China Securities Co., Ltd.: Multiple factors accelerate market concentration in pharmaceutical distribution, and the valuation of leading enterprises is expected to improve.

China Securities Co., Ltd. released a research report stating that the pharmaceutical distribution industry is experiencing stable growth with market share steadily increasing. With the recovery of in-hospital diagnosis and treatment orders combined with long-term growth in medical insurance expenditures, the pharmaceutical distribution industry has ample short-term and long-term growth momentum. Additionally, the introduction of prepayment policies by the medical insurance bureau is beneficial for industry scale and turnover efficiency improvement. Furthermore, under the influence of factors such as centralized procurement and scale advantages, leading enterprises have a clear advantage, and market concentration is accelerating. Key points from China Securities Co., Ltd. include: Industry Overview: Market size steadily expanding with continued support from multiple factors The release of household drug demand and steady growth in the pharmaceutical distribution industry. Since 2011, with steady growth in per capita disposable income, expansion of medical insurance coverage, increased supply of drugs, and an increase in residents' health awareness, the demand for household drugs continues to grow. China Meheco Group's sales in the distribution market have increased from 751.1 billion yuan in 2011 to 2.29 trillion yuan in 2023, with a compound annual growth rate of 9.7%. In addition, the accelerated hospital payment collection by the medical insurance bureau is favorable for industry scale and turnover efficiency improvement. Diverse factors contribute to ample short-term and long-term growth momentum. In the first three quarters of 2024, due to various factors, the growth of listed companies' performance has slowed down. However, factors such as compliant in-hospital sales and centralized procurement continue to accelerate the market concentration, while leading enterprises further expand innovation business development and operations continue to improve. Additionally, the firm believes that at the current stage, due to the steady long-term growth of medical insurance expenditures, the pharmaceutical distribution market has ample long-term growth momentum. Industry Trends: Multiple factors promote market concentration growth, accelerating development of innovative business and off-hospital market Clear industry barriers exist, and multiple factors promote market concentration growth. Currently, China has formed a competitive landscape of "4 national players + multiple regional players," with SINOPHARM (China National Pharmaceutical Group), CHINARES PHARMA, Shanghai Pharmaceuticals Holding, and Jointown Pharmaceutical Group's logistics distribution networks in the top tier, covering the entire country. The firm believes that under the influence of factors such as expanded centralized procurement, highlighted scale advantages, and the transformation of hospital-side demand, leading enterprises' operational advantages are further amplified, with the potential for accelerated market concentration. Accelerated growth in innovative business, contributing additional increments. Listed pharmaceutical companies are actively promoting business transformation and innovation, focusing on developing synergistic businesses around the distribution core to optimize overall profitability: 1) Conducting comprehensive commercial insurance business that covers the entire chain; 2) Upstream: Focus on industrial product research and development and production of drugs, equipment, special medical food, and medical beauty products; 3) Internal distribution industry: Conducting innovative businesses such as SPD, innovative drug import agents, and CSO; 4) Downstream: Providing services such as full-course management, maintenance of large medical equipment, and systemic support for pharmacies and clinics. Off-hospital market accelerating growth, continuously releasing terminal demand. With the implementation of outpatient coordination policies and increased resident health awareness, the scale of off-hospital drug use is expected to accelerate, driving upstream distribution enterprises to expedite their layout in the off-hospital market. Research Framework: Focusing on multiple indicators, optimizing valuation through SOE reform Steady growth in revenue, continuous improvement in cash flow. The revenue growth of the pharmaceutical distribution industry mainly comes from the increase in the proportion of medical institutions covered by the supply of drugs and medical devices and the increase in the number of covered medical institutions. Gross profit is affected by the different proportions of centralized procurement drug and medical device sales, the selling expense rate shows a gradual downward trend, and management expenses and financial expenses remain relatively stable, leading to a continuous improvement in cash flow. Continued implementation of SOE reform, potential optimization of valuation system. In 2023, the new round of top-level SOE reform was implemented, focusing on "functional reform" and "system and mechanism reform." On January 24, 2024, the State-owned Assets Supervision and Administration Commission announced that it would further study the inclusion of market value management in the performance assessment of central enterprise leaders, drawing market attention. The valuation levels of pharmaceutical distribution enterprises are relatively low, but with clear defensive attributes. With the reform of SOEs and the increase in dividend payout ratio, the valuation system is expected to be optimized. Differentiation in corporate operations, focusing on high-quality leading enterprises Recommended Focuses 1) CHINARES PHARMA: Parallel operation of industrial and commercial businesses, building a specialized management system; 2) SINOPHARM: National distribution network nearly completed, optimistic about improvements in the medical equipment sector; 3) Shanghai Pharmaceuticals Holding: Complete distribution network, continuous improvements in the industrial sector; 4) Jointown Pharmaceutical Group: Focusing on the off-hospital market, continuously optimizing valuation through innovative business; 5) China National Accord Medicines Corporation: Leading distribution enterprise in the two Guangzhou regions, significant room for improvement in retail business; 6) China National Medicines Corporation: Leading national distributor of Ma Jing drugs, the leading distributor in the Beijing region. Risk Warnings Uncertainty in the SOE reform process: Policy implementation requires a certain amount of time, and the actual implementation situation is difficult to predict. If the progress of SOE reform does not meet expectations, it may affect the subsequent operations of relevant companies; Greater-than-expected drug price reductions: If drug price reductions are significant, industry gross profit margins may suffer, compressing overall profit margins and affecting the overall profitability of the industry. Increased market competition: The main competitors in the market or new entrants may weaken the company's relative advantages and sustainable development capabilities, affecting the company's long-term development; Research and development risks: If the progress of product research and development is slower than expected, it may damage the company's long-term business competitiveness; Policy risks: The pharmaceutical industry is a highly regulated industry, and if strict policies are implemented, it may have adverse effects on the company's operations; Significant impairment of goodwill due to the target company's performance falling below expectations from M&A activities: If the performance of an acquired entity falls significantly below expectations, goodwill may be heavily impaired.Failure to integrate as expected may result in impairment of goodwill and consequently affect the company's performance.Je viens de rentrer la maison aprs une longue journe de travail.