Key points of investment:
The company's current position has the logic of improving both performance and valuation. 1) In terms of performance, the profitability of the retail business has great potential to improve. With the implementation of various gross profit improvement measures, the profitability of the retail business is expected to increase rapidly, driving overall performance growth. 2) In terms of valuation, the company's current valuation is lower than the industry average. As expectations for improvements in internal operating efficiency are fulfilled, the valuation is expected to continue to be repaired.
The pharmaceutical wholesale business is deeply involved in the Liangguang region, and growth is expected to be steady.
The company's pharmaceutical wholesale business leads the distribution business in the Liangguang region. The customer network layout is extensive and deep. In 2023, it has covered 1,110 secondary and tertiary medical institutions, 6155 retail terminal institutions, and 8,373 primary medical institutions, with steady profitability. As the company continues to improve the customer network layout in the two regions and accelerate the digitalization and diversification transformation of its business, the company's leading position in the Liangguang region will become more stable and maintain steady overall growth.
The pharmaceutical retail business has a nationwide chain layout, and the potential to unleash profitability is huge.
The company's pharmaceutical retail business is mainly based on National University Pharmacies. As of 2023, it has a total of 10,516 pharmacy stores, including 8,528 direct stores and 1988 franchise stores. The network covers 20 provinces, cities and autonomous regions, covering more than 160 cities in China. The net profit margin and gross margin of NU Pharmacies have a lot of room to improve compared to peers, and the company's many gross profit improvement measures have been gradually implemented, including changes in the headquarters management model and the establishment of a gross profit improvement project team (procurement, products, own brand, marketing, operation). Through the adjustment of the category structure and optimization of the procurement process, the profitability of the retail business is expected to gradually improve.
The four major joint ventures contribute stable investment returns.
Joint investment income brings considerable profit contributions to the company every year, accounting for more than 20% of profits in 2018-2023. The company's joint investment income was mainly contributed by the four major joint ventures, namely Sinopharm Hyundai, Sinopharm Zhijun, Wanle Pharmaceutical, and Zhijun Pingshan. The investment income ratios contributed in 2023 were 29%, 23%, 22%, and 26%, respectively.
Profit forecasting and investment advice
We expect the company's revenue for 2024-2026 to be 820/874/92.6 billion yuan, up 8.6%/6.0% year on year, and net profit to mother of 18.5/20.6/2.24 billion yuan, respectively, up 15.5%/11.6%/8.5% year on year, corresponding to current PE 12/11/10 times, respectively. We selected Sinopharm Co., Ltd. in the pharmaceutical business sector, Shanghai Pharmaceuticals, Jiuzhou Dao, Yifeng Pharmacy, Ordinary People, and Dashenlin as comparable companies. The consistent valuation of Sinopharm was lower than the average of comparable companies. As a leading pharmaceutical wholesale and retail platform in the country, the company's wholesale business is deeply involved in the two Guangzhou regions. The regional advantages are obvious, and the retail business has great potential to unleash profitability. It was covered for the first time and was given a “buy” rating.
Risk warning: retail profit margin improvement falls short of expectations, retail store expansion falls short of expectations, industry policy risks