Stock code：603883 stock abbreviation：LBX

LBX Pharmacy Chain Co., Ltd.
Institutional investor conference call
1、Proceedings
（1）Conference date：15 December 2022
（2）Conference format：Online
（3）Conference venue：Company meeting room
（4）Participants：
1.Company participants：
Board Secretary: Shini Feng
Securities Representative: Xiaer Liu
Investor Relations: Linyi He
2.Conference call participants：
Morgan Stanley, Blackstone Group, UBS Asset Management, Apah Capital, Destination Partners, Ellerston Capital, Eurizon Capital, Franklin Templeton Investments, Helved Capital Management Limited, Janus Henderson Investors, Jetha Global, Manulife Investment Management, Matthews International Capital Management, Millennium Partners, Oberweis Asset Management, Orbimed Advisors, Pictet Asset Management, Quest Management, Snow Lake Capital, Stillpoint Investments, Torq Capital Management, Tree Line Advisors, Trikon Asset Management, TT International, UBS, Ug Investment Advisors, Orbimed Advisors and etc.(34 participants from international investment institution in total)

2、Main content
（1）Brief introduction by Shini Feng
The effectiveness of the company's digital reform and efficient organizational reform has gradually emerged since the third quarter of last year, and our business performance has continued to improve. In the first three quarters of this year, the company realized total revenue of RMB13.78 billion, an increase of 22.13% over the same period last year; Net profit attributable to shareholders of RMB610 million has been achieved, showing an increase of 14.46% year on year; Net profit attributable to shareholders of the company before non-recurring gains and losses of RMB567 million reached 18.88% growth over the same period. For the third quarter, the company realized total revenue of RMB4.79 billion, an increase of 25.28% over the same period last year; the net profit attributable to shareholders was RMB153 million, reaching a 20.79% increase over the same period last year; In particular, we earned net profit attributable to shareholders of the company before non-recurring gains and losses of RMB147 million, up 29.34% over the same period last year, reaching a record high growth in the past five years, also showing a good trend of rising quarter by quarter in the first three quarters.
Since the company went public in 2015, we have been maintaining a growth on both total revenue and net profit. The annual compounded growth rate of total revenue and net profit attributable to shareholders was 22.84% and 18.55% respectively from 2015 to 2021. The steady improvement of business performance was derived from the continuous expansion of the company's scale. The annual compounded growth rate reached 35.48% for the store number from 2012 to 2021. By the end of the third quarter of this year, the store number peaking to 10,327, and the company became the first public listed private pharmaceutical retail enterprise with more than 10,000 stores in China.
The company is the most widely covered publicly listed private run pharmaceutical retail enterprise. At present, the company's sales network has covered 20 provincial markets including more than 140 prefecture-level cities, the store number has reached 10,327 in nationwide. After years of deep cultivation and accumulation, the company has formed advantages of brand awareness, management, and supply chain, given the advantage of the future development of franchise, alliance business and online business. Based on the first-mover advantage of wide layout, the company implements the strategy of "focus on advantageous markets + expansion into lower-tier markets", representing of focusing on 16 domain provinces, formulating the "9 + 7" expansion strategy, that is, 9 advantageous provinces are intensively distributed stores through self-construction, mergers and acquisitions, franchises, and alliances, and 7 provinces are constructed mainly of franchises and alliances with asset-light expansion. At the same time, the tier 3-5 small-town market will be distributed in the near term.
The company's eco-enterprise scale is industry leading. For franchise sector, the company began to develop it in 2015, implementing “Seven Unified”, including 100% supply of stocks to ensure the quality of operation of franchise stores. By the end of September 2022, the company owned 2,965 franchise stores. For alliance sector, the company's subsidiary named "Simple Medicine" was established in 2017, positioned as "the leading full trusteeship expert of the county". There are 130 cooperative enterprises, involving more than 4,000 stores by the end of September 2022.
By consolidating the information technology system, strengthening the accumulation and governance of data assets, the company carries out digital transformation from the dimensions of traditional value chain upgrading, product service innovation and business model innovation, building a technology-driven health service platform. After continuous R & D, the company's digital tools and products have gradually matured, enabling the company's business lines in depth. With the launch of LBX "one-click shopping" program, "Bai Xing Tong" employee assistant APP and other digital products, it reduced costs and increased working efficiency, bringing up a growth of revenue.
The company takes the construction of professional pharmacy system as one of the key points, constantly improving the professionalism of employees and stores. By the end of the third quarter, the company had 181 dual-channel stores, 151 DTP pharmacies. In 2021, DTP sales accounted for 10.3% of the retail business, medical insurance accounted for 91.65% of directly operated stores, there are 789 special clinics, and the number of hospital-side stores is close to 10%. The professionalism of pharmaceutical retail enterprises is also the competitiveness to undertake the outflow of prescriptions.
The company has established the earliest and most extensive chronic disease management service system in the domestic industry, bringing professional, warm and intimate chronic disease services to customers. By the end of the third quarter, the company has laid smart Bluetooth examine devices for blood sugar, blood pressure, heart rate, blood uric acid, blood lipids and other chronic diseases in more than 6500 stores nationwide. The company's chronic disease management services have accumulated more than 8 million members and held more than 20,000 online and offline patient education sessions, which further enhanced the important function of pharmacies as primary medical care in national graded diagnosis and treatment.
Under the driven by data, the competitiveness of the company's new retail sector's omni-channel business has been improved in an all-round way, business performance has grown rapidly. In aspect of public domain, the company ranked second and fourth respectively in the national sales of “Mei Tuan” and “E Le Me” in the third quarter, entering the top. In aspect of private domain, the company continued to focus on the "one-click shopping" program, with sales increasing by 93% quarter-on-quarter. In the first three quarters of 2022, the company's online sales exceeded RMB900 million, an increase of 81% over the same period last year.
The company runs digital and other means to further strengthen the refined operation of "People, Stocks and Market" strategy. In terms of "people", the Company improves management efficiency through efficient organizational reform, enhances the ability of employees through the combination of training and competition, and ensure the supply of human resource through the HR supply chain; in terms of "Stocks", the Company vigorously improves its own brand products selling and strengthen the proportion of unified procurement to improve gross profit margin; in terms of "Market", it uses the store layout to achieve online and offline integration development, increasing customer loyalty through professional and intimate store services.
Looking forward, the company has formulated six strategies to build the core competitiveness of enterprises. Firstly, technology-driven, digitalization enables enterprise management, business support, intelligent decision-making, and core operations. Second, seize the opportunity of prescription outflow and seize the blue ocean market of prescription. Third, develop new retail and create a closed-loop ecosystem of "Products + Services + Customers". Fourth, enter to the countryside and build a three-dimensional expansion network. Fifth, expand the healthy social space for the elderly. Sixth, perfecting the ODM mode of health products to cultivate and expand the private brand camp. The company will build a health service platform driven by technology and is committed to building the "LBX" into a more complete, warmer, and more professional long-lasting enterprise.

（2）Questions and answers session
Question 1: How about the sales of four kinds of medicines and epidemic prevention materials in December? What are the expectations for 2023?
Answer: The demand for four types of medicines and epidemic prevention materials has increased sharply in some areas recently. To deal with it, the company has formed a sound business plan and actively responded to it. On the one hand, according to the national and regional epidemic prevention policies, the company actively purchases epidemic-related materials and make every effort to ensure the normal operation of over 10,000 stores across the country, the stable supply of materials, and the price stabilization of our stocks, in order to meet the health needs of customers to the greatest extent; On the other hand, the company actively meets the needs of customers via “LBX Pharmacy Online Store”, such as medication consultation, and home delivery, in order to satisfy the demand of high-quality drugs for customers as far as possible.
We believe, in next year and even in the long run, the main factor driving growth is still the company's ability to refine management and policy direction. Under the influence of the epidemic policy this year, whether it is the decline in the flow of customers in front of the store or the closure of stores in some areas, as well as the control of four types of medicines, all pose challenges to the operation of stores. With the strategy of "National Chess Game", the company aggressively hedges its influence through group-buying and commercial insurance, has achieved good results. In 2023, with the change of epidemic policy, the passenger flow rebounded, while the company's efficient organizational reform and digital reform brought about the improvement of store operation quality, the company is full of confidence in business expectations.

Question 2: What accomplishments has the company achieved in the refined operation of the stores?
Answer: Since 2019, the company has improved the quality of lean operation through digital empowerment of "People, Stocks and Markets". Through the efficient organizational reform 2021, the company has achieved a significant improvement in the quality of store operation. In terms of "people", the company improves efficiency through efficient organizational reform; "combination of training and competition" improves the development of training and consolidates the construction of human resource supply chain; "Short term, Medium term and Long term" remuneration system gives incentives and cohesions to the team. In terms of "Stocks", the commodity and inventory management continued to improve, concentrated SKU and strengthened the centralized procurement increases gross profit. In the third quarter, the company operated more than 27 thousand kinds of stocks, decreased by 5.9% year on year. Centralized procurement accounted for 66%, up 3 percentage points from the same period last year. In September 2022, the inventory turnover days were 90, maintaining the leading position in the industry. With the rapid development of self-owned brands, category innovation continues to develop. In the third quarter, self-owned brand sales accounted for 19.8% to the total retail sales, which was increased by 24.3% year-on-year, and gross profit increased 27% on yearly basis. In terms of "Market", the construction of professional pharmacies is developing rapidly, and actively docking Centralized Medical Insurance resources. By the end of September 2022, the company had 151 DTP pharmacies, 91.65% of company stores were medical insurance stores, about 10% of company stores were hospital-side stores. Besides, there are 789 special clinic and 181 "dual-channel" stores. The chronic disease service system has been continuously improved to enhance customer loyalty. The company's chronic disease management service has a total of 30 + million times of self-testing.

Question 3: What are the company's future M & A plans?
Answer: The company's future mergers and acquisitions will continue to focus on the dominant "9 + 7" market, continue to increase market share, and consolidate the leading position. The company's deep integration of “Huai Ren” Pharmacy will take time. At this stage, the company will be cautious about large-scale mergers and acquisitions, but mainly focus on small-scale mergers and acquisitions, and more on filling the gaps in the original layout network. Compared with the merger and acquisition of heavy assets, the company is more inclined to light assets of franchise and alliance mode in the future. Under the current epidemic situation and policy environment, small and medium-sized chains and single pharmacies are facing greater impact, while the digital system and supply chain system developed and operated by LBX for many years bringing them strong empowerment, and the construction of the "big ecology" of the pharmaceutical retail industry through franchise and alliance can not only accelerate the expansion of the company, but also integrate industry resources, so that many peers could improve their quality of management and achieve performance growth.
At the same time of expansion, the company will also focus on expansion into lower-tier market strategy. At present, the potential development of the domestic lower-tier market is greater, and it has become the key direction of the head pharmacy chain companies. According to relevant data, the three-year compounded growth rates of medicine retail in T3-6 cities and county markets between 2017 and 2020 were 5.1% and 7.1% respectively, significantly ahead of 2.4% in that of T1-2 cities. Due to the more serious aging problem of the prefecture-level cities, the lower cost rate, as well as the lower level of health management than that for the first-and second-tier cities, there is more room for lower-tier market development. The company will concentrate on the "9 + 7" dominant market, enhance the share of the dominant market. In the first three quarters this year, about 90% of the company's new stores are in prefecture-level cities.

Question 4: How to value the merger and acquisition target of the company?
Answer: Corporate acquisitions are divided into “equity acquisitions” and “asset acquisitions”. The target of M & A is generally the regional market leader, such as “Huai Ren” Pharmacy, which mainly focuses on PE (price-earnings ratio) and the synergy effect between the target company and the existing layout of our company. As to “asset acquisition”, we mainly focus on the location of stores. Such acquisitions generally focus on PS (price-to-sales ratio).

Question 5: How to treat the risk of goodwill impairment?
Answer: The retail drugstore industry in which the Company is located is a typical asset-light industry. Mergers and acquisitions are one of the main ways of scale expansion, and the accumulation of goodwill is an industry phenomenon. From the perspective of company operation, whether there is a risk of impairment of goodwill depends on the value of the target and its future profitability, that is, control could be made through the selection of target and post-investment integration.
First, the company has always insisted on mergers and acquisitions in the same industry to ensure that risks can be controlled.
Secondly, in the early stage of due diligence, the company has an experienced investment team, combined with third-party intermediary resources, we can conduct adequate due diligence on the investment target. The company's merger and acquisition are based on the main business of the pharmaceutical retail industry, and the company has 20 years of experience in the pharmaceutical retail industry. For large-scale targets, after several months of due diligence by the company's own functional departments, such as mergers and acquisitions, finance, commercial procurement, human resources, information, and quality department, while the audit team, evaluation team and lawyer team will also conduct a comprehensive and in-depth understanding from multiple dimensions. Then we will consider the management ability of the target, location advantages, future synergies with our company and negotiation pricing and other factors to determine whether to acquire the target.
Thirdly, the company has strong integration capabilities. After years of deep industry cultivation and cross-provincial development experience, we enable the target companies of mergers and acquisitions to rapidly optimize and empower in terms of commodity structure, procurement costs, capital efficiency, operating standards, talent echelon, digitalization and new retail. The company has formed rich experience in cross-provincial acquisition and operation.
Fourthly, the company generally sets performance commitments for equity acquisitions, and the performance growth and achievement of most acquisition projects are good. Because of the scale effect and regional market share advantage, the performance growth of the large-scale targets acquired by the company is particularly prominent.
Fifth, the company has been using prudent accounting treatment. Up to now, the company has been employing big-4 accounting firms as annual audit accounting firms, and the company conducts goodwill impairment test by a third party in strict accordance with relevant requirements every year. In addition, the company will effectively control the growth of goodwill by acquiring controlling rights and retaining minority shareholders' equity to achieve common growth for the regional pharmaceutical retail leader. Step acquisition only includes the corresponding proportion of goodwill in the first acquisition, and goodwill will not be added in the second acquisition of minority shareholders' equity.
Generally, the operation of the target acquired by the company are in good condition, and the growth rate of goodwill for the company is stable.

Question 6: What is the impact of centralized procurement on the company?
Answer: It is more advantageous for leading pharmacies to purchase with quantity. On the one hand, for consumers, leading drugstores have more advantages in price and category. The price of the winning and selected varieties purchased with quantity is close to that of public hospitals in leading chain pharmacies, while the losing varieties, especially foreign-funded original research drugs, can only be bought in out-of-hospital pharmacies, thus driving the increase of store passenger flow. On the other hand, the bargaining power of leading chain drugstores for unsuccessful varieties has been improved, and the profit margin has been expanded, which has led to the growth of overall gross profit.

LBX Pharmacy Chain Co., Ltd.

December 19, 2022