Wanlian Securities: Medical reform accelerates the upgrade and differentiation of retail pharmacy formats, large chain pharmacies usher in new opportunities.

Wanlian Securities released a research report stating that as China has entered a deep aging stage, the population structure is at a turning point, and the demand for health will further increase. Under the promotion of a new round of medical reform, the separation of medicine from medical treatment continues to deepen, accelerating the outflow of prescriptions from hospitals, and speeding up the upgrading and differentiation of retail pharmacies. The range of varieties for volume-based procurement continues to expand, speeding up the transition of more varieties to outside of hospitals; including drugstores in outpatient co-management provides opportunities for drugstores to receive more prescriptions and customer flow; the rapid development of pharmaceutical e-commerce brings more market opportunities for online channels, accelerating the increase in industry concentration and chain rate. Long-term positive trends remain unchanged for pharmaceutical companies that meet consumer health needs, have strong professional service capabilities, clear supply chain advantages, and operate in compliance. The main points of Wanlian Securities are as follows: Under strong regulation and the trend of prescription outflow, large chain pharmacies are welcoming new opportunities. Prescription outflow is a long-term trend, and designated retail pharmacies being included in outpatient co-management accelerates prescription outflow. Currently, the percentage of prescription drugs sold outside of hospitals in the domestic market is relatively low, leaving room for significant growth compared to countries like Japan and the United States. The progress of pharmacy co-management varies in different regions, and the benefits for large chain pharmacies from pharmacy co-management have yet to be fully realized. The outpatient market is an important scene for daily medication and stocking up on medication for families. In the trend of aging population, especially with the elderly and people with chronic diseases, relying more on medical insurance co-management, pharmacies being included in outpatient co-management are expected to play an important role in meeting the demand for medication for chronic diseases, and the outpatient market is expected to continue expanding. Large chain pharmacies deploying dual channels, DTP pharmacies, and obtaining qualifications for outpatient co-management are actively accepting the outflow of prescriptions, and are expected to further increase customer flow. Under the trend of strict regulation and increased price transparency, large chain pharmacies with compliant operations, precise management, stronger product selection and service capabilities will further highlight their advantages. National leading pharmaceutical chain pharmacies have strong bargaining power, a rich product matrix, and compliant management empowered by digitalization, which can further increase market share, market concentration, and chain rate in the "market integration period." Comparing the main financial data and operational situation of listed pharmacies in recent years, it is found that the revenue scale and number of stores of listed pharmacies are generally proportional, with the growth of revenue and the speed of store expansion being basically consistent. In recent years, Yifeng Pharmacy Chain and DaShenLin Pharmaceutical Group have led in terms of revenue scale and growth rate among listed pharmacies; overall, pharmacies with larger store and revenue scales have a leading gross profit margin, reflecting economies of scale in the pharmacy industry. Yifeng Pharmacy Chain and LBX Pharmacy Chain Joint Stock have industry-leading sales gross margin levels and have shown growth in recent years; in the context of market and policy factors leading to a slowdown in industry growth, most chain pharmacies have started to slow down the speed of store expansion, focusing on developing existing stores and controlling costs for efficiency improvement. DaShenLin Pharmaceutical Group is the only one among listed pharmacies that has seen a decrease in the combined level of three expense ratios in recent years. The expansion of pharmacies and the increase in related expenses for new stores in recent years have had a negative impact on the short-term performance of companies. Looking at the profit levels in the first three quarters of 2024, Yifeng Pharmacy Chain and Anhui Huaren Health Pharmaceutical have shown resilience in profits under the background of declining industry revenue and the impact of fixed expenses; the daily sales per square meter of pharmacies are affected by the addition of new stores, and new stores in the cultivation period will lower the overall efficiency level. In addition, the square meter efficiency levels are higher in provincial capitals and flagship stores. Overall, in recent years, the daily sales per square meter of listed pharmacies from high to low are DaShenLin Pharmaceutical Group, Shu Yu Civilian Pharmacy Corp., Ltd., Yifeng Pharmacy Chain, LBX Pharmacy Chain Joint Stock, Anhui Huaren Health Pharmaceutical, JZJ Chain Drugstore Corporation, and Yixintang Pharmaceutical; operational efficiency indicators corresponding to pharmacy operations mainly include accounts payable turnover days, inventory turnover days, and accounts receivable turnover days. Looking at the data of listed pharmacies in recent years, only DaShenLin Pharmaceutical Group has shown a decrease in inventory turnover days, while most companies have shown an increasing trend in accounts receivable turnover days and accounts payable turnover days. Regarding targets: it is recommended to pay attention to large chain pharmaceutical retailers with strong professional service capabilities and compliant operations focused on meeting consumer health needs. Risk factors: risks such as policy impacts on the pharmaceutical retail industry exceeding expectations, and the policy of prescription outflow not meeting expectations, among others.