtake the “14th Five-Year Plan” curve.
The revenue scale of the medical device business continues to expand, achieving revenue of 9.51 billion yuan in 2022, accounting for 14.0%; the volume of medical devices continues to grow, and the revenue structure continues to be optimized. By the end of 2022, there were about 800 retail stores, including nearly 110 DTP pharmacies, with DTP prescription pharmacy sales up 28.7% year over year. In 2022, the gross margin of medical devices was 12.2%, and the gross margin of pharmaceutical retail was 22.1%, which is higher than the gross profit margin of 7.7% of pharmaceuticals. We expect the proportion of the company's high-margin business to continue to increase, and profitability will increase steadily.
Investment advice: Heavy Pharmaceutical Holdings has grown from a distribution enterprise in Chongqing to a leading distribution enterprise with a national layout. The growth rate is strong. The 14th Five-Year Plan: 100 billion revenue is just around the corner, and in the context of a new round of state-owned enterprise reform, profitability is expected to continue to improve. We expect the company's net profit to mother will reach 7.1/10/1.16 billion yuan respectively in 23-25. The corresponding PE was covered for the first time, giving it a “buy” rating.
Risk warning: Regional competition increases risks, volume procurement may affect the industry's growth rate, and post-pandemic recovery falls short of expectations