Trillion-Dollar Market: Middle East & Foreign Bulk Invest in Pharmacies

Recently, the retail pharmacy sector, which had undergone significant adjustments earlier, has seen a continuous uptrend, with many stocks turning red.

Since August 30th, the stock of Laobaixing has achieved four daily limit-ups in five trading days.

The A-share market often says, "A foreign monk knows how to chant scriptures," and it is not difficult to observe that retail pharmacy stocks have been highly recognized by foreign institutions.

Among the 13 concept stocks, 10 are heavily held by QFII funds or Northbound Capital.

The introduction of multiple national policies to support the development of the pharmaceutical industry has provided strong support for the sector's rise, boosting investor confidence and driving the continued activity of the retail pharmacy sector in recent days.

Stocks of leading retail pharmacies such as Laobaixing and Jianzhijia have seen rapid price increases.

However, looking back at the previous trend, it is not difficult to find that the retail pharmacy sector has just experienced a long period of adjustment, and the just-ended semi-annual report shows that the performance of companies in the industry is uneven, with frequent increases in revenue but not in profits.

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Statistics show that although all 13 concept stocks made a profit in the first half of the year, only four companies saw an increase in net profit attributable to the parent company compared to the same period last year.

During the reporting period, eight companies achieved year-on-year growth in operating income, and only three companies, Dajia Wei Kang, Hua Ren Health, and Yifeng Pharmacy, achieved double growth in both revenue and net profit.

The growth in company revenue is inseparable from the rapid expansion of stores.

In the first half of this year, the total number of stores of Laobaixing, Dashenlin, Yifeng Pharmacy, and Yixin Tang all exceeded ten thousand.

For example, Dashenlin's semi-annual report shows that as of the end of the reporting period, there were a total of 16,151 stores (including 5,379 franchised stores), with 2,077 new pharmacies added in the first half of the year.

Laobaixing and Yifeng Pharmacy also have as many as 14,969 and 14,739 stores respectively, with more than a thousand new stores added in the first half of the year.

However, although pharmacies are opening more and more, the market is continuously shrinking.

Data shows that the retail scale of domestic physical pharmacies in the first half of this year was 298.6 billion yuan, a year-on-year decrease of 3.7%.

The per-store sales of pharmacies fell by 10.6% year-on-year, with the average customer order value falling by 8.9% year-on-year.

This increase and decrease will inevitably lead to a more serious trend of involution.

But looking at the industry, there are also many positive views in the market.

Zheng Wei, an analyst at Guolian Securities, said that the retail pharmacy industry is the second-largest terminal in China's drug consumption market.

According to the data from the Min Network, the drug sales of China's retail pharmacies increased from 337.5 billion yuan in 2016 to 553.3 billion yuan in 2023, and the terminal share increased from 22.5% to 29.3%.

In recent years, driven by the reform of medical and pharmaceutical policies, prescription drugs have gradually flowed to the market outside the hospital.

It is expected that the drug sales of retail pharmacies will increase from 553.3 billion yuan in 2023 to 888.7 billion yuan in 2030, with a compound annual growth rate of 7%, and the sales share is expected to increase from 29.3% in 2023 to 37.4% in 2030.

According to the data of the Japanese Pharmacist Association, the prescription outflow rate in Japan increased from 9.7% in 1986 to 80.3% in 2023.

Guolian Securities believes that China's prescription outflow rate is close to that of Japan before 1997, so there is still a large room for development in the future.

In recent years, China has been promoting the reform of the medical and pharmaceutical system.

The Chinese-style medical security system represented by the Sanming medical reform is expected to change the old system of public medical institutions, reverse the incentive mechanism of medical personnel, and continue to promote the separation of medicine and prescription outflow.

Referring to the data of the top ten drugstores in Japan, the market share exceeds 70%.

The market concentration of Chinese pharmacies still has a large room for improvement, and non-drug business is expected to create a second growth curve for Chinese pharmacies.

In addition, the data from the Ministry of Commerce shows that from 2016 to 2022, the market share of the top 100 Chinese pharmacies increased from 29.1% to 36.5%, and the drug retail chain rate increased from 49.4% to 57.8%.

The industry concentration still has a large room for improvement.

In recent years, China has introduced various policy documents to strengthen the standardization and supervision of the pharmacy industry.

Guolian Securities said that individual pharmacies with insufficient operating capacity will face severe challenges, while large chain pharmacies have outstanding advantages in management, brand, and informationization, and are expected to drive the industry concentration to further improve.

With the gradual relaxation of the scope of business by the regulatory authorities, the diversified business model and the full industry chain layout of pharmacies in the future are worth being optimistic about.

At present, outpatient coordination is gradually opened to retail pharmacies, and the medical insurance bureau has issued several documents in the near future to strengthen the management of the medical insurance fund used by designated retail pharmacies, which is expected to promote the market share to concentrate on pharmacies with stronger compliance awareness.

The internal control system of leading pharmacies is more perfect, and the market share is expected to continue to increase through self-built, acquisition, and franchising methods.

Relevant enterprises such as Yifeng Pharmacy, Laobaixing, Dashenlin, Yixin Tang, and Jianzhijia are worth focusing on.

The policy support continues to increase, and the long-term development prospects of the industry are optimistic, which has also attracted the high recognition of foreign institutions.

Statistics show that among the 13 retail pharmacy concept stocks, 10 were heavily held by QFII funds or Northbound Capital in the second quarter, and Yifeng Pharmacy, Dashenlin, and Laobaixing were favored by both QFII funds and Northbound Capital.

Looking at the changes in foreign holdings, five companies were further increased in the second quarter, and two companies were newly heavily held.

J.P. Morgan Securities Co., Ltd. appeared for the first time in the top ten circulating shareholders list of Dajia Wei Kang with a new heavy position, and Goldman Sachs newly heavily held Shenqi Pharmaceutical.

Looking at the scale of the increase, Yifeng Pharmacy, Dashenlin, and Laobaixing were more recognized by foreign institutions, and the latest holdings at the end of the second quarter were all more than ten million shares compared to the end of the first quarter.

Yifeng Pharmacy, which is currently the highest in the holding market value and the largest increase in shares, was mainly favored by Hong Kong Settlement Co., Ltd. in the second quarter, with the latest holdings increasing by 45.1999 million shares compared to the previous report period.

Further observation found that this increase is not the first time Hong Kong Settlement Co., Ltd. has increased its holdings.

In the fourth quarter of 2023 and the first quarter of this year, it also completed an increase of 3.6124 million shares and 19.5638 million shares, respectively.

Dashenlin and Laobaixing were not only increased by 10.7666 million shares and 18.4414 million shares by Hong Kong Settlement Co., Ltd. in the second quarter but were also heavily held by Fidelity Fund (Hong Kong) Co., Ltd. and Abu Dhabi Investment Bureau.

Fidelity Fund holds 10.6466 million shares and ranks as the tenth largest shareholder of Dashenlin; Abu Dhabi Investment Bureau holds 8.7039 million shares and ranks as the ninth largest shareholder of Laobaixing.

Compared to the end of the first quarter, Abu Dhabi Investment Bureau has increased its holdings of Laobaixing by 2.0086 million shares.