Key points of investment
Ordinary people are one of the leading companies listed in domestic pharmacy chains. The analysis found that the company's own growth is driven by coordinated store growth and high growth in the number of stores, and commercial procurement optimization is expected to increase profit margins. The company's gross margin increased dramatically in 2024Q1, and we explained the company's profitability issues by analyzing the drivers, space, and pace of its profit margin increase.
Driven by increased profit margins?
Analyzing the drivers behind the company's increase in profit margins, we think they are mainly due to:
(1) Product restructuring drives an increase in gross margin, including:
① Increased share of total procurement. The company implemented the torch project to transform the commercial procurement system and key business processes. In 2023, the company's total procurement accounted for 68.40%, an increase of about 2.4 pct over the previous year; the company's gross margin increased steadily in 2023 and 2024Q1. We believe that through measures such as increasing the share of integrated procurement and adjusting the product structure, the gross margin of the company's pharmaceutical retail sector is expected to continue to increase in 2024-2026. 2024Q1
② Increased share of private brands. In 2023, the company's own brand sales accounted for 19.64%, an increase of about 0.9 pct; 2024Q1 private brand self-operated stores had sales of 830 million yuan, accounting for 20.8% of sales, an increase of 1.3 pct over the previous year, and the gross profit margin of its own brand was more than 50%, which was higher than the company's overall gross profit margin. We believe that the private brand layout may be an effective measure to hedge against price competition in the industry and raise the gross margin level. The share of private brands continues to increase, which is expected to drive gross margin.
(2) Rental efficiency continues to improve, and the sales expense ratio is at a low level.
We calculate rent efficiency (rental efficiency for short) by dividing total operating income by rent in sales expenses, and found that the company's rental efficiency increased year by year in 2019-2023. We believe that, on the one hand, the increase in franchise share led to an increase in revenue without rent expenses, and on the other hand, the company's strategies such as continued store decline led to an increase in rental efficiency. We believe that as the company continues to expand, such as the decline in franchising, leasing efficiency may still be improving, thus maintaining a relatively low level of sales expenses.
Room for increased profit margins?
Compared to comparable companies in the industry, there is still a lot of room for improvement. At the end of 2023, Yifeng Pharmacy's retail gross profit margin was 39.59%, and the gross profit margin of Chinese and Western proprietary medicines was 34.80%; Dashenlin Pharmaceutical's retail gross profit margin was 38.15%, and the gross profit margin of Chinese and Western proprietary medicines was 31.16%. Compared with comparable companies in the industry, especially Yifeng Pharmacy, which has a comparative advantage in fine management, the company's pharmaceutical retail gross profit margin of 35.69% in 2023, and the gross profit margin of Chinese and Western proprietary medicines is 30.48%.
The pace of increasing profit margins?
The gross margin of the company's pharmaceutical retail sector is expected to continue to rise in 2024-2026. In 2021-2023, the company's R&D investment continued to be at a historically high level. We believe that digital management optimization, commercial procurement optimization, and product structure adjustment are a relatively continuous process, and the resulting increase in gross margin may be steadily reflected on the reporting side year by year. The gross margin of the company's pharmaceutical retail sector is expected to continue to increase in 2024-2026.
Profit forecasting and valuation
Based on the above analysis, we expect the company's total revenue for 2024-2026 to be 258.88/306.61/36.566 billion yuan, respectively, up 15.38%, 18.44%, and 19.26% year-on-year; net profit to mother will be 11.47/14.00/1,677 billion yuan, up 23.49%, 22.05%, and 19.75% year-on-year respectively. The corresponding EPS is 1.96/2.39/2.87 yuan/share, corresponding 17 times PE in 2024, maintaining a “gain” rating.
Risk warning
The risk of increased competition in the industry; the risk of policy changes; the risk of demand fluctuations.