The following article has been translated into English:

I have been strongly advocating for the pharmaceutical sector, mainly due to these factors:

In terms of industry, the internationalization process in the field of life sciences is accelerating. Recently, domestic innovative drugs have repeatedly set new highs in overseas licensing, and the number of FDA-approved products is steadily increasing.

In terms of pharmaceutical policies, there has been a positive transformation, with anti-corruption efforts entering a critical phase. The State Council has targeted high-quality development for the pharmaceutical industry and medical equipment from 2023 to 2025.

In terms of valuation and market share, the pharmaceutical sector has been declining for three consecutive years, with a dynamic P/E of about 25 times in 2023. After the valuation switch, a large number of companies have a P/E/G ratio significantly less than 1, among which the most expensive medical services have also returned to a valuation of 30-40 times in 2024.

This year, the consumer sector has been very sluggish overall, as the pandemic has severely damaged the balance sheets of residents. However, the pharmaceutical sector has extremely rigid demand. Over the next 10 years, 24 million people will join the 60-year-old population each year, increasing the paying population (although the total payment amount is to be determined). In contrast, the main consumer groups for some consumer goods are shrinking.

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The ChiNext board has recently continued to hit new lows, mainly dragged down by new energy represented by CATL. If it were not for the pharmaceutical sector's hedge, the ChiNext board might be even lower.

The recent good performance of the blood products sector can be explained as follows:

On the supply side, the state no longer approves the establishment of new blood product production enterprises. Currently, there are less than 30 blood product companies, and the industry concentration is very high, with a trend of mergers and acquisitions, which promotes further improvement of industry concentration.

In the past decade, the number of plasma station approvals has been relatively low. During the "14th Five-Year Plan" period, the state has gradually relaxed restrictions on the construction of new plasma stations. Listed blood product companies have successively obtained new plasma station approvals. Blood product production depends on the supply of plasma, and leading companies have a strong ability to obtain approvals, ushering in a new era of increased plasma supply during the "14th Five-Year Plan" period.

Resource monopoly, and advantageous resources are gradually gathering towards listed companies.Additionally, some companies, such as Paring Biotech, Weiguang Biotech, and Shanghai Laishi, have changed their major shareholders (Shanghai Laishi's major shareholder has surprisingly become Haier Group), which facilitates the establishment of plasma stations and has led to a reversal in performance in the third quarter.

From the demand side, the domestic market is still in a tight balance. The expectation of price reduction in the centralized procurement of blood products in Guangdong is moderate, with the bearish factors exhausted, and winning the bid is conducive to the increase in the volume of products in the hospital. There is still a large room for domestic substitution for albumin.

In the short term, the channel inventory of basic varieties such as intravenous immunoglobulin has been digested to a historically low level. The high incidence of respiratory diseases has driven the demand for products such as intravenous immunoglobulin and albumin in the hospital. The awareness and usage of domestic doctors have increased.

In addition, traditional Chinese medicine has also been commendable recently.

Currently, institutions continue to look for undervalued opportunities in the pharmaceutical sector, and some niche and undervalued directions can also be actively followed.

Today, let's talk about pharmacies. Previously, some students asked about this, which is also a direction with low valuation and expectations at present.

Today, I will explain the investment logic of pharmacies to everyone in one go.

Low Valuation

This is a review of the price-to-earnings ratio of listed pharmacy companies, and the overall price-to-earnings ratio is currently less than 20 times.The director has experienced the super bull market in the pharmaceutical sector during 2019-2020, where the price-to-earnings ratio of pharmacies once reached as high as 60 times. At that time, due to the expenditure on epidemic prevention materials (masks, cold medicines, etc.), the performance was thickened, and the sector showed a general upward trend.

In 2021, the impact of the epidemic gradually cleared, and coupled with the negative factors of epidemic control, the market value began to fall with the performance. In 2022, due to the low base of the same period and the increment of the epidemic prevention and control opening, high growth in performance and market value increase were achieved. In May and October 2022, there was a wave of stockpiling medicines after the epidemic was released.

The logic of the big bull market in pharmacies before: the logic of prescription outflow + low concentration, which once compared with Japan. Looking back now, this long-term logic has not changed, but the valuation has fallen to less than 20 times.

The director always believes that undervaluation is the hardest logic, especially when the valuation is low, but there are unexpected changes. Just like the logic of blood products, it is a high barrier but the expected growth is low, but it can also be interpreted under the stimulation of the outbreak of respiratory diseases.

Low expectations + positive changes

The market's expectations for the listed pharmacy were very low before.

This is because the base in the fourth quarter of 2022 and the first quarter of 2023 was very high, and everyone knows the specific reasons. After the release at the end of October 2022, everyone rushed to buy and stockpile medicines.

The pharmacy also ushered in a pulse of revenue and profit, but this is difficult to replicate again. The base is high, and the apparent growth this year looks very poor, and the market's expectations for it are low. Some brand traditional Chinese medicine companies also have the same logic.

As time goes by, the marginal impact of the high base is gradually decreasing. For pharmacies, there are several positive changes:The first one is the outbreak of influenza. The following graph shows the cases of influenza-like illness in sample hospitals in the north. The red represents the situation in 2023-2024, and the others are comparison charts from previous years. It is very clear that there is a major outbreak of influenza this year.

You can also see similar news on some social platforms. The dominant strain in winter 2023 is consistent with that of 2022, both being the A(H3N2) subtype, and the current drugs are still effective.

This will stimulate the short-term performance of pharmacies and over-the-counter traditional Chinese medicine.

The second is the implementation of outpatient coordination in various provinces, which catalyzes the performance in the third quarter of 2023. In February 2023, after the National Medical Insurance Administration issued a document to promote "the inclusion of designated pharmacies in outpatient coordination management," the penetration rate of outpatient coordination has increased.

The average daily order volume of pharmacies nationwide has been rising for four consecutive months, with the order amount growing from 2,871 yuan per day in July to 3,269 yuan per day in October.

The long-term logic of pharmacies

I. Prescription outflowFor instance, consider a patient with a chronic illness. Every month, you need to go to the hospital to pick up medication, and it's always the same medication. You are familiar with every clinic in the hospital. Even so, on a certain day of each month, you must set an alarm before 7 a.m., just to spend less time in line when picking up medication in the outpatient lobby. This experience is quite poor for patients.

Prescription externalization refers to the transfer of prescription dispensing from hospitals to outside, undertaken by distribution companies or social pharmacies.

In detail, a prescription issued by a doctor, after being reviewed by a hospital pharmacist, is uploaded to a "prescription information sharing platform." Soon after, the pharmacy cooperating with the hospital obtains the information, and the patient can choose to go to a physical pharmacy to pick up the medication directly, or opt for home delivery from the pharmacy.

Separation of medical and pharmaceutical services, with retail pharmacies becoming the main terminal for prescription drug sales—retail pharmacies in the United States and Japan account for about 80% and 70% of the prescription drug market, respectively.

The country has also been continuously promoting prescription externalization.

II. Industry concentration increases, and leading companies capture market share

From the development experience of pharmacies in the United States and Japan, the chain operation of retail pharmacies is the general trend of the pharmaceutical retail industry. The chain rate of retail pharmacies in the United States has basically reached 78%. The chain rate of Chinese pharmacies has rapidly increased in recent years, from 36% in 2014 to 62% last year.In terms of industry concentration, the market share of the top ten Chinese chain stores is only 25.2%, far behind Japan's CR10 market share of 70.7%, and even further behind the United States' CR4 market share of 79.6%.

In recent years, listed companies have aggressively expanded by leveraging their financial advantages.

Do not overthink the pharmacy business; in fact, the business model of a pharmacy is very simple, it is just the retail industry. By continuously opening new stores, the number of people covered increases, and so does the traffic. The more stores opened, the higher the revenue, the more drugs are wholesaled, and the higher the bargaining power with upstream pharmaceutical companies, the higher the circulation efficiency.

After opening a new store, it continues to operate, and after a period of time, it turns a profit, and the money earned is used to open new stores, while closing the old stores that are at a loss.

From the perspective of stock selection, if you understand this logic, it is also very simple. In terms of the total number of stores, Dashenlin, Laobaixing, and Yifeng Pharmacy all have more than ten thousand stores, which are basically the leaders in the domestic retail pharmacy industry. In terms of growth rate, their store growth rates this year are 29.35%, 21.16%, and 20.28%, respectively.

Declaration: The article only records the author's thoughts and does not constitute investment advice. Investment carries significant risks, and caution should be exercised. I hope everyone treats their investments as seriously as they would when renovating a house. Do not spend more time choosing a company than you would spend choosing furniture. If you can weigh your small money repeatedly, why be so careless with large sums of money?