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27 Jun, 2019 (Thursday)



PWRD(002624.SZ)
Analysis¡G
The group engaged in Film and TV series creation as well as Gaming development in China, together with strong game development and film production capabilities. In the first quarter of 2019, the revenue reached RMB 2.04 billion, up by 13.3%; the net profit attributed to owners was RMB 490 million , a YoY of 35%. Gross profit margin reached 68.1%, an increase of 6.8% YoY. The group launched a PC and console dual-platform game "Subnautica", which is a submarine survival game, similar to "Minecraft". Currently, "Subnautica" has a 94% favorable rate in Steam, a gaming platform, and the score from the game rating website IGN was also 9.1 points, showing is widely welcomed by players. In addition, the Group is also developing the different PC games for example "Zhu Xian New World", "Perfect World" host version and PC and console dual-platform games "DON`T EVEN THINK", "Torchlight II", "Magic The Gathering", etc. , we believe it will bring new momentum to the gaming business. in 2019, the ¡§§¹¬ü¥@¬É¡¨ mobile version developed by the group was officially launched, and the results were excellent. The number of new users on the 12-hour exceeded 2.6 million. It reached the first in iOS free list on the first day, then reached the top in free list and the best-selling list on the forth day. According to the forecast of ¡§¤C³Á¼Æ¾Ú¡¨, the cumulative download volume in the Android has reached 18 million times as of 18 June. Due to the suspension of the gaming license approval, the revenue of gaming revenue has dropped, but we believe game revenue growth will resume as the approval restarted again in 2019.
Strategy¡G
Buy-in Price: RMB25.50, Target Price: RMB30.00, Cut Loss Price: RMB22.00



SINOPHARM ACCORD (000028.SZ) - Leading Company in Pharmaceutical Industry, ¡§Wholesale and Retail Integration¡¨ Boost Growth

Investment Summary

Leading enterprise in pharmaceutical industry, continue to promote the ¡§Wholesale and Retail integration¡¨ strategy

The company is a comprehensive pharmaceutical listed company under the China National Pharmaceutical Group and Sinopharm Group, and it is the leading enterprise in pharmaceutical industry of the country. After the completion of major asset restructuring in 2016, the company actively promoted the ¡§wholesale and retail integration¡¨ strategy, made full use of the commercial platform with mature distribution and the terminal advantageous network with wide retail sales to extend the commodity to the retail terminal through effective resource integration means and give play to the scale effect so as to achieve the synergistic interaction between distribution and retail, continue to further promote the distribution business in Guangdong and Guangxi, and expand the layout of retail pharmacies. In 2018, the sales revenue of wholesale and retail synergy was RMB590 million, a YoY increase of 75%.

Improve distribution network, transformation and innovation of distribution business

The company's distribution business is concentrated in the Guangdong and Guangxi provinces, with Sinopharm Group Guangzhou/Guangxi companies as the core companies, ranking the first in the two markets, comprehensively covering the Grade-III and Grade-II medical institutions and retail chain terminals in Guangdong and Guangxi, covering more than 4,000 medical institutions. With the changes in the market environment, the company has transformed and innovated in the distribution field, and actively expanded its business development areas, clearly focused on the development of four business directions including retail direct sales, equipment consumables, retail diagnosis and treatment, and primary care. The company has improved supply chain management efficiency and reduced operating costs to ensure that earnings are growing through informatization reform. In 2018, the retail direct sales increased by 34% YoY, equipment consumables increased by 29% YoY, retail diagnosis and treatment increased by 49% YoY, and primary care increased by 17% YoY.

Build a ¡§new Guoda¡¨, continue to promote internationalization

As a large-scale pharmaceutical retail enterprise in China, Guoda Drugstore has 28 regional chain companies and established the logistics and distribution network including Shanghai National Logistics Center and 23 provincial and municipal distribution centers. Guoda Drugstore ranked the first among the China pharmaceutical retailers for seven consecutive years since 2011. According to the ¡§Statistical Analysis Report on the Operation of Drug Circulation Industry in 2017¡¨ by the Ministry of Commerce, the total sales of Guoda Drugstore in 2017 was RMB11.08 billion, a YoY increase of 7.48%, leading 21.49% to second-class Beijing Tongrentang (RMB9.12 billion). As of drug retail market of RMB400.3 billion in 2017, the market share of Guoda Drugstore was 2.8%, which was the same as in previous years. In July 2018, Guoda Drugstore completed the introduction of Walgreens Boots Alliance (WBA), and became a Chinese-foreign joint venture after the equity transfer.

Initial coverage with TP of RMB 50.29 and investment rating of ¡§BUY¡¨

Based on our SOTP valuation model, we initiate coverage on Sinopharm Accord with 16.13x/14.11x/12.50x FY19/FY20/FY21 PER, corresponding to TP RMB 50.29 with a 21.0% potential upside compared with current price RMB 41.56 as of June 24, 2019, and recommend ¡§BUY¡¨ investment rating.

Industry Analysis

The scale of the pharmaceutical circulation market has grown steadily

According to the Ministry of Commerce's Drug Circulation Statistics System, the total sales of the seven major categories of pharmaceutical products in the first quarter of 2019 was 596.6 billion RMB (including tax), showing an increase of 8.65% YoY deducting incomparable factors, and the growth rate was 0.72% higher than the same period of last year. The sales of retail market was 119.3 billion RMB, a YoY increase of 9.70%, growth rate increased by 0.6%. Among them, the income of pharmaceutical circulation direct reporting enterprises (total 1071 enterprises) was 426.8 billion RMB (excluding tax), after deducting incomparable factors, the growth rate was 9.63% YoY, growth rate increased by 0.93%; the profit was 7.3 billion RMB, representing an increase of 8.84% YoY deducting incomparable factors, growth rate increased by 5.62%; the average gross profit margin was about 8.45%, an increase of 1.07%; the average expense rate was 6.88%, increasing by 0.71% YoY; the average profit rate was about 1.71%, remaining the same with last year. In 2018, the total sales of seven major categories of pharmaceutical products was 2,168.8 billion RMB (including tax), representing an increase of 7.51% YoY deducting incomparable factors, growth rate decreased by 1.03%. The pharmaceutical retail market's sales were 433.8 billion RMB, a YoY increase of 8.88%, growth rate dropped by 0.07%. Overall, the scale of the pharmaceutical circulation market maintained steady growth. From 2007 to 2018, the compound annual growth rate of the market scale reached 16.54%. Although the growth rate has declined slightly in recent years, the overall growth trend remains stable.

Industry concentration has a large room for improvement

According to the overall goal of the National Drug Circulation Industry Development Plan (2016-2020), by 2020 there will be a number of intensive, informatized and large-scale drug circulation enterprises with a network coverage of the whole country: the annual sales of the top 100 wholesale enterprises will account for more than 90% of the total pharmaceutical wholesale market, the annual sales of the top 100 pharmaceutical retailers will account for more than 40% of the total retail market, and the retail chain rate will exceed 50%. This plan also encourages the implementation of wholesale and retail integration, chain management and multi-business mixed operations. At present, the target of the drug retail chain rate has been completed ahead of schedule. According to the ¡§Food and Drug Regulatory Statistics Annual Report¡¨ issued by the CFDA, as of the end of November 2018, there were 5,671 drug retail chain enterprises nationwide, an increase of 262 compared with last year; 2.55 million retail chain stores, an increase of 26 thousand stores compared with last year; 234 thousand retail pharmacies, an increase of 9 thousand pharmacies compared with last year; the retail chain rate of pharmacies is 52.1%, an increase of 1.7% compared with last year. It is expected that in the situation of pharmaceutical circulation management becoming stricter, the scale effect gradually becoming prominent and the industry's normative improvement, the pharmacy retail chain rate will continue to rise.

According to the ¡§Statistical Analysis Report on the Operation of Drug Circulation Industry in 2017¡¨ issued by the Department of Market Supervision of the Ministry of Commerce, the retail pharmaceuticals industry is still relatively fragmented. In the top 100 pharmaceutical retailers ranking by sales in 2017, there were a total of 58,355 retail stores, accounting for 12.9% of the market. The total sales were 123.2 billion RMB, accounting for 30.75% of the whole retail market, increasing by 15.04% YoY and exceeding 30% for the first time. The industry's leading Sinopharm Group Guoda Drugstore's sales in 2017 was 11.08 billion RMB, based on the total estimate of 2017 drug retail market 400.3 billion RMB, the industry's leading enterprise's market share was only 2.8%. Combined analysis with the pharmacy chain rate, since 2015, the retail pharmacy chain rate has increased rapidly, and in 2017 it broke through 50% for the first time. We believe that chain pharmacies have scale effect and management advantages, especially in terms of procurement costs, expense control, personnel management, overall planning and city coverage rate. Compared with the chain rate of US retail pharmacy market, CVS, Walgreens and Rite Aid - three chain drugstore giants account for more than 75% of the US market share, while in 2017 China's pharmaceutical retail industry CR5 is only 11.3%, the scale of leading enterprises is relatively small. It is expected that there will be large room for improvement in the chain rate and concentration of retail pharmacies in China in the future.

Two-vote system promotes industry integration

The "two-vote system" in the field of pharmaceutical circulation means that the pharmaceutical production enterprises directly invoice to the circulation enterprise, and the circulation enterprise re-invoices (delivery) to the hospital, and invoices are issued twice. Under the influence of the "two-vote system", the pure-selling and reallocation business have polarized. The pure-selling business grows rapidly due to the "two-vote" medical reform policy, and the reallocation business, in which the intermediaries transfer inventories to the sub-distributors, has a smaller proportion of business, leading to a further decline in industry sales growth. In addition, as the ¡§two-vote system¡¨ brings greater capital turnover pressure to enterprises, M&A integration in the pharmaceutical commerce sector will become a new development trend. We believe that with the implementation of the national health reform policy and the enhancement of capital, the concentration and chain rate of the pharmaceutical circulation industry will further increase in the future.

Company Analysis

Company Profile

The company is a comprehensive pharmaceutical listed company under the China National Pharmaceutical Group and Sinopharm Group (stock code: 000028, 200028), which has a national cross-regional pharmaceutical retail chain brand ¡§Guoda Drugstore¡¨. The company has established 29 regional chain companies in 19 provinces, autonomous regions and municipalities in China, covering nearly 70 large- and medium-sized cities with over 4,000 retail pharmacies. In 2019Q1, the revenue was RMB11.879 billion, with a YoY increase of 15.82%; net profit contributed to owners was RMB300 million, an increase of 2.53% YoY; net profit contributed to owners after deduction of non-recurring profit or loss was RMB297 million, an increase of 4.36% YoY. In 2018, the revenue was RMB43.122 billion, with a YoY increase of 4.51%; net profit contributed to owners was RMB1.211 billion, an increase of 14.46% YoY.

Since 2016, the company has located as the national pharmaceutical retail integration platform under the China National Pharmaceutical Group. It has completed the integration and reorganization with the Guoda Drugstore and realized the strategic transformation and upgrade of ¡§National Retail + Guangdong-Guangxi Distribution + Industrial Investment¡¨. The company's distribution is willing to create ¡§the leading pharmaceutical distribution and supply chain service provider in Southern China¡¨, relying on the deep distribution and delivery network of the Southern Region. The company is the manufacturer and supplier of domestic and foreign pharmaceuticals, medical devices, consumables and other health care products. And it also provides comprehensive distribution, logistics and other value-added services to downstream hospitals, other distributors, retail pharmacies, primary care providers and other customers. At the same time, the company has transformed itself into a leading provider of pharmaceutical supply chain solutions, integrating innovation in the supply chain and the Internet in health-related industries such as medicine and medical care, and exploring the coordinated development of diversified businesses. At present, the network of professional prescription chain pharmacies has been managed in a direct manner in major cities in Guangxi and Guangdong Province, and new drug special drugs, chronic disease drugs and large health products have been sold to terminal consumers. Meanwhile, Guoda Drugstore actively carried out chronic disease management services such as diabetes and high blood pressure and actively docked the "Internet +" service, initiating the health service APP and the construction of online health community. In the past seven years, Guoda Drugstore constantly ranked the first in the pharmaceutical retail industry in China.

Key Business Analysis

The company is a comprehensive pharmaceutical listed company under the China National Pharmaceutical Group and Sinopharm Group. After the reorganization, all of the businesses are related to pharmaceutical business, including pharmaceutical distribution and pharmaceutical retail. The business of the company is mainly divided into the following two sections:

1. Pharmaceutical distribution business

The company's pharmaceutical distribution business is established in Guangdong and Guangxi, the company has completed the network construction of Guangdong and Guangxi in 2013, and the business has extended to the county-level regions; in 2014, the company has accelerated the integration of three-tier companies and achieved an operation all over the network in 2015; moreover, the distribution network has further expanded in 2018 and main development direction is retail terminals, including: 982 secondary and tertiary medical institutions, 4,996 primary medical customers and 1,947 retail terminal customers (chain drugstores and single store). The company's pharmaceutical distribution business has achieved the first scale in Guangdong and Guangxi and the leading position in market segment of Guangdong and Guangxi, and has obtained the relatively leading position in vaccine, instrument, and e-commerce industries.

In 2018, the revenue of pharmaceutical distribution business was RMB32.757 billion, representing a YoY increase of 3.92%, the net profit was RMB716 million, a YoY increase of 11.89%. From 2014 to 2018, the distribution business maintained steady growth. The compound annual growth rate of revenue reached 10.1%, and the compound annual growth rate of net profit reached 19.26%.

1. Pharmaceutical retail business

Guoda Drugstore, which was reorganized into the company in 2016, is a pharmaceutical retail enterprise that ranks the first in the sales volume throughout the country, and is one of the enterprises in China with national direct sales drug retail network. By the end of 2018, Guoda Drugstore has operated 4,275 stores, with a YoY increase of 441 stores compared with 2017. Among them, there are 361 hospital-side stores, increased 58 new ones; 1,213 national chronic disease stores, increased 302 new ones; 2,670 medical insurance stores of direct sales; covering 19 provinces, autonomous regions and municipalities, entering nearly 70 large and medium sized cities, which has formed a drugstore networks covering eastern and northern China, southern coastal cities, and gradually expanded into northeast, central plains and inland cities, the sales scale of which has exceeded 10 billion, ranking the first within industry.

In 2018, the revenue of Guoda Drugstore was RMB10.878 billion, a YoY increase of 8.45%, the net profit was RMB302 million, a YoY increase of 15.10%. From 2016, the compound annual growth rate of revenue of Guoda Drugstore was 9.28%, and the compound annual growth rate of net profit was 16.37%, which showed a steady growth of the retail business.

Investing Highlights

Leading enterprise in pharmaceutical industry, continue to promote the ¡§wholesale and retail integration¡¨ strategy

The company is a comprehensive pharmaceutical listed company under the China National Pharmaceutical Group and Sinopharm Group, and it is the leading enterprise in pharmaceutical industry of the country. After the completion of major asset restructuring in 2016, the company actively promoted the ¡§wholesale and retail integration¡¨ strategy, made full use of the commercial platform with mature distribution and the terminal advantageous network with wide retail sales to extend the commodity to the retail terminal through effective resource integration means and give play to the scale effect so as to achieve the synergistic interaction between distribution and retail, continue to further promote the distribution business in Guangdong and Guangxi, and expand the layout of retail pharmacies.

Despite the influence of factors such as ¡§two-vote system¡¨, GPO, price reduction and post-restructuring operation integration in the past two years, wholesale and retail synergy has achieved initial success, in 2018, the sales revenue of wholesale and retail synergy was RMB590 million, a YoY increase of 75%. At the same time, the company created the new model of distribution-Guoda wholesale and retail ¡§member store¡¨, and gave play to the advantages of commercial distribution center in variety, background connection, and delivery, combined with Guangdong Guoda retail network, developed member stores in Guangdong and Guangxi, and the members increased to 86 stores throughout the year. We believe that the continually promotion of wholesale and retail integration, integration of distribution and retail strategy varieties, category planning and resource sharing, will benefit to the company to build a more complete operating system, play the synergy effect of wholesale and retail, and enhance the comprehensive competitiveness of the company.

Improve distribution network, transformation and innovation of distribution business

The company's distribution business is concentrated in the Guangdong and Guangxi provinces, with Sinopharm Group Guangzhou Co., Ltd. and Sinopharm Group Guangxi Co., Ltd. as the core companies, ranking the first in the Guangdong and Guangxi, comprehensively covering the Grade-III and Grade-II medical institutions and retail chain terminals in Guangdong and Guangxi, covering more than 4,000 medical institutions. In 2018, through investment in mergers and acquisitions and new establishments, Sinopharm Holding Guangxi Hezhou Co., Ltd., Sinopharm Holding Guangxi Qinzhou Co., Ltd., Sinopharm Holding Guangxi Hechi Co., Ltd., Sinopharm Holding Guorun Medical Supply Chain Service (Guangxi) Co., Ltd., and Sinopharm Holding Baiyi Pharmacy Guangxi Co., Ltd. have been established, which has further strengthened the layout of the distribution business of Guangdong and Guangxi.

Affected by the policies of the Guangdong medical reform system such as ¡§two-vote system¡¨, GPO and second bargaining, the growth rate of the entire pharmaceutical industry slowed down and the company's distribution business was affected accordingly. However, with the changes in the market environment, the company has transformed and innovated in the distribution field, and actively expanded its business development areas, clearly focused on the development of four business directions including retail direct sales, equipment consumables, retail diagnosis and treatment, and primary care. The company has improved supply chain management efficiency and reduced operating costs to ensure that earnings are growing through informatization reform. In 2018, the retail direct sales increased by 34% YoY, equipment consumables increased by 29% YoY, retail diagnosis and treatment increased by 49% YoY, and primary care increased by 17% YoY. The company has promoted the implementation of 131 key cooperation projects of two vote system, the income of Guangdong's pure sales business increased by RMB958 million; accelerated the stationing of distribution and retail, there were 61 open drugstores throughout the year, including 23 drugstores newly opened in 2018 (12 cooperative drugstores in the hospitals, 6 drugstores near the hospitals, and 5 DTP pharmacies), the quality of the drugstores was gradually improved, and the sales revenue increased by 36% YoY. We expect that the company's distribution business will continue to grow steadily as the distribution business transforms and innovates.

Build a ¡§new Guoda¡¨, continue to promote internationalization

As a large-scale pharmaceutical retail enterprise in China, Guoda Drugstore has 28 regional chain companies and established the logistics and distribution network including Shanghai National Logistics Center and 23 provincial and municipal distribution centers. Guoda Drugstore ranked the first among the China pharmaceutical retailers for seven consecutive years since 2011. According to the ¡§Statistical Analysis Report on the Operation of Drug Circulation Industry in 2017¡¨ by the Ministry of Commerce, the total sales of Guoda Drugstore in 2017 was RMB11.08 billion, a YoY increase of 7.48%, leading 21.49% to second-class Beijing Tongrentang (RMB9.12 billion). As of drug retail market of RMB400.3 billion in 2017, the market share of Guoda Drugstore was 2.8%, which was the same as in previous years.

Based on the retail business developed in nearly 70 cities in 19 provinces and autonomous regions, Guoda Drugstore expanded their retail scale advantage with the ¡§self-opening + M&A¡¨ model; meanwhile, it completed the investment in newly establishing Fujian Guoda Medicine Co., Ltd., Shanghai Guoda Ruijing Pharmacy Co., Ltd., Sinopharm Holding Guoda Drugstore Zhengzhou Chain Co., Ltd. and Inner Mongolia Guoda Drugstore Pharmaceutical Co., Ltd., and the acquisition of 100% equity of Shanxi Zhongao Pharmaceutical Co., Ltd., the acquisition of relevant retail business and assets of Inner Mongolia Tongren Pharmacy Chain Co., Ltd., and the acquisition of 100% equity of Shanxi Yixintang Pharmacy Co., Ltd. At the end of 2018, the total number of Guoda Drugstore reached 4,275 stores, a net increase of 441 stores, including 3,202 direct stores, with sales revenue of RMB10.02 billion, up 9.87% YoY; 1,073 franchise stores, distribution revenue of RMB1.183 billion, an increase of 6.25% YoY.

In July 2018, Guoda Drugstore completed the introduction of Walgreens Boots Alliance (WBA), and became a Sino-foreign joint venture after the equity transfer. WBA is the world's largest drugstore retailer that provides health care services through the operation of pharmaceutical wholesale and community pharmacies. At the same time, it also has advanced chain pharmacy management experience and DTP pharmacy operation experience. In 2018, the revenue of WBA was US131.5 billion and net profit attributed to owners was US5.024 billion. We believe that through the cooperation with WBA with introducing internationally advanced management concepts, information technology and product supply chain management, the company could improve the operational efficiency, pharmaceutical service capabilities, etc. of Guoda Drugstore, and enhance the gross profit rate, thereby strengthening the company's profitability, and accelerating the internationalization process to lead the development of China's pharmaceutical retail industry.

Financial Forecast and Valuation

Financial Performance

The company's gross profit in 2018 was 5.098 billion RMB, representing an increase of 14.73% YoY; gross profit margin was 11.82%, increasing by 1.05%; net profit attributable to shareholders was 1.211 billion RMB, increasing by 14.46% YoY; net profit attributable to shareholders margin was 2.81%, increasing by 0.25%. It is expected that as Guoda Drugstore completes the introduction of WBA, the store expansion and operation efficiency will gradually improve, and more profits will be released in 2019.

Financial Forecast

It is estimated that the company's revenue in FY19/FY20/FY21 will be RMB 45.99/49.72/53.37 billion, representing increases of 6.65%/8.11%/7.34% YoY; net profit attributable to shareholders will be RMB 1.34/1.53/1.72 billion, representing increases of 10.24%/14.32%/12.83% YoY; corresponding EPSs are RMB 3.12/3.56/4.02. The company continues to promote the integration of wholesale and retail, exerts the synergy effect. At the same time, it further enhances the transformation and innovation of the circulation business and builds up a new Guoda Drugstore. We are optimistic about the future development of the company.

Valuation

Based on our SOTP valuation model, we initiate coverage on Sinopharm Accord with 16.13x/14.11x/12.50x FY19/FY20/FY21 PER, corresponding to TP RMB 50.29 with a 21.0% potential upside compared with current price RMB 41.56 as of June 24, 2019, and recommend ¡§BUY¡¨ investment rating.

Risk

1. Industry policy risk

2. Guoda Drugstore's business fails expectations

3. Distribution business transformation fails expectations

Financials

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Recommendation on 27-6-2019
RecommendationBUY
Price on Recommendation Date$ 41.560
Suggested purchase priceN/A
Target Price$ 50.290
Writer Info
Leon Duan
(Research Analyst)
Tel: +852 2277 6515
Email:
leonduan@phillip.com.hk

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