ROE is the core indicator to measure a company's return on investment ratio from the perspective of shareholders, and it refers to the net profit that shareholders can obtain in a certain business cycle for every dollar of capital invested.
According to the DuPont analysis, ROE can be broken down into three indicators, namely net profit margin, total asset turnover ratio and equity multiplier, which actually reflect three profit models.
The first is to increase the rate of return through products or services with high net profit margins, the second is to speed up the asset turnover and increase the rate of return by improving the operating ability of the enterprise management, and the third is to increase the rate of return by amplifying leverage and leveraging more resources to invest.
There is a company with a compound annual growth rate of ROE of 48.07% in the past five years, and an ROE of 13.81% in 2023.
At the same time, the willingness to give back to shareholders is also very strong, the dividend payment rate in 2023 is as high as 80%, and the social security fund has also increased its position in the first quarter of 2024.
From the perspective of dismantling the ROE of Zuoli Pharmaceutical, the improvement of the company's product net profit margin in the past five years has become a key factor in ROE growth.
So, what are the specific factors that promote the increase in the net profit margin of the product?
From 2019 to 2023, the compound growth rate of Zuoli Pharmaceutical's net profit attributable to the parent company and operating income will reach 71% and 34% respectively.
From the perspective of revenue, there are three ways for enterprise revenue growth, one is the growth of potential demand, the second is the expansion of market share, and the third is the increase in product prices.
Zuoli Pharmaceutical's Wuling Capsule is the company's largest product, with revenue of 1.228 billion yuan in 2023, a year-on-year increase of 12.45%, accounting for 63% of revenue, mainly used to treat psychosomatic disorders such as anxiety and insomnia.
In terms of potential demand, data shows that the incidence of insomnia among Chinese adults will be as high as 38.2% in 2023, and the number of people with sleep disorders will be as high as 510 million.
Considering the impact of drug side effects, it is expected that in the next few years, the proportion of chemical drugs for the treatment of insomnia in the market will gradually shrink, and the proportion of Chinese patent medicines for the treatment of insomnia will gradually expand.
In addition to the demand stimulus of the disease, the revenue growth brought by the sales channel cannot be ignored.
In 2023, the scale of the national pharmaceutical retail market will reach 516 billion yuan, with a growth rate of 21.18% in the past five years, and the proportion of retail pharmacies in total terminal sales will also increase from 23.71% in 2019 to 26.68%.
As an OTC Class A drug, Wuling capsules can be sold in medical institutions and retail pharmacies outside hospitals. With high safety and no prescription required, there are few barriers to patient purchase, and companies can distribute goods in more scenarios.
In 2023, the OTC channel revenue of Wuling Capsule will only account for 13%, compared with 36% of the competing Yang Serum Brain Capsule and 24% of Baile Eye Capsule, which still has great potential for breakthrough.
At present, the company is actively promoting strategic cooperation with chain pharmacies, and at the same time using the operation of Tmall and Jingdong flagship stores, Douyin, Weibo, Taijitang Traditional Chinese Medicine Hall + Internet Hospital, etc., to increase market coverage and improve competitiveness.
In terms of market share, in 2023, Wuling Capsule will rank first in the use of proprietary Chinese medicines for neurological diseases, with a market share of about 13.3%, an increase of 1.5% compared with 2021, and the market competitive advantage is obvious.
At the same time, Wuling Pharmaceutical has entered the national basic drug catalog, and according to relevant documents, the number of essential drugs equipped with primary medical and health institutions, secondary public hospitals, and tertiary public hospitals shall not be less than 90%, 80%, and 60% in principle.
This ensures the future performance of Wuling Capsule, and also helps to expand its sinking market and further increase its market share.
In addition to the revenue side, Zuoli Pharmaceutical has also carried out a series of optimization and improvement on the cost side. From 2020 to 2023, the company's operating cost ratio decreased from 93.86% to 81.41%, a decrease of 12.45%.
In 2022, Wuling capsules will enter centralized procurement, involving nearly 50% of the sales volume, and the winning bid price is 0.85 yuan / capsule, a decrease of 21%.
For example, after centralized procurement, Wuling capsules added large-size packaging, which stabilized the price of a single box, reduced packaging and production costs, and improved profitability.
In addition to production costs, Zuoli Pharmaceutical's ability to control expenses during the period has also gradually increased in recent years. The expense ratio for the period decreased from 59.81% in 2019 to 41.01% in the first quarter of 2024, with the largest contribution from the decrease in the selling expense ratio.
With the continuous improvement of Zuoli Pharmaceutical's market share and the reduction of the company's channel sales expenses due to centralized procurement in 2022, the overall sales expense ratio has gradually decreased, from 48.96 in 2019 to 37.29% in the first quarter of 2024.
In other words, the increase in the company's operating income, the decline in production costs and period expenses jointly promoted the increase in the net profit margin of products.
From a cash flow perspective, how effective is the company's operation?
From the perspective of cash flow, in the past three years, Zuoli Pharmaceutical has basically been cash inflow from operating activities, cash outflow from investment activities, and cash outflow from financing activities, indicating that the company relies on operating cash inflow to implement investment and pay off debts and return shareholders at the same time.
In addition, in recent years, the company's operating cash inflow has always been greater than the sum of investment cash outflow and cash outflow from financing activities excluding dividends, which shows that Zuoli Pharmaceutical is a high-quality growth dairy enterprise, and the company's operating efficiency will continue to improve in the future.
From the perspective of operating results, the cash flow of Zuoli Pharmaceutical's operating activities in the past five years is basically greater than the net profit, indicating that the transformation of net profit into operating cash flow is still very good, laying a good financial foundation for the company's continuous operation.
However, from 2022 to 2023, the conversion rate of the company's net profit to cash has decreased, mainly due to the impact of centralized procurement, the company has taken the opportunity of centralized procurement to implement a more relaxed sales policy to expand market share, and the proportion of accounts receivable in operating income has increased from 20% in 2020 to 24% in 2023, but it is still within a more reasonable range.
In addition, the safety of business operations is also a special concern for growing companies. The support of Zuoli Pharmaceutical's cash and cash equivalents for the company's operating activities and investment activities at the end of the period has only been reflected in the past two years, and the financial pressure has gradually eased.
Specific to interest-bearing debt, Zuoli Pharmaceutical compared with Kanghong Pharmaceutical and Tasly, the interest-bearing debt ratio is at a central level, combined with the company is still in the growth period, the 24% interest-bearing debt ratio is still relatively benign, and with the continuous improvement of operating efficiency, the company's interest-bearing debt ratio has decreased significantly in the past five years.
To sum up, benefiting from the growth of drug demand for insomnia and anxiety in China, Zuoli Pharmaceutical's operating income and net profit have increased significantly, and its market share has reached the first place in the nervous system Chinese patent medicine products, and it is a veritable growth dairy cow enterprise.
In addition, the improvement of the company's own efficiency has greatly alleviated the pressure on operating funds, provided reliable security for subsequent development, and the future performance growth space is unlimited.
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