The company was founded in January 1999 and listed in July 2021. It has carried out regional expansion with the strategy of “focusing on the north of the Yangtze River and deeply cultivating the whole province of Shandong”. The marketing network covers Shandong, Liaoning, Fujian, Henan and Gansu. The company's performance continued to grow rapidly in 2013-2022. The CAGR of revenue and net profit was 26.4% and 20.4% respectively, and equity incentives were issued in March 2023, demonstrating confidence in development.
The number of stores has doubled in the past 2 years, and performance is expected to accelerate. As of 2023H1, the company has 6,332 stores, including 3868 direct-run stores and 2,464 franchise stores. In 2021-2022, the company's store growth rates were 67.3% and 63.3%, respectively, and the number of stores doubled within 2 years; considering that the new stores mentioned above are currently about 2-3 years old, it is expected to usher in a phase of accelerated release of profits from loss to profit; at the same time, the company's mergers and acquisitions of stores have also begun to improve operating efficiency after integration; in addition, the company plans to complete the acquisition of 556 stores (424 in Tianshili in China+132 in Pingjia, Jinan). Overall, the company is expected to follow the increase in the number of stores to accelerate performance.
Shandong is a major pharmaceutical province in the country, and there is plenty of room for improvement in the share of leading cities. Benefiting from its huge population and GDP (ranked 2nd and 3rd in the country, respectively), the retail scale of pharmaceuticals in Shandong Province reached 41.2 billion in 2022, ranking second in the country after Guangdong, and the space within the province is quite vast. In terms of competition, in 2022, residents of Su Yu in Shandong Province accounted for about 17%, and the leading position in the province was stable, far ahead of competitors; the 2-4 places were Shandong Lijian, Yan Xitang, and Huaxin Hongrentang, with market shares of 8%, 4%, and 4% respectively. There are also pharmacy chains with a market share of less than 4%, such as Qingdao Tongfang, Qingdao Health Insurance City, and Happy People (Shandong).
From the perspective of prefecture-level cities, the company has implemented a business strategy with a broad layout of counties and cities within the province. It has covered 15 prefecture-level cities (only 1 prefecture-level city in Weihai has not entered). Of these, 11 prefecture-level cities have a coverage rate of more than 80%, and 8 prefecture-level cities have all districts and counties under their jurisdiction. Currently, only Jinan's layout density is basically saturated (more than 1,000 stores); all other counties and cities have great potential for decline. Shandong Province is divided into three major economic circles, including the provincial capital, Jiaodong, and Lunan economic circles. The retail pharmacy pattern is unique. Among them, the company is the absolute leader in the economic circle of the provincial capital, and there is plenty of room for integration and improvement in the Jiaodong and Lunan economic circles. At present, the citizens of Shuyu have established a leading position in Shandong Province, with a market share of only 17% (Yixintang's share in Yunnan has already exceeded 60%, which can be used as a final reference), so there is plenty of room for long-term exploration.
Accelerate nationwide expansion and actively lay out Fujian, Liaoning. Based on its deep cultivation in Shandong, the company also focuses on expanding into Liaoning and Fujian. As of the end of 2022, the revenue of the two provinces was 120 million yuan and 190 million yuan respectively.
Performance is expected to accelerate, and there is broad scope for the long term. Looking at the long term, we expect the retail sales scale of pharmacies in Shandong to exceed 70 billion in 2030 (including pharmaceuticals and non-pharmaceuticals), with a CAGR of 6.9% in 22-30. Considering the company's stable position in Shandong, if calculated based on a long-term 60% market share and 5% net interest rate, the single province is expected to contribute 40 billion dollars in revenue and 2 billion dollars in profit, with broad room for growth. Looking at the short to medium term, given the rapid growth rate of stores over the past 2 years, we expect the company to achieve net profit of 2.7, 3.6, and 490 million yuan in 23-25, with year-on-year growth rates of 15%, 37%, and 33% respectively, giving a target PE of 32 times in 24 years (corresponding to about 0.9 times PEG). The current market value has room for 41% increase, corresponding to the target price of 28.8 yuan. First coverage, giving a “recommended” rating.
Risk warning: Market competition intensifies, store expansion falls short of expectations, prescription outflow falls short of expectations, mergers and acquisitions of Tianshili, Liaoning, and Pingjia, Jinan fall short of expectations.