Key points of investment
One sentence logic: The countercyclical nature of leading TCM chain diagnosis and treatment is highlighted. National expansion is expected to accelerate, driving performance beyond expectations.
Market expectations: Endogenous growth is relatively stable, and rapid large-scale nationwide expansion is difficult.
1) Referring to historical acquisition data, epitaxial expansion is dominated by millions and tens of millions of small and medium-sized institutions, and the scale of expansion is limited.
2) Most of the company's revenue comes from old institutions established in 21 years or earlier. As efficiency increases, endogenous growth may stabilize.
We predict that demand for traditional Chinese medicine diagnosis and treatment will continue to be high. The company will expand its store+expand its city+expand its area+increase mergers and acquisitions to meet incremental demand, and its revenue and performance in 24 years are expected to exceed expectations.
1) On the demand side, demand for sub-health issues has increased and the penetration rate is low. Traditional Chinese medicine diagnosis and treatment is one of the most noteworthy consumer medicine tracks in the next few years, and the countercyclical nature is prominent. The external environment has been disrupted in recent years, overall health awareness has increased, and demand for diagnosis and treatment of common respiratory diseases and sub-health problems has increased. The company's revenue/adjusted net profit was +43%/54% year-on-year in '23, confirming high demand. Furthermore, national policies strongly support the development of the traditional Chinese medicine industry, all of which are expected to accelerate the penetration of traditional Chinese medicine diagnosis and treatment.
2) On the supply side, both the company's epitaxial and endogenous expansion are maintained at a rapid pace. As of 23, the company had 56 domestic institutions. The company is expected to maintain an active pace of expansion in 24, adding 10-15 stores and 3-5 new cities.
From an endogenous point of view, the company uses a combination punch of Tuodian, Tuocheng, and Expanding Area to meet demand.
Looking at the epitaxial sector, recent changes in the external environment have led to a clean-up of mid-tail institutions. It coincides with Gushengtang having completed the early stages of regional market paving the way, welcoming a golden period of national expansion and increasing epitaxial development.
Inspection and catalysis
Inspection indicators: number of stores opened, volume of mergers and acquisitions
Possible catalysts: promotion of medical consortium cooperation, development of new provincial cooperation, implementation of large-scale mergers and acquisitions, introduction of favorable national/regional policies for traditional Chinese medicine
The value of research
1) Unique perception: The market believes that the efficiency of old stores is already high, and endogenous growth is stabilizing. We believe that the company is supply-driven, and its core competitive advantage is to bind the country's high-quality traditional Chinese medicine medical resources. Judging growth mainly depends on the company's cooperation with leading public medical institutions (such as signing medical consortia), number of doctors, and average doctors' output value. In terms of institutional cooperation, the company added 6 traditional Chinese medicine hospitals and the University of Traditional Chinese Medicine medical consortium cooperation in 23 years, reaching more than 20 cooperative units in the national medical consortium, and continuously integrating high-quality medical resources. In terms of doctor resources, the number of doctors in the company increased by 26% in 23, and the average contribution performance of doctors who have cooperated for 3 years or more increased by 28% compared to the same period in '21. Against the backdrop of sufficient doctors' reserves, it is expected that the endogenous growth rate will continue to be high in the future.
2) A different perception than before: In the past, it was thought that most of the new cities were second-tier cities, and the increase in contribution was limited. It is now believed that second-tier cities in regions such as Jiangsu and Zhejiang have large market space, strong economic strength, and good acceptance of traditional Chinese medicine. The pace of progress and scale of expansion in new cities is expected to exceed expectations.
Profit forecast: Considering that the traditional Chinese medicine industry maintains a high level of prosperity, the countercyclical nature continues to be prominent, and the company also maintains a positive expansion trend, continues to integrate high-quality medical resources, and accelerate national expansion, we expect the company's revenue and net profit to mother will maintain a high growth rate. The company's revenue for 24-26 is estimated to be $313, 41.7, and 5.38 billion, respectively, up 35%/33%/29%; net profit to mother will be 3.54/525/725 million, respectively, up 40%/48%/38%. Excluding effects such as amortization of equity incentives, etc., the adjusted net profit for 24-26 is estimated to be 417/566.749 million, an increase of 37%/36%/32%. The corresponding adjusted PE is 22/16/12 times, respectively, maintaining the “buy” rating.
Risk analysis and tips
Risk of policy changes; risk of compliance with public opinion; risk of opening a store or falling short of expectations when a new store falls short of expectations