The reorganization of the civilian population in Soyu was abruptly executed

Economic Observer reporter Zhang Ling On December 29, 2023, the civilian (301017. SZ) announced that it has terminated its planned acquisition of 556 pharmacies owned by Tasly (600535.SH).

At the end of September 2023, Shuyu Civilians plans to purchase 90% of the shares of Liaoning Tasly, 60% of the shares of Jinan Pingjia, and 10% of the shares of Liaoning Tasly held by Li Shanshan, director of Liaoning Tasly, at a total price of 715 million yuan, and win a total of 556 pharmacies under Liaoning Tasly and Jinan Pingjia.

In the following mid-October, due to the reasonableness of the asset appraisal value and the failure to set a performance commitment, Shuyu received an inquiry letter from the Shenzhen Stock Exchange. After four postponements in responding to the letter of inquiry, the acquisition was finally terminated.

On January 2, Shuyu civilians held an investor briefing on the termination of major asset purchases, and Li Wenjie, chairman of Shuyu civilians, said that in the process of promoting the restructuring, combined with the actual situation of the external and the company, the company and the parties to the transaction further communicated on the transaction plan, but finally did not reach an agreement on supplementary matters, "The company will continue to adhere to the development strategy of 'deeply cultivating the Shandong market and choosing the opportunity to go to the whole country', and will steadily advance in accordance with the original regional development strategy."

On January 4, the Economic Observer contacted Shuyu Civilians about the reasons and effects of the termination of the acquisition of Tasly's pharmacy and the company's next acquisition plan, and Song Qingyu, manager of the corporate culture department of Shuyu Civilians, replied that the company will have relevant announcements on this matter in the future, "The official announcement will explain it to everyone."

High premiums attract regulatory attention

The main business of Liaoning Tasly and Jinan Pingjia is pharmaceutical retail chain business, the former is the top pharmaceutical retail chain enterprise in Liaoning Province, and the latter is the top pharmaceutical retail chain enterprise in Jinan market share.

According to the "Report on Major Asset Purchase (Draft)" (hereinafter referred to as the "Report") issued by Shuyu Civilian in September 2023, Liaoning Tasly's main sales area is Liaoning and Tianjin, with 424 directly-operated stores, and the appraised value of the company's 100% equity is 569 million yuan, while the main sales area of Jinan Pingjia is Jinan, with 132 directly-operated stores, and the appraised value of the company's 60% equity is 156 million yuan.

The premiums of the two targets reached 68 times and 11 times respectively. If the transaction is completed, the transaction will also set a new record for the acquisition amount of chain pharmacies in 2023, and the valuation of a single pharmacy will exceed one million yuan based on the total transaction value and the total number of stores.

On October 19, 2023, the Shenzhen Stock Exchange issued a restructuring inquiry letter to Shuyu civilian, requiring Shuyu civilians to explain the specific reasons and reasonableness of the transaction without performance commitments and performance compensation arrangements under the circumstances that the two target companies have a high appraisal value-added rate, the transaction consideration is all paid in cash, and the transaction will form a large amount of goodwill, and explain the measures that have been taken and are planned to be taken to protect the interests of the company and small and medium-sized investors and their feasibility.

Li Le, general manager of a chain pharmacy in North China, told the Economic Observer that when general pharmaceutical retail listed companies acquire chain pharmacies, they mainly value from two aspects, one is the price-earnings ratio (PE) and the other is the price-to-sales ratio (PS).

"In the past few years, we have seen more PS, and in the past two years, we have seen more PE", Li Le said, pharmaceutical retail profits are very low, in the past two years, the profits of major chain pharmacies have been declining year by year, in the past few years, the industry has paid special attention to scale, and the recent emphasis on profits has been raised.

According to the financial data disclosed by Tasly, from 2021 to 2022 and as of the first quarter of 2023, Liaoning Tasly's revenue will be about 640 million yuan, 710 million yuan and 180 million yuan respectively, and the net profit will be 6.8368 million yuan, 8.5835 million yuan and 3.5863 million yuan respectively, while Jinan Pingjia's revenue will be about 250 million yuan, 290 million yuan and 73.7163 million yuan respectively, and the net profit will be 1.6363 million yuan, 8.1248 million yuan and 3.3095 million yuan respectively.

Bai Yu, a senior practitioner in the pharmaceutical retail industry, told the Economic Observer that if the valuation is based on PS, in previous years, profitable pharmacies would generally be valued at 1.5 or even 1.7 times of annual sales, and in the past two years, they would be generally valued at 1.2 times, while unprofitable pharmacies would be lower, at 0.6-0.8 times. "Referring to this criterion, if you look at the sales of Tasly's pharmacies in 2022, the price of this acquisition is not very high."

However, this time, Shuyu civilians were based on PE's valuation of Liaoning Tasly and Jinan Pingjia. Referring to the comparable transaction cases in the pharmaceutical retail industry in 2023, the average P/E ratio is 31.03 times, the latest P/E ratio of Shuyu Civilian is 29.89 times, and the P/E ratio of Liaoning Tasly Trading is 39.06 times.

The Shenzhen Stock Exchange also questioned this point, requiring Shuyu civilians to explain the reasons why the price-earnings ratio of this transaction is significantly higher than the price-earnings ratio of comparable transaction cases and the latest price-earnings ratio of Shuyu civilians, whether the appraised value of the relevant assets is reasonable, and make sufficient risk warnings.

From January to March 2021, 2022 and 2023, the gross profit margin of Liaoning Tasly was 33.44%, 31.82% and 30.91% respectively, which continued to decline, lower than the average level of comparable listed companies in the same industry, and the difference widened from 1.88 percentage points to 3.43 percentage points. Shuyu civilians predict that the gross profit margin of Liaoning Tasly from April to December 2023 will be 32.02%, and it will continue to rise by about 0.5 percentage points per year in 2024 and beyond. Shuyu civilians predict that the gross profit margin of Jinan Pingjia is generally on the rise.

Accordingly, the letter of inquiry asked Shuyu civilians to explain the specific basis and reasonableness of predicting that the gross profit margin of Liaoning Tasly will continue to increase and the gross profit margin of Jinan Pingjia will generally rise under the circumstances of the continuous decline in gross profit margin and the intensification of market competition in the pharmaceutical retail industry during the reporting period.

A "watershed" for industry mergers and acquisitions

Prior to the signing of the equity purchase agreement in September 2023, the transaction between the two parties had been made public at the end of March 2023, when Shuyu said that it had signed an agreement of intent with Tasly Pharmaceutical Commercial, a wholly-owned subsidiary of Tasly.

Before the announcement of Shuyu civilians and Tasly, the industry had already known the trading intentions of the two parties.

Bai Yu learned about this news two or three years ago, "The first two years were the period of the highest valuation of M&A, if you look at the valuation at that time, it looks a little higher now, but it was appropriate at that time." In August 2021, the common people (603883. SH) spent 1.4 billion yuan to acquire a 51% stake in Huatuo Pharmacy, which owns 715 stores.

There are also industry insiders who hold different views, Wuhan Qiuyou Health Management Co., Ltd. founder Shang Feng told the Economic Observer: "This price is obviously inappropriate, the trading price-earnings ratio is significantly higher than the industry average, and the gross profit margin of Liaoning Tasly is not good."

In response to the inquiries of the Shenzhen Stock Exchange, Shuyu civilians did not reply as scheduled before November 2, 2023, and issued four postponement response announcements on November 2, November 9, November 16, and November 23, 2023. In the end, the commoner did not respond to the inquiry and canceled the trading plan.

Li Le introduced that when choosing a target, scale, whether the medical insurance is fixed, local influence, management radius, and store location are all weighing criteria.

Bai Yu further explained that in addition to the valuation based on PE and PS, regional issues and accompanying policies may also be considered. For example, the scarcity of store qualifications, such as whether the seller will give some other policies, etc., the factors are very complex. "For the civilians of Shuyu, Liaoning Tasly and Jinan Pingjia may be scarce resources."

Although the Shenzhen Stock Exchange's inquiries about Shuyu's civilians have long been concerned, the untimely death of the restructuring case still surprised Bai Yu.

As of June 30, 2023, the total balance of monetary funds and trading financial assets of Shuyu civilians was 1.313 billion yuan, and the balance of cash and cash equivalents was 689 million yuan. Shuyu Civilians originally planned to complete the acquisition with its own funds and self-raised funds, and pay the relevant equity transfer price in three installments.

In October 2023, CSI Pengyuan paid attention to the major asset restructuring and issued an announcement reminding that the transaction still needs to be deliberated and approved by the shareholders' meeting of both parties, the approval of the anti-monopoly law enforcement agency of the State Council on the concentration of undertakings in this transaction, and other approvals or approvals that may be required by relevant laws and regulations, and there is still a certain degree of uncertainty.

Bai Yu observed that in the past two years, the economic environment and the number of mergers and acquisitions have become fewer and fewer, and industry mergers and acquisitions have slowed down, and he believes that the speed of mergers and acquisitions in the pharmaceutical retail industry will continue to slow down in the future, and the risk of mergers and acquisitions will become greater and larger, which is irreversible.

Bai Yu said that the failure of the merger and acquisition after the attention of the regulator should be the first case in the industry. He sees this as a watershed moment for mergers and acquisitions in the pharmaceutical retail industry: "In the future, mergers and acquisitions will not be as easy as before, and buyers and sellers will have to think more clearly." ”

Expansion and goodwill concerns

In recent years, in order to expand its territory, it has undergone many acquisitions, and its goodwill has increased significantly.

According to the above-mentioned "Report", in the 12 months prior to this transaction, a total of 11 asset purchases of Shuyu civilians need to be combined with this transaction, involving an amount of about 671 million yuan.

In the first half of 2023 alone, Shuyu Civilians acquired five companies, Harbin Baofeng Pharmacy Chain Co., Ltd., Benxi Shuyu Civilians Kangyuan Pharmacy Chain Co., Ltd., Huai'an Xiansheng Pharmaceutical Management Co., Ltd., Guanxian Xinxinmin Pharmacy Chain Co., Ltd., and Gansu Longzhong Laomin Pharmaceutical Chain Co., Ltd., with an investment amount of 344 million yuan.

At the end of 2022, the goodwill of Shuyu civilians was 975 million yuan, accounting for 43.70% of the net assets of 2.231 billion yuan. After the completion of this transaction, the listed company will add 685 million yuan of goodwill, the amount of goodwill will reach 1.782 billion yuan, and the proportion of goodwill in net assets will increase to 76.45%.

The substantial growth of goodwill is one of the key focuses of the Shenzhen Stock Exchange. Tasly's transaction plan does not set performance commitments and performance compensation arrangements, and if the transaction goes smoothly and the operation of the acquired pharmacy does not meet expectations, the risk of goodwill impairment will continue to increase.

The expansion and goodwill concerns of the common people of Shuyu are a microcosm of the entire pharmaceutical retail industry.

Taking the common people as an example, the company has 13,100 stores, which is the largest number of stores in the A-share chain pharmacy, and its goodwill amount is 5.81 billion yuan, accounting for 80.12% of net assets.

The temptation of 10,000 stores

According to the 2023 semi-annual report of Shuyu Civilian, there are a total of 6,332 stores, including 3,868 directly operated chain stores and 2,464 franchised stores, of which nearly 90% of the directly operated stores are distributed in Shandong Province. According to the "2022 Statistical Analysis Report on the Operation of the Pharmaceutical Circulation Industry" released by the Ministry of Commerce in November 2023, Shuyu Civilians ranked seventh in the "Top 100 National Pharmaceutical Retail Enterprises in 2022 in Total Sales".

Before 2023, Sinopharm (01099. HK), Gaoji Medical, Laobaimin, Yifeng Pharmacy (603939.SH), Dashenlin (603233. SH), Jointown (600998. SH) and other enterprises have entered the era of 10,000 stores. In September 2023, Yixintang (002727. SZ) also announced the opening of its 10,000th directly-operated pharmacy in Kunming.

Even in China, where restaurants and pharmacies are dotted with restaurants, 10,000 stores is a scale that is not easy to achieve. As of June 2023, there are only 5 10,000-store chain brands in China's catering industry: Michelle Bingcheng, Wallace, Juewei Food, Zhengxin Chicken Chop and Luckin Coffee.

Now, with more than 6,000 stores, Sotama civilians are one of the most promising companies to squeeze into the "10,000 store club".

However, behind the expansion of scale, operating costs continue to increase, and gross profit margin is declining. Guohai Securities Research Report pointed out that from 2017 to 2022, the average gross profit margin of leading chain pharmacies has dropped from 36.1% to 33.7%.

Bai Yu introduced that the overall industry has entered the era of meager profits, and now, on the one hand, the sprint to 10,000 stores is the requirement of the stock market, on the other hand, the relevant state departments have also given policy guidance to enterprises to expand their layout.

In 2021, the Ministry of Commerce issued the "Guiding Opinions on Promoting the High-quality Development of the Pharmaceutical Circulation Industry during the 14th Five-Year Plan Period", proposing to cultivate and form 1-3 large-scale digital and comprehensive drug circulation enterprises exceeding 500 billion yuan and 5-10 exceeding 100 billion yuan by 2025, 5-10 specialized and diversified drug retail chain enterprises exceeding 50 billion yuan, and about 100 intelligent, characteristic and platform-based pharmaceutical supply chain service enterprises. The annual sales of the top 100 pharmaceutical wholesale enterprises account for more than 98% of the total pharmaceutical wholesale market, the annual sales of the top 100 pharmaceutical retail enterprises account for more than 65% of the total pharmaceutical retail market, and the drug retail chain rate is close to 70%.

As of the end of 2022, the chain rate of pharmaceutical retail enterprises was 57.8%, an increase of 0.6 percentage points over the previous year, but it was still far from the target of 70%. Sprinting to 10,000 stores in the current staking is more like raising a ticket to participate in the future competition.

In the first three quarters of 2023, a total of 8,699 new stores will be added to the four early chain pharmacies of Dashenlin, Laobaimin, Yifeng Pharmacy, and Yixintang, which is equivalent to an average of 32 new stores per day.

If you want to further improve your status in the industry and not fall behind, you must maintain a certain growth rate of stores. As a reference, in October 2023, the people set the growth rate of the number of new stores in the next three years at about 25%, and the growth rate of the stores of several major pharmacy chains in the past two years is about 20%. To reach the average level of its top peers, Soyu civilians need to add thousands of new stores every year.

Li Le introduced that the pressure of opening new stores through internal operations is greater, and the merger and acquisition of chain pharmacies is a faster way. "Even if the goodwill is damaged, mergers and acquisitions are a must, there is no way to do it, it has to be done at scale. ”

Bai Yu judged that next, the civilians of Shuyu were bound to look for the next target.

He said that in the past two years, due to centralized procurement and anti-corruption in the pharmaceutical field, the importance of retail channels has become more and more prominent. In addition, when the pressure on medical insurance is greater, companies will also pay more attention to the retail market, China's current drug sales are 70% in hospitals, 30% in pharmacies, "the future may be the opposite, just like the United States, the United States has 90% of sales in pharmacies."

2023 is also the year when outpatient co-ordination pharmacies will be fully implemented. In February 2023, the National Health Insurance Administration (NHSA) issued a notice to encourage eligible designated retail pharmacies to voluntarily apply for outpatient co-ordination services. Compared with ordinary pharmacies, chain pharmacies have more financial strength to undertake outpatient co-ordination pharmacies, which will also accelerate the increase in industry concentration.

(At the request of the interviewee, Li Le and Bai Yu are pseudonyms)