China Nepstar: Emerging drug store chain
"Today, most independent drug stores in the U.S. have been replaced by the behemoth pharmacy departments; but in China, the business is still dominated by mom-and-pop operations," says China expert Tony Sagami.
In his The Asia Stock Alert, he says, "However, that is changing, and getting in on the ground floor with China Nepstar (NYSE:NPD) could make you a bundle of money."
"No Chinese company controls more than 1% of the country’s entire pharmacy industry. In the business world, that’s called a highly fragmented industry. Not for long.
"Just like in the U.S., the pharmacy business is in the process of slowly changing from mom-and-pops to big, bulk-buying corporate giants.
"In China, that change is being brought on by China Nepstar, the country’s largest drugstore chain with 2,700 outlets. Established in 1995, the green Nepstar store is becoming a familiar sight in many Chinese urban neighborhoods.
"Being the biggest has some significant advantages. For instance, it’s the only retailer to have successfully negotiated discount purchasing agreements with drug manufacturers and it has aggressively introduced private label products (with jumbo profit margins) into its stores.
"Much like American drug stores, Nepstar sells a lot more than just prescription drugs. In fact, only 20% of 2008 sales were pharmaceutical drugs — over-the-counter drugs (38% of sales) and nutritional supplements (21%) are even bigger sellers.
"China has 160 million citizens over the age of 60, which is double the number of total U.S. baby boomers. On top of the growing demographic bulge, China’s fast-growing middle class has the money to spend on better health care.
"China currently has 20% of the world’s population, but buys only 1.5% of the global drug market. So that percentage is going to do nothing but increase. Plain and simple, Nepstar is sitting pretty.
"When Nepstar went public in October 2007, it had 1,800 stores in 62 Chinese cities. At the end of 2008, that number had grown to 2,700 stores in 76 cities — making Nepstar the largest drug store in China.
"Meanwhile, the company has a pristine balance sheet. Nepstar has $173 million in cash, another $94 million in marketable securities, and no long-term debt. That gives the company roughly $1.30 per share in cash.
"Nepstar grew its profits by 27.5% to $167 million in 2008, which means it’s trading at only 18 times trailing earnings. In my book, 18 times earnings for a stock that grew its profits by 27% is a bargain.
"Nepstar’s stock is on sale right now. After rising above $20 shortly after its IPO, the shares dropped to under $5. Now, that 75% haircut doesn’t guarantee that Nepstar won’t fall any more. But it has been building what looks like very strong support above the $4 range.
"In my view, Nepstar’s upside is huge and while the ride may be bumpy, my first target is $7 by the end of 2010 — and much, much higher further down the road."
