China Baicaotang (CNBI) is engaged in pharmaceutical distribution, retail pharmacy stores and manufacturing of pharmaceuticals and medical-related products through three subsidiaries: Liuzhou BCT, Hefeng Pharmaceutical and BaiCaoTang Retail, all located in Guangxi Province, China. They are the largest pharmaceutical distribution network in southwest China with 8,000 products across sales channels and 4,000 suppliers.
China Baicaotang has more than 125 stores. With rapid growth, a strong balance sheet, and a P/E of 8, this is a company worth watching. China Baicaotang is planning to upgrade to a senior stock exchange this year.
Chairman and CEO Huitian Tang and CFO Shelly Zhang recently sat down with
to discuss the company's growth prospects.
Where do you see the company in five years?
With its experience and track record, we see China Baicaotang as a consolidator in the pharmaceutical distribution industry, partly supported by demand created by the China BCT retail pharmacy stores.
Our corporate growth strategy focuses on leveraging economies of scale supported by aggressive merger and acquisition activities in retail pharmacy network and reinforcing synergies through vertical integration by expanding the pharmacy and distribution networks. On the retail side, we will adopt a more modern drugstore trend. In five or 10 years, we see ourselves as China's
What are CNBI's competitive advantages? What makes these sustainable over long periods of time?
With the largest wholesale network in the region, we work with 4,000 suppliers to offer more than 8,000 products, including 3,000 under exclusive contracts within the province. Similarly, each of our retail pharmacies offers more than 3,000 products across a range of price levels in mostly under the radar, second and third tier cities in Guangxi.
We believe this is a scalable and replicable business model. We plan to expand and grow through new store openings and acquisitions over time to maintain our competitive edge in providing product breadth and depth, as well as expand our regional footprint in Guangxi and beyond.
How do you plan on expanding outside of Guangxi Province?
In the wholesale segment, we will focus in Guangxi province and strengthen our competitive advantages in Guangxi.
In the retail segment, after we build out a comprehensive drugstore chain in Guangxi province, we plan to expand to other provinces, such as Guizhou, Sichuan and Yunnan. In our pharmaceutical manufacturing segment, we currently sell our products nationally and work on strengthening our distribution network inside of China.
Can you explain your main competitors a bit more?
Our competitors are mostly smaller, regional competitors in Guangxi province. China BCT is in the process of acquiring local pharmacy chains as a market consolidator. In April, we acquired 11 pharmacy stores. We will invest a total of approximately 49,000 to upgrade to the company's operating standards. The renovation has already begun and is expected to be completed by July.
On a national basis, China Nepstar, Shenzhen retail pharmacy, and Hunan Laobai Xing Pharmacy are some of our competitors. Our competitive advantage is that we have different target markets. Most of our big competitors look at first-tier cities, which increase operational risk. For example, Nepstar has a gross profit margin at 45%, and net profit is at 8%. But we have gross profit at 30%, and net profit at 15%.
Why do your customers choose you over the competition?
In our retail pharmacy business, our diverse product offering and convenient store locations are among the key attractions. A typical BCT retail store carries close to 3,000 different products, with the mix regularly reviewed and refined by store managers to ensure timely response to changes in customer demographics, habits, product preferences, etc.
In our pharmaceutical distribution business, we operate one of the largest networks in southwest China. In our wholesale distribution channel, 1,200 of the 4,000 suppliers (including Hefeng) and 3,000 out of the 8,000 products are under exclusive wholesale contracts at provincial level. These exclusive product contracts cover 95% of the drugs listed in China's 307-product National Basic Drug Catalogue, providing affordability to ensure adequate patient access to these essential medicines.
What were the terms of the acquisitions for pharmacies?
On average, we pay around RMB500,000 for the pharmacies, which is around $70,000 per store. We pay 4-5 PE multiples according to their profitability.
Do you expect to raise additional capital through the equity markets?
Yes, we will plan on doing this after uplisting to a major exchange.
How long does a retail store usually take to reach breakeven?
The average payback period per each newly acquired store is approximately 2.5 to 3 years.
What will be the capex for the modernized logistics center?
$15 million to $30 million.
Zack Buckley is general partner for Buckley Capital Partners Hedge Fund and manages his blog at Uncoveringalpha.com. He developed his investing methodology by synthesizing the ideas from the best investors of all time: Warren Buffett, Peter Lynch, Seth Klarman and Benjamin Graham. Using a value approach, he researched thousands of companies in order to pursue the most undervalued companies, which led primarily to companies in China. Buckley will be spending three months this year in China visiting companies that are exciting investment opportunities. Follow him on his blog, Uncoveringalpha.com, as he travels across China touring factories and interviewing management.