Flexible system+excellent management to build a regional pharmaceutical distribution leader in Guangxi. The predecessor of Liuzhou Pharmaceutical Group was the Liuzhou Pharmaceutical Wholesale Station established in 1953. Under the leadership of a flexible system and excellent management, it has been concentrating on the regional market for a long time to form a comprehensive pharmaceutical health industry group focusing on “pharmaceutical wholesale, pharmaceutical retail, pharmaceutical industry, and collaborative development of innovative businesses such as supply chain value-added services, pharmaceutical internet services, and terminal health services”. In 2022, the company's revenue reached 19.053 billion yuan, ranking 16th among pharmaceutical wholesalers in the country.

Batch and zero integration have built barriers to collaboration, and the pharmaceutical industry has sprung up. The company's business is mainly divided into 3 segments: pharmaceutical wholesale, pharmaceutical retail, and pharmaceutical industry. Among them, pharmaceutical wholesale is the company's cornerstone business and is firmly in the leading position in the region; the pharmaceutical industry is a new field that the company has vigorously developed in recent years, and is gradually growing into the company's second growth curve:

1) Pharmaceutical wholesale: Liuyao Group is a designated pharmaceutical reserve unit and an anesthetic drug business unit. In Guangxi, it has established three modern pharmaceutical logistics centers and collaborative sub-warehouses covering 14 prefecture-level cities throughout the region. The storage scale exceeds 140,000 square meters, forming an efficient distribution network covering the entire region. The company has improved service efficiency and specialization through supply chain management platforms, pharmaceutical consumables SPD projects, and Internet medical services. In recent years, through information system construction and intelligent equipment applications, the company has built an information platform covering upstream and downstream drug distribution to provide professional logistics value-added services to customers in the supply chain and meet the refined, intelligent, standardized and traceable management requirements of customers, thereby improving customer stickiness, promoting the implementation of collection and distribution, and increasing the company's market share. The company's business covers 100% of the middle and high-end medical institutions in Guangxi. As of 2023H1, the multi-provincial coalition that participated in the implementation of this year had a 100% click-through rate. In the “National Basic Medical Insurance, Work Injury Insurance and Maternity Insurance Drug Catalogue (2022)”, which was officially implemented on March 1, 2023, the distribution rate of the newly added products exceeded 98%; the total number of cooperative suppliers exceeded 6,000, and the operating product regulations exceeded 80,000. It is the main distributor of many well-known domestic and foreign pharmaceutical companies in Guangxi.

Growth point: The company's share of the pharmaceutical wholesale market in the region has reached a high level. There is still plenty of room for improvement in the wholesale device market, and the business structure is expected to continue to be optimized. With the normalization of drug collection policies, equipment consumables are also showing a trend of centralized, standardized, and transparent procurement. The company's market share of medical device consumables in Guangxi is far lower than the pharmaceutical market share, and there is a lot of room for growth. In recent years, the company has increased its market expansion efforts in medical device consumables and test reagents, strengthened business resource collaboration between the drug side and the device side, jointly promoted the development of hospital customers for device consumables and test reagents, and the implementation of hospital SPD projects, and implemented a collection and distribution model. The rapid development of the variety of medical devices and test reagents is expected to further optimize the company's variety structure, help raise the gross profit level of the company's wholesale sector, and push the company's wholesale business to continue to maintain steady growth.

2) Pharmaceutical retail: The company's Guizhong Pharmacy is one of the top 100 pharmaceutical chain enterprises in the country. It has more than 700 pharmacies. It is one of the earliest pharmacy chains in Guangxi. It has strong service capabilities and brand influence in the region, leading other pharmacy chains in the region. In recent years, the company has further optimized its store layout, developed special pharmacies such as DTP pharmacies, dual-channel medical insurance pharmacies, and chronic disease pharmacies, developed innovative businesses such as prescription outreach, chronic disease management, and online pharmacies, and used the Internet and modern information technology to promote the integration of online and offline businesses and create a “new retail” business format. Currently, Gui Zhong Da Pharmacy is ranked 12th among national drug retailers.

Growth points: site selection advantage+comprehensive health management services, differentiated advantages improve drug compliance and consumption stability of end customers. The company is the first company to launch DTP pharmacy business and online pharmacy business in the region. In 2022, the number of the company's DTP pharmacies (including courtyard stores) reached 174, an increase of 62 over the previous year; other stores improved their refined management level and professional service capabilities by optimizing layout and variety equipment, and achieved improved floor efficiency. The company targets the entire customer life cycle and develops a series of characteristic and differentiated health services such as sub-health management and chronic disease management to effectively enhance the customer consumption experience, thus forming a stable customer base. In 2022, the company promoted full coverage of specialized health services such as chronic disease management in chain stores, providing one-stop specialized services such as chronic disease file management, free testing, medication consultation, medication tracking and return visits, and medication guidance. At the same time, the company set up professional subject teams and chronic disease return visit teams to improve the drug compliance of end customers and form a stable consumer base.

3) Pharmaceutical industry: The company mainly focuses on the traditional Chinese medicine industry, carrying out the production and processing of traditional Chinese medicine tablets and the production and development of modern traditional Chinese medicine products such as proprietary Chinese medicine and traditional Chinese medicine formula granules, building and cultivating the “Xianwei” Chinese medicine tablet and formula granule brands, as well as national pharmaceutical brands such as “Wantong” and “Kangsheng”. The company continues to increase investment in R&D and diversify the variety of products. By the end of 2022, Xianju Traditional Chinese Medicine Technology has been able to produce and process 1100 varieties of Chinese medicine tablets, with an annual production capacity of nearly 5,000 tons, and has completed 7 patent applications including tablet processing technology and quality inspection technology; Wantong Pharmaceutical launched new products such as anti-stasis and spleen tea, Angong Niuhuang Pills, Erchen Pills, Liuwei Pills, etc., and has carried out research on antibacterial, anti-inflammatory, and antiviral symptoms of core products such as Wantong Yankang tablets (capsules) in the fields of pneumonia and pharyngitis; Kang Sheng Pharmaceutical has carried out research on antibacterial, anti-inflammatory, and antiviral indications; Renfukang capsules, Shuxenin capsules, Zhishengtong It produces pharmaceutical products with high clinical demand and accurate curative effects, such as capsules and soft liver protection tablets, and has also been awarded as a national high-tech enterprise.

Growth point: During the formula granule window period, the pharmaceutical industry is expected to lead cross-regional development. With the full liberalization and implementation of the national standard for traditional Chinese medicine formula granules, enterprises outside the pilot entered, and the industry ushered in expansion and market-based development. During the transition period, the variety of national and provincial standards was incomplete, as well as the cross-provincial sales registration system, giving new entrants a window for enterprise development. Within Guangxi, the company relies on commercial channel advantages and is expected to achieve rapid layout and occupy a large market; markets outside the region are expected to expand across regions through proper operation. By 2023Q3, the first phase of the company's formula granule project had been completed and put into operation, with a production capacity of 800-1000 tons; the company had completed 449 product registrations in Guangxi, 420 varieties in Guangdong, and more than 300 in Sichuan, Chongqing, Guizhou, etc.; 265 customers had been developed (119 within the province, 146 outside the province, 24 medical institutions above level 3, and 241 medical institutions below level 2), an increase of 115 compared with the number of development customers in the first half of 2023.

The foundation is stable, and the performance structure is expected to continue to improve. Through intensive cultivation in the pharmaceutical distribution field for 70 years, driven by a high share in the pharmaceutical wholesale sector, the company has continuously strengthened its ability to obtain resources with upstream suppliers and the ability to meet supply with downstream terminals to empower the expansion of other businesses; combine high-quality pharmacy chains to form integrated batch and zero management advantages and DTP business advantages; promote industrial product market expansion through commercial channel advantages, and continuously enhance the profitability of the industrial sector. Compared with the wholesale business (7.68%, 2022), retail (20.15%, 2022) and industrial (48.82%, 2022) sectors have higher profit margins, and their share of performance contributions has continued to increase in recent years. As the retail business further undertakes hospital outflows and the industrial business expands across regions, the company's profit structure is expected to continue to improve.

The goals are clear, and the incentive plan is expected to have good results. In 2023, the company issued an equity incentive plan, awarding 132 incentive targets of 19.95 million shares, including middle and senior management and core executives. The plan sets three-year assessment targets for 2023-2025, divided into overall net profit growth to mother (20%/44%/73% increase over 2022) and net profit growth targets for various business segments. By 2023Q3, the company's net profit to mother increased 17.26% year on year, and net profit from the wholesale/retail/industrial sector increased 13.00%/16.09%/29.39% year on year, respectively. Prior to the company's last round of incentive plans in 2019, the company's revenue growth targets for 2019-2021 were 18%/35%/50% increase over 2018, respectively. The company's actual completion situation for three years was an increase of 26.82%/33.75%/46.27% compared to 2018, and the performance targets were well fulfilled.

Investment advice: As a leader in the pharmaceutical distribution industry in Guangxi, the company has a stable foundation for the pharmaceutical wholesale business, and can continue to empower the pharmaceutical retail and pharmaceutical industry businesses to achieve continuous optimization of the performance structure. At a time when the traditional Chinese medicine formula granule industry ushered in a development window, the company's pharmaceutical industry sector is expected to lead growth across regions.

The company introduced an equity incentive plan. The growth target has good reference value, and the company's growth is highly certain.

We predict that the company's EPS for 23-25 will be 2.31, 2.79, and 3.34 yuan/share, respectively, and the corresponding PE will be 8.3x, 6.9x, and 5.7x, respectively. This is the first coverage, giving it a “buy” rating.

Risk warning: industry policy risks, business development falling short of expectations, account management risks, collection policy risks, increased market competition.