The company is one of the largest domestic pharmaceutical retail chains with leading revenue and coverage of the widest range of regions. The company started in Changsha, Hunan, and pioneered the affordable pharmacy hypermarket model. As of September 30, 2023, the total number of the company's stores reached 13,065, including 8,945 direct-run stores and 4,120 franchise stores, covering 20 provinces across the country. After more than 20 years of development, the company has become a benchmark in the industry. It has been ranked first in the comprehensive competitiveness list of China's top 100 pharmaceutical retail enterprises many times, and has a good reputation and wide recognition.

The concentration of the industry continues to increase, the outflow of prescriptions is gradually being realized, and the racetrack is booming. China's pharmacy chain rate has increased to 55.92% in 2022, and has maintained a growing trend in recent years. In terms of concentration, the total revenue scale of the top 100 pharmacies in 2022 was about 280 billion yuan, and the market share broke through to 55.83%. Among them, the pattern began to diverge. The revenue growth rate of leading companies was faster. The 10-year compound revenue growth rate of the top 10 companies reached 19.97%, which is significantly higher than the compound growth rate of the top 100 companies and the market as a whole, and the leading effect is obvious. Compared to the US and Japan, China's CR10 accounts for only 30.91%, and there is plenty of room for market improvement. In terms of prescription outflow, the country has continuously improved the prescription outflow policy in terms of top-level design. After entering 2021, the policy was continuously strengthened. The reform of employee health insurance accounts and the introduction of dual channel and outpatient coordination policies are all expected to accelerate the outflow of prescriptions, benefiting from the continuous increase in the market share of second-terminal retail pharmacies in terminal drug sales.

Adhere to the “four carriages” strategy, endogenous+epitaxial two-wheel drive. The company has stores in 20 provinces, regions and municipalities across the country. Since 2020, the number of new self-built stores has shown a rapid growth trend, and the performance has gradually entered the cash out period. The company focuses on developing the “9+7” dominant provincial market, uses the Spark M&A model to focus on regional expansion, nurtures professional teams for many years of M&A projects, and has strong integration capabilities to ensure the efficient completion of M&A targets. At the same time, the company is one of the earliest enterprises to vigorously develop franchise business in the industry. The franchise model with high standards and strict requirements guarantees the operating quality of franchise stores. The franchise model is expected to increase profits, strengthen bargaining power, and promote private brand sales.

Store transformation is accelerated, specialty pharmacies are being built, and profitability is enhanced. Since 2019, the company has implemented a plan to disassemble large stores to optimize large stores. Up to now, the optimization of large stores has achieved remarkable results, and the average store area and average daily efficiency have gradually improved. The company's logistics network construction is becoming more and more perfect, supply chain management capabilities are improving, and overall procurement share and private brand sales have increased markedly. The company is actively connecting with outpatient coordination. By the end of the third quarter of 2023, the number of outpatient co-ordinated stores was 2,893, accounting for 22.14% of the company's total number of stores. At the same time, the company focused on improving chronic disease management capabilities, strengthening pharmacy service capabilities and improving the ability to handle prescription outflows. In the first three quarters of 2023, the number of designated qualifying stores for “outpatient chronic diseases” reached 1,280; the number of stores with dual channel qualifications reached 266. The company is deeply involved in digital intelligence construction, continuously consolidating and strengthening the informatization foundation, and empowering new online retail businesses. By the end of the third quarter of 2023, 10,005 stores had launched O2O services, accounting for 76.58% of the company's total number of stores. Online channel sales reached 1.49 billion yuan, an increase of 60% over the previous year.

Investment advice

In recent years, the company's refined store management capabilities have improved, the scale of self-built stores has increased and gradually entered the performance release period. Through its nationwide layout network, it has further achieved deep cultivation of advantageous regions and actively built asset-light franchise businesses to achieve breakthroughs in the sinking market. Furthermore, the company's layout of specialized pharmacies such as DTP continues to improve pharmacy service capabilities, and is expected to take the lead in enjoying outpatient coordination dividends and actively embrace the new retail industry. The performance is expected to continue to grow. We forecast that in 2023-2025, the company's net profit to mother will be 905/11.06/1,347 million yuan, with year-on-year growth rates of 15.2%, 22.3%, and 21.8%, respectively. The corresponding EPS is 1.55/1.89/2.30 yuan, respectively, and the corresponding P/E is 21/17/14 times, respectively. Considering the company's growth, coverage was given a “buy” rating for the first time.

Risk warning

Market competition increases risk; risk of store expansion falling short of expectations; risk of franchise store development or falling short of expectations; industry policy risk.