With the approaching of the Fed's interest rate cut window, highly interest rate sensitive industries such as pharmaceuticals are experiencing a positive market outlook.

Many authoritative institutions have voiced that pharmaceutical stocks, due to their sensitive response to interest rate changes, are highly likely to stand out and become the darlings of the capital market under the catalyst of interest rate cuts. Among them, there are many stocks with both cost-effectiveness and exceptional potential that are quietly brewing rich investment opportunities, waiting for investors' discovery.

Recently, Pharmacist Assistance, China's largest digital comprehensive service platform for outpatient pharmaceutical industry, released its performance data for the first half of 2024. The company's revenue continued to maintain a double-digit growth trend, and net income turned positive for the first time, with adjusted net income increasing by 30.3% year-on-year to 91.411 million RMB (the same unit).

So, at a time when digital pharmaceutical companies are generally in the stage of exploring and investing heavily, why is Pharmacist Assistance able to stand out, quickly achieve profitability, and maintain sustainable growth? How should we view its future development?

Net income turns positive, performance exceeds market expectations.

From the results, based on the latest disclosed semi-annual report data, it can be seen that while maintaining revenue and profit growth, the company's operating efficiency has also improved significantly.

In the first half of 2024, despite various uncertainties in the external environment, the company's profitability continued to improve steadily. Net income turned positive, reaching 13.35 million RMB, compared to a loss of 3.177 billion RMB in the same period last year. The first half of this year saw a significant turnaround in losses to profits. Adjusted net income reached 91.411 million RMB, an increase of 30.3% year-on-year. The operating efficiency continued to improve, the capital structure was healthy, and the asset quality was good, showing excellent performance.

Looking at the revenue side, the company's revenue growth is rapid. The company's total revenue in the first half of 2024 reached 8.814 billion RMB, an increase of 10.6% year-on-year, with growth significantly outpacing the industry average.

On the expenditure side, the company's research and development investment continues to increase, while the three expenses continue to decrease. On the one hand, the company's research and development expenses in the first half of 2024 were about 45.7 million, an increase of 14.5% year-on-year; on the other hand, the company has controlled the sales expense ratio, management expense ratio, and financial expense ratio.

On the profit side, the company has significantly reduced costs and improved efficiency, and its profitability has steadily improved. According to the company's announcement, the net income in the first half of 2024 has changed from a substantial loss to the first positive number, with a net income of 91.411 million yuan, demonstrating sustained profitability.

From the perspective of operational efficiency, under the smart supply chain management system, the company's overall operational efficiency has gradually improved.

According to the announcement, the company is able to process and complete orders within an average of about 3 hours, far superior to industry peers. In the first half of 2024, the company's inventory turnover days remained around 31.0 days, accounts payable days were 60.6 days, accounts receivable turnover days were about 0.6 days, and the cash cycle was about -28.9 days. The company has achieved efficient cash management, bringing a large amount of accumulated cash to the platform, replenishing the company's liquidity, and providing guarantees for rapidly expanding the overall business scale.

It is worth noting that the company's user base and user stickiness are also continuing to improve, maintaining a leading position in the industry. According to the financial report, in the first half of 2024, the cumulative registered buyers of Yaoshiban exceeded 741,000, including approximately 426,000 drugstores and approximately 310,000 grassroots medical institutions, which demonstrates the company's extensive layout and deep penetration in the medical industry chain, laying a solid foundation for its business growth.

From a user perspective, the average monthly active buyers in the first half of 2024 reached 425,000, a year-on-year increase of 20.4%, and the average monthly paying buyers reached 396,000, a year-on-year increase of 19.6%; the payment rate exceeded 93%, and the average monthly order volume per paying buyer remained at a high level of around 28 orders.

With the support of digital capabilities, the company's management efficiency has also improved. Compared to the same period last year, the business expansion team has further improved its efficiency, with each member being able to manage around 150 drugstores, an increase of more than 14 from the same period last year; in the first half of 2024, each member of the business expansion team brought in approximately 8.2 million yuan of GMV, a year-on-year increase of 6.4%.

Overall, the company's financial condition is good, with high-quality assets and a relatively low asset-liability ratio compared to industry peers. The company has ample cash flow (as of June 30, 2024, the company's cash and cash equivalents amounted to 1.405 billion yuan), which allows it to go further in the cold winter and develop more steadily when spring comes.

How should we look at it in the future?

To answer the second question, how should we look at the future development after Pharmacist Bang's net income has turned positive? In my opinion, we can discuss it from three dimensions: industry changes, company development strategy, and valuation.

First, from the perspective of industry development, with the opening of online medicine purchase and medical insurance reimbursement, and the increase in outpatient pharmacies, as well as the implementation of price regulation both online and offline, the pharmaceutical industry is entering an era of accelerated reshuffling, and the pharmaceutical distribution field is also undergoing transformation.

Take medical insurance price comparison as an example, policy guidance helps retail channels establish reasonable pricing, and real-time comparison of prices between offline pharmacies, online pharmacies, online and offline prices, as well as in-hospital and out-of-hospital prices, further enhances market transparency. This also prompts retail pharmacies to seek high-quality supply chains in order to obtain relatively more comprehensive pricing and product selection space. Faced with the new policy context, Pharmacist Bang fully utilizes its channel and pricing advantages, constantly expands the number of upstream merchants, enriches the supply category, and provides a broader range of procurement choices for downstream pharmacies, helping to minimize procurement costs and further expand Pharmacist Bang's coverage of end-users.

While continuously improving its service competitiveness, Pharmacist Bang also focused on expanding strategic cooperation with exclusive brands and its own brand "Happy Pharmacist" product business during the reporting period. The GMV of these two sub-businesses reached 0.224 billion yuan, a year-on-year growth of 94%. Among them, "Happy Pharmacist" has launched 170 varieties, serving over 0.3 million purchasing customers, and the GMV and procurement amount from primary medical institutions have significantly increased, with a substantial increase in paid users. The significant effectiveness of the single-product strategy is evidenced by the fact that the new product "Huoxiang Zhengqi Oral Liquid" covered 0.1 million terminals in its first 5 months of launch, achieving sales of over tens of millions in June, and making outstanding contributions to single pharmacies and primary medical institutions.

As the largest digital comprehensive service platform in China's out-of-hospital pharmaceutical industry, Pharmacist Bang is expected to further increase its market share and enhance its competitive barriers in the industry development by leveraging its leading scale effect and stronger bargaining power.

Secondly, from the perspective of company development strategy, Pharmacist Bang is also continuously investing in digitization and actively exploring innovative businesses to create new growth momentum.

Among them, in the platform business, Pharmacist Bang will upgrade and improve the digital operation system for upstream sellers, assist the long-term growth of third-party businesses, and focus on expanding traditional Chinese medicine business. In the self-operated business field, on the basis of improving the layout of self-operated warehouses, Pharmacist Bang will further develop same-city delivery services, achieving same-day delivery for orders in main warehouse cities and surrounding cities. At the same time, the company plans to gradually launch medical cold chain distribution operations in major cities to further improve supply breadth and delivery efficiency.

In addition, relying on existing business advantages, Pharmacists Help will fully tap into incremental value. According to the plan, the company will launch the "Spectrum Cabin" smart medical solution in the second half of the year, which integrates instant detection devices, clinic SaaS, and AI doctor assistance systems to help grassroots medical workers provide more efficient and professional services to patients.

Finally, from a valuation perspective, the current valuation of the pharmaceutical sector is attractive, and undervalued, high-cost-effective quality stocks are expected to be favored.

According to WIND data, the PE ratio (TTM) of the pharmaceutical and biotechnology sector is only 26.79 times, which is 6.46% of the past ten years, far below the opportunity value of 28.60 times, indicating an attractive valuation.

Several brokerages have pointed out that in the era of aging population, the pharmaceutical sector still belongs to the blue ocean market of steady and long-term growth. After experiencing more than 3 years of systematic adjustments, as the bearish factors in the sector are gradually cleared, the industry's growth rate is expected to show a trend of low to high, and the capital market will return to focusing on bottom pharmaceutical assets with low valuation and improved operating margins.

Pharmacists Help, after announcing its performance for the first half of the year and achieving a significant turnaround in net income, is expected to have a PE ratio of less than 25 times for the full year, slightly below the industry average. This means that in the Hong Kong stock industry/sector, the company's valuation is relatively favorable.

Chart 1: Pharmaceutical and Biotechnology PE (TTM)

Data source: WIND, compiled by GLG Data as of the close on August 21, 2024

Summary

Currently, the digitalization of external pharmacy distribution where Yaoshi Bang operates is still in a high-speed growth stage, with a high ceiling. Policy changes are particularly favorable for its leading development, and it is expected to continue the competitive pattern of the strong getting stronger in the future.

Its unique business model of "platform + self-operated" driven by dual wheels has already been proven successful, with clear profitability. Subsequent performance is expected to accelerate realization, and the intrinsic value may gradually be recognized by the market. The future development is worth looking forward to.