Results increased steadily in 2021 and Q1 2022. Jiuzhitang owns the traditional Chinese medicine “Jiuzhitang” brand, the modern traditional Chinese medicine “Youbo” brand, the biopharmaceutical product “Sikkang”, and a series of medicinal food products of the same origin, covering various fields such as cardiovascular, cerebrovascular, kidney, blood supplements, women and children, and facial features. In 2021, the company achieved revenue of 3.774 billion yuan (+6.31%) and net profit of 271 million yuan (-0.59%). This is because the OTC business sector comprehensively enhanced product service capabilities, profitability and brand premium capacity, and achieved continuous growth in business performance. 2022Q1 achieved revenue of 1,196 million yuan (+4.40%) and net profit of the parent company was 124 million yuan (+15.58%), maintaining steady growth.
Competition in the pharmaceutical retail industry is becoming increasingly fierce, and the concentration of the industry has been further strengthened. In the context of accelerated aging and consumption upgrades, residents' willingness to consume traditional Chinese medicine and health products has increased. OTC traditional Chinese medicines have independent pricing power. Prices have increased due to factors such as price increases for upstream herbal medicines and the need for downstream pharmacies to increase their profitability. According to Yixintang's 2021 annual report, by the end of September 2021, the number of pharmacies nationwide had reached 586,500, including 335,300 retail chain stores. In 2020, the size of China's pharmaceutical retail market was 5119 billion yuan. Excluding incomparable factors, the year-on-year increase was 10.1%. With the rapid development of the pharmaceutical retail chain industry, competition is also becoming increasingly fierce, and the concentration of China's pharmaceutical retail industry has further strengthened. Comparatively speaking, the revenue volume of Jiuzhitang chain stores is comparable to Yifeng Pharmacy, but profitability needs to be improved.
A win-win cooperation with Yifeng Pharmacy is expected to enhance Jiuzhitang's profitability and store management. On April 23, 2022, the company and Yifeng Pharmacy signed an “Equity Transfer Framework Agreement”. The company plans to sell 51% of the shares of Hunan Jiuzhitang Pharmaceutical Co., Ltd. to Yifeng Pharmacy. The transaction is expected to increase Jiuzhitang's current net profit (non-recurring profit and loss) by about 158 million yuan. In addition, the controlling shareholder, Mr. Li Zhenguo, plans to transfer 5.00% of the company's shares to Yifeng Pharmacy. The strategic cooperation between products and channels between the two sides is expected to enhance Jiuzhitang's profitability, and the operation and management of the original chain stores is expected to improve.
Profit forecast and investment rating: The company's revenue for 2022-2024 is estimated to be 32.16/35.64/3,915 billion yuan respectively, net profit of the mother is 575/633/691 million yuan respectively, and PE is 1,370/12.45/11.42X respectively. We believe that Jiuzhitang has brand awareness and commercial store management is expected to improve. We set the 2022 PE valuation range for Jiuzhitang to be 19-21 times, and the corresponding target price range is 12.54-13.86 yuan. It was covered for the first time and gave a purchase rating.
Stock price catalyst: share transfer to Yifeng Pharmacy or improve store profitability and expand related cooperation.
Risk factors: risk of foreign investment, risk of insufficient supply of raw materials and price fluctuations, product development risk, industry policy risk.