Core logic: As of 2024/2/27, the company's PE-TTM valuation is only 8.65 times (average PE value 11 times in the past 5 years, 10 times valuation in the past 3 years). The valuation is at a historically low level and has a strong margin of safety.
The company continues to consolidate its competitive advantage in the pharmaceutical wholesale business while promoting the rapid development of retail business and industrial business. We believe that in the future, with the expansion of retail pharmacy stores and the application of AI technology, the superimposed industrial business will expand nationwide and strengthen its brand power, and the company is expected to experience both performance and valuation improvements.
The wholesale business is “steady and progressive”: ① The wholesale business contributed about 80% of revenue in 2022. The company has built an efficient logistics distribution network and after-sales service system covering 14 prefecture-level cities in the autonomous region, and has achieved full coverage of hospitals above level 3 and above in Guangxi. In 2022, the company accounted for nearly 30% of the pharmaceutical wholesale market in Guangxi. ② In terms of pharmaceutical wholesale, due to years of integration, the company already has a large market share. Subsequent drug wholesale may maintain steady growth, while its core focus may be on speeding up repayment and account period optimization; ③ In terms of device wholesale, since there is no two-ticket system+collection of devices, the overall market is scattered. Currently, the company is gradually promoting the SPD project, and has now cooperated with more than 20 hospitals for the SPD equipment and consumables project. If construction of the SPD project is accelerated in the future, the equipment wholesale business is expected to bring impressive results.
Retail business “expansion+AI optimization” dual drive: At the end of 2022, Gui Zhongda Pharmacy had 736 pharmacies (including 174 DTP pharmacies, accounting for 23.64%). In 2022, Gui Zhongda Pharmacy ranked 12th in the list of the top 100 drug retail companies in the country. We believe that the driving force behind the subsequent growth of Guizhong Pharmacy comes, on the one hand, from the expansion of the number of stores, and on the other hand, from the application of AI technology to increase customer flow.
In addition, all aspects of the outpatient coordination policy may be implemented, and there will be additional volume.
The industrial business is expected to be nationalized & branded: ① The company's industrial business mainly relies on Chinese medicine tablets, traditional Chinese medicine formula granules and proprietary Chinese medicines. Among them, the Chinese medicine tablet business (operated by Xianju Traditional Chinese Medicine) is currently the company's basic market. Xianju Traditional Chinese Medicine still contributed more than 50% to the revenue of the industrial sector in 2022. With the company's deep cultivation in the Guangxi region, the corresponding brand awareness and penetration rate have increased. At the same time, the company is also gradually laying out markets outside the autonomous region, laying the foundation for the brand's nationwide layout. ② Traditional Chinese medicine formula granules may be worth looking forward to. In July 2021, the company established Xianju Pharmaceutical (focusing on the production and development of traditional Chinese medicine formula granules). Currently, it has completed the registration of more than 400 types of traditional Chinese medicine formula granules (covering most varieties of national and provincial standards), and the production capacity has reached 1,500 tons (the total design and output of the traditional Chinese medicine formula granule project reached 3,000 tons). By the end of 2023Q3, the company had developed nearly 200 customers. In addition, 2023H1 formula has achieved revenue of about 28.89 million yuan. ③ With the adjustment of the marketing system for proprietary Chinese medicines, high-quality products are expected to gradually spread throughout the country. Sun Company Kangsheng Pharmaceutical and its subsidiary Wantong Pharmaceutical mainly carry out the production and development of proprietary Chinese medicines. In 2022, a total of 19 products from the two companies were included in the first batch of Guangxi folk medicine lists certified by the Guangxi Ethnic Medicine Expert Committee published by the Autonomous Region Administration of Traditional Chinese Medicine, laying the foundation for subsequent inclusion in the national medical insurance catalogue and base drug catalogue.
Profit forecast: We expect the company's revenue for 2023-2025 to be 20.789 billion yuan, 23.147 billion yuan, and 25.719 billion yuan respectively, with year-on-year growth rates of 9%, 11%, and 11%, respectively, and realized net profit to mother of 834 million yuan, 1.0 billion yuan, and 1.05 billion yuan, respectively, up 19%, 20% year-on-year, and corresponding to the current stock price PE 8.3 times, 6.92 times and 5.75 times, respectively. Considering that the company's current valuation is at a historically low level, it is expected that the future will see an increase in both performance and valuation as the company's two major high-margin businesses, retail and industrial businesses gradually rise. First coverage, giving the company a “buy” investment rating.
Risk factors: Untimely collection of accounts receivable, rising financing interest rates, increased market competition, growth in the pharmaceutical wholesale business falling short of expectations, and falling short of expectations in new business expansion.