Key points of investment

Incident: On September 25, 2024, Kyushu Express announced that Huitianfu Jiuzhou Pharmaceutical Warehousing and Logistics Closed Infrastructure Securities Investment Fund (hereinafter referred to as “Public REITs”) was accepted by the Securities Regulatory Commission and the Exchange on September 24. Meanwhile, the pre-REITs declared by the company in July 2024 are also progressing steadily. We believe that the launch of REITs is a milestone in the company's development process, and the improvement in capital turnover efficiency as a core variable will drive the company to usher in a revaluation.

Financial impact: A significant increase in net profit to mother is expected to drive the ROE center to increase profits significantly in the short term. Fixed assets with a book value of 0.323 billion corresponding to this public offering of REITs will be published to raise equity capital with an assessed value of 1.17 billion. After deducting issuance fees and taxes, the premium portion will increase the company's profit by no more than 0.7 billion yuan. On the cost side, Kyushu Express will later use leasing of metered storage assets. Referring to the revenue situation for the first quarter of 2024 and the proportion of related parties in the prospectus, we expect Kyushu Express to increase the rent cost by about 80 million yuan/year; considering the elimination of depreciation and amortization (about 30 million yuan) and management costs of the original assets, we expect the impact of additional costs every year to be relatively limited. At the same time, since Kyushu Express will hold 34% of the fund share in this issuance, which will be included in long-term equity investments, future REITs fund earnings will be reflected in changes in investment income. Furthermore, if pre-REITs are implemented as scheduled within this year, they will generate a net profit of no more than 1.1 billion yuan.

The company's capital turnover efficiency may be greatly improved, and the REITs model is expected to increase the ROE center. Referring to the prospectus, the funds raised by the company's public REITs will be invested in logistics and warehousing construction in Shanghai, Hainan, Yunnan, Ningbo, Nantong, Yili and other places. We believe that through the innovative financing model of REITs, the company will no longer need to rely on other high-cost equity financing instruments, and will also accelerate capital return and warehousing and logistics construction, and achieve an increase in the turnover ratio of circulating assets. According to estimates, assuming that the company maintains a balance ratio of 70%, a non-profit margin of 1.5%, and 100 days of capital turnover in the future, 1 billion equity capital can leverage about 2.3 billion in debt, compounded with a turnover of 3.6 times a year, which is expected to contribute about 12 billion revenue and 0.18 billion profit to the company and promote the rapid development of the company.

How to understand the scarcity and sustainability of the Kyushu-dori REITs model?

We believe that pharmaceutical logistics warehousing assets have strong scarcity and profit stability, and REITs may become a stable, continuous, and scarce new financing model for the company. Since pharmaceutical business qualification certification has strict requirements for its storage area and “modern pharmaceutical logistics conditions” that meet GSP standards, a perfect quality management system and pharmaceutical storage with digitization and automation capabilities are just what is required with high barriers. As the largest commercial company in the outpatient market, Kyushu has continued to optimize its inventory turnover ratio over the past 5 years, which is significantly higher than the industry level. We believe that the company may have a strong competitive advantage in terms of the level of intelligent digitization of warehousing and logistics assets, management efficiency, etc., and earnings expectations are stable.

The company is rich in warehousing assets, or is steadily expanding through the two models of pre-REITs and REITs. In terms of issuance scale, the first batch of public REITs issued assets had a storage area of 0.172 million square meters, the first batch of pre-REITs issued assets had an area of 0.24 million square meters, and the company's warehouse area that met the issuance requirements exceeded 3.3 million square meters. Referring to the asset size and assessed value increase of the company's first batch of REITs, we anticipate that the existing warehouse assets may support continuous expansion for 10 years, corresponding to a total capital raised of 28 billion or more. In terms of time rhythm, pre-REITs and REITs can meet stable capital requirements in line with continuous annual issuance.

Profit forecasting and valuation

Since the REITs project has not yet been officially implemented, without considering the impact of its issuance, we predict that the company's revenue for 2024-2026 will be 161.8/175.8/191.9 billion yuan, with corresponding growth rates of 7.78%/8.65%/9.12%, respectively; the estimated net profit to mother will be 2.392/2.69/2.998 billion yuan, respectively, with year-on-year growth rates of 10.04%/12.43%/11.49%, respectively, corresponding to the closing price on September 26, 2024 PE was 11x in 2024, maintaining a “buy” rating.

Risk warning

Risk of short-term fluctuations in upstream and downstream operations due to the accelerated liquidation of the industry; risk of innovative distribution business development falling short of expectations; financial leverage and financing risks