Pharmacy Stocks: Opportunities Ahead?
Since June of this year, Yifeng Pharmacy has experienced a sharp decline, with its stock price reaching a low point similar to that of 2022, and the price-to-earnings ratio has dropped to around 16 times, which is at an historically very low level.
The market trend is quite ugly, has it bottomed out? Let's compare with peers and see the quality of Yifeng Pharmacy's "2024 Semi-Annual Report"!
Chapter 1: Financial Fundamental Analysis
(1) Cash Flow and Asset-Liability Situation
The debt ratio in the retail industry is generally not low, but Yifeng Pharmacy's debt ratio of 58.74% is acceptable, while Dacenlin is at 67%, and Laobaixing is at 64%. Naturally, the more stores opened, the faster the debt ratio rises. In the same period of 2022, it was 53.28%, and it has increased by 5.5 percentage points in two years, which is a bit fast.
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Although the asset-liability ratio is a bit high, the scale of interest-bearing borrowings is not large. There is 1.7 billion in long-term loans, and there are no short-term loans (the vast majority of non-current liabilities due within one year are lease liabilities). Relatively speaking, the asset liquidity is much stronger, with 4.2 billion in cash and cash equivalents, plus 3.2 billion in trading financial assets (financial products), totaling about 7.4 billion.
With such strong liquidity, the company still spent more than 70 million in financial expenses in the first half of the year (interest expenses of 100 million, and interest income of more than 40 million), this capital utilization efficiency is a bit hard to justify! Dacenlin and Laobaixing are not much better, it's a case of the pot calling the kettle black.
There is no need to worry about the cash flow in the retail industry, it's great. In the first half of the year, sales collections accounted for 108% of revenue, and the net operating cash flow was 212% of net profit. Therefore, accounts receivable and other such items will not be too high, accounting for about 8% of annual revenue.
(2) Inventory and Goodwill and Other Asset Risk ItemsInventory trends are one of the important indicators in the retail industry. Yifeng Pharmacy had an inventory of 3.77 billion in the first half of the year, a sequential increase of 0.9% from the first quarter, and a decrease of 1% from the beginning of the year. The overall direction of inventory changes is good, as revenue grew by 9.86% during the same period.
However, the inventory is still somewhat large, accounting for about 17% of revenue and 14.3% of assets, which are not low proportions. Almost all of the inventory consists of stock goods, with a depreciation provision of 0.5%. Laobaixing and Dashenlin also have a similar provisioning ratio (less than 1%).
Goodwill stands at 4.75 billion, mainly due to the acquisition of pharmacies. Now, 20% of the newly opened stores come from mergers and acquisitions. Goodwill accounts for 18% of total assets, which is a relatively high level and continues to rise steadily.
The right-of-use assets also amount to more than 4 billion, mainly consisting of shop leases and similar items, with no significant risks.
(3) Dividends, financing, and profit sedimentation situation
Yifeng Pharmacy's dividends in previous years were generally average, as the valuation was relatively high, and the dividend yield has been below 1% for many years. It was only after the stock price fell in the past two years that the dividend yield rose to the level of 2-3%.
The current dividend yield is 2.1%, with a dividend payout ratio of about 35%, and the undistributed profit accounts for 22% of the market value. There is a significant potential and probability for dividends to increase.
Yifeng Pharmacy went public in 2015, and financing was very frequent in the early years of listing, with additional financing in 2016 and 2018. Chain pharmacy brands are in the store expansion phase, and the demand for funds is strong. Yifeng's payout financing ratio is only about 28%, which is very low. In recent years, the capital market has not been favorable, suppressing the desire for financing. In the future, when the market conditions ease, there may be new financing plans, which require close attention!
(4) Performance growth trend
As shown in the figure below, the performance growth curve of Yifeng Pharmacy in previous years was very beautiful. However, don't be blinded by this. With the number of new stores opening each year, performance growth is almost inevitable. Not increasing would be a significant problem. It is necessary to rationally recognize that the opening of new stores is the core driving force for performance growth in recent years.For example: In 2023, revenue increased by 13.6%, and profit increased by 11.9%; the net increase in stores was 2,982, a growth of 29%. In H1 of 2024, revenue increased by 9.9%, and profit increased by 13.1%, with a net increase in stores of 1,486, a growth of 11%.
Even when considering the fact that newly opened stores may not be as mature in operations as older stores, it must be acknowledged that there is a widespread growth bottleneck in individual pharmacies.
Moreover, starting this year, the growth rate of market demand has generally slowed down. If the growth is overly dependent on scale expansion and internal growth cannot keep up, it will inevitably severely affect the company's profit performance!
However, in the first half of the year, Yifeng Pharmacy's performance growth was the best among the leading companies. In the first half of the year, Dashenlin's revenue increased by 11.3%, and profit decreased by 28.3%; Laobaixing's revenue increased by 1.2%, and profit decreased by 2.1%.
(5) Profit quality and cost control
In the first half of the year, Yifeng Pharmacy's gross margin was 40%, and the net profit margin was 7.3%. Dashenlin's gross margin was 35%, and the net profit margin was 5.3%. Laobaixing's gross margin was 34%, and the net profit margin was 5.4%. Yifeng Pharmacy has the strongest profitability.
Looking at the trend over the past five years, Yifeng Pharmacy's gross margin has been well maintained, and there is even a trend of increasing net profit margin, which is quite rare. I believe that the scale effect has played a role.
In the first half of the year, Yifeng's sales expense ratio was 25.55%, while Laobaixing and Dashenlin were only around 22%, fortunately, it has been declining in recent years; the management expense ratio was 4%, which has been at this level in recent years, and Laobaixing and Dashenlin were also 4-5%.
Chapter 2: Store layout and operating efficiency
In 2023, the number of domestic retail pharmacies has already exceeded 650,000, and the pace of opening 30,000 new stores a year is not low. The current problem is that the coverage density of pharmacies is too high. On some streets, just 100 meters long, several pharmacies have already settled in, which can easily lead to a situation of vicious competition.Several leading domestic chain pharmacies have stores on the same order of magnitude. As of the first half of the year, Yifeng Pharmacy has 14,736 stores (with 1,575 newly opened), Dacenlin has 16,151 stores (with 2,295 newly opened), and Laobaixing has 14,969 stores (with 1,625 newly opened).
(1) Different advantage markets: Yifeng Pharmacy focuses on the Central South and East China markets, which together contribute 87% of its revenue, including Guangdong in the Central South region. Dacenlin focuses on South China, contributing 64% of its revenue. Laobaixing has 42% of its revenue from Central China and 25% from East China.
(2) Different new store structures: Yifeng Pharmacy has 53% self-built stores, 19% acquired stores, and 28% franchised stores. Dacenlin has 35% self-built stores, 12% acquired stores, and 53% franchised stores. Laobaixing has 53% self-built stores and 47% franchised stores.
The Central South region includes: Hunan, Hubei, Guangdong. The East China region includes: Jiangsu, Jiangxi, Shanghai, Zhejiang.
(3) Different operating efficiency: In the first half of the year, Yifeng Pharmacy's average monthly efficiency per square meter was around 1,500 yuan, a nearly 20% decrease compared to last year, and other peers also show a trend of declining efficiency. Dacenlin's average monthly efficiency per square meter is around 2,100 yuan, and Laobaixing's is around 1,500 yuan.
Chapter 3: Business Structure and Layout
Domestic retail pharmacies are more positioned as professional pharmacies, mainly selling drugs, and also selling some medical devices, health products, and daily necessities. There are very few successful cases of diversified transformation. Most foreign models follow a "supermarket + pharmacy" model, where it's hard to tell whether it's a supermarket selling drugs or a pharmacy selling daily necessities.
Yifeng Pharmacy has all the business forms it should have, and its competitors are also developing well. This is another issue in the pharmacy industry: the comprehensive strength between top brands cannot be significantly differentiated, and the scale, positioning, and business structure are all similar, with obvious competition among similar types.
(1) Yifeng Pharmacy: In the first half of the year, retail accounted for 88.4%, and wholesale accounted for 25%. In 2023, Chinese and Western patent medicines accounted for 76%, with a gross margin of 35%; non-drugs accounted for 12%, with a gross margin of 43%; Chinese herbal medicine accounted for 9.7%, with a gross margin of 47%.
(2) Dacenlin: In the first half of the year, retail accounted for 83%, and franchising and distribution accounted for 15%. Among them, Chinese and Western patent medicines accounted for 75%, with a gross margin of 31%; non-drugs accounted for 12%, with a gross margin of 24%; Chinese medicinal materials accounted for 11%, with a gross margin of 42%, which is a characteristic business of Dacenlin.(3) Ordinary People: In the first half of the year, retail accounts for 82%, with franchising and distribution making up 17%. Among these, Chinese and Western patent medicines account for 81% with a gross margin of 32%; non-pharmaceuticals account for 12.6% with a gross margin of 40%; traditional Chinese medicine accounts for 6.5% with a gross margin of 50%.
Chapter 4: Shareholder and Management Analysis
The top ten shareholders hold 76.7% of the shares, and there is no phenomenon of a single dominant shareholder, which indicates a relatively ideal equity structure. The actual controller, Gao Yi, directly holds 11.7% of the shares, owns 21.7% through Houxin Partnership Enterprise, and with additional minor holdings, the total is just over 30%.
Strategic partner Jinri Capital holds a total of 19.2% of the shares, which is a good proportion, and the stability of shareholding is very high, with very little reduction over the years. The current president of Jinri Capital, Ms. Xu Xin, has invested in companies such as NetEase, ChinaHR.com, Wahaha, Great Wall Motor, Kung Fu Fast Food, and Yonghe King.
The executive team of Yifeng Pharmacy is a bit too large, with some redundancy in position settings, and there are shadows of some family members. It is hoped that the company will gradually become more mature and standardized in the future.
Chapter 5: Yifeng Pharmacy Valuation and Investment Strategy
The following chart shows the valuation and basic situation of global pharmacy stocks. From the chart, it can be seen that:
The valuation of Japanese chain pharmacy stocks is very stable, with not much difference in valuation between companies, with a price-to-earnings ratio concentrated in the 15-20 times range, and a price-to-book ratio in the 1.5-2 range. This is the development characteristic presented by a mature market and industry, and the valuation of domestic pharmacy stocks in Japan has great reference significance!
The US stock pharmacy market is an oligopolistic pattern, with only two major companies. Due to the different future prospects and profits of the two, the valuation difference is huge, and there is no reference significance, so it is omitted here.
In terms of investment preference and risk, Yifeng Pharmacy's current price-to-earnings ratio of around 16 times is not high from an absolute valuation perspective! However, looking at it horizontally, the PE valuation of many sectors in the current large A market has also fallen to 15-20 times, and there are actually quite a few choices. Yifeng's dividend rate and internal growth do not have an advantage, so stock friends might as well look around and compare more before making a decision!Please provide the text you would like me to translate into English.