On the evening of March 11th, YSB (9885.HK) released its 2023 performance report, marking its first report card since going public in June 2023.
In 2023, YSB's revenue reached 17.972 billion yuan, an 18.9% increase compared to the previous year. However, the company also reported a net loss of 3.207 billion yuan for the year, a significant increase from the 1.5 billion yuan loss in 2022.
The main reason for the expanded loss was attributed to the conversion of preferred shares after YSB's IPO, which was a one-time impact. Excluding this data, the company's net loss for the period could have been reduced to 35 million yuan.
Specifically, YSB's revenue from self-operated and commission-based platform businesses were 16.036 billion yuan and 0.873 billion yuan respectively, representing a year-on-year increase of 18.6% and 25.8%.
It is worth mentioning that YSB has set a target of &#34;100 billion GMV&#34; and plans to continue focusing on the traditional Chinese medicine business. Whether this strategy will lead to more performance growth remains to be seen by the market.
However, there are still concerns about YSB's business.
Since 2023, there has been a wave of mergers and acquisitions in the chain pharmacy industry. Major chain pharmacies have not only expanded in terms of the number of stores, but also increased their presence in lower-tier markets such as county towns. The consolidation of retail pharmacies has had a certain impact on individual pharmacies, which are important customers for YSB.
How to break through this situation is the challenging issue facing YSB.
<h2>Focusing on Traditional Chinese Medicine</h2>
YSB's business model does have a certain uniqueness in the pharmaceutical distribution industry.
As a B2B sales platform in the pharmaceutical industry, YSB connects pharmaceutical companies and distributors upstream, and links with outpatient pharmacies and grassroots medical institutions downstream to meet their needs for small-scale drug purchases.
As the first annual report submitted to the market after going public, YSB's revenue has maintained a growth trend.
In 2023, YSB's revenue reached 17.972 billion yuan, an 18.9% increase compared to the previous year.
Despite this growth, YSB has yet to achieve profitability, reporting a net loss of 3.207 billion yuan for the year, more than double the 1.5 billion yuan loss in 2022.
The main reason for the significant loss was the &#34;fair value changes of financial liabilities at fair value through profit or loss&#34; in 2023, amounting to 3.172 billion yuan, a 144.09% increase year-on-year.
&#34;The change was mainly due to a one-time non-cash adjustment caused by the revaluation of preferred shares at the end of 2022 based on the per-share value at the company's listing, and the appreciation of the US dollar against the Chinese yuan also increased the fair value of the preferred shares priced in US dollars,&#34; explained YSB.
An auditor in Beijing explained to TradeWind01 that the company included the issued preferred shares in the fair value changes of financial liabilities at fair value through profit or loss. When the fair value of financial liabilities increases, it leads to a decrease in profit for the period, impacting the company's earnings.
If the impact of fair value changes is excluded, YSB's loss for 2023 can be reduced to 0.35 billion yuan.
TradeWind01 noted that when YSB went public in June 2023, all preferred shares were converted into common shares, meaning that from 2024 onwards, its profits will no longer be affected by the fair value changes of preferred shares.
In this light, YSB's losses are expected to significantly narrow in 2024.
Specifically, self-operated business remains the main source of revenue, generating 16.036 billion yuan in 2023, accounting for 94.49%, a YoY increase of 18.6%.
Self-operated business refers to YSB directly purchasing from upstream manufacturers and selling drugs and health products to pharmacies and grassroots medical institutions.
YSB attributes the growth of this business to the expansion of the buyer base.
&#34;Mainly attributed to the expansion of the buyer base and increased buyer engagement, which has enhanced the GMV of our self-operated business. The number of monthly paying buyers for self-operated business has steadily increased compared to the same period last year, and the monthly average GMV contribution per paying buyer and the average order amount have also increased.&#34; YSB pointed out.
In 2023, self-operated business contributed a total of 18.447 billion yuan in GMV to YSB, a YoY increase of 21.4%.
In contrast, third-party merchants are the real driving force, achieving 28.465 billion yuan in GMV during the same period, a YoY increase of 25.8%, accounting for 60.7% of the total GMV.
This means that YSB's total GMV in 2023 has reached 46.912 billion yuan, a 24% increase from 2022.
YSB's Chairman and CEO, Zhang Buzhen, has set the goal of &#34;trillion GMV.&#34;
&#34;Looking ahead to 2024, we will embark on a new journey of high-quality development. With a trillion yuan GMV scale as our target for the next 2-3 years, we will continuously expand upstream, redefine drug production and distribution with digital technology, continuously build supply chain capabilities, provide users with better products and services, and achieve higher quality growth.&#34; YSB Chairman and CEO Zhang Buzhen stated.
To achieve this, YSB's strategy is to expand into new product categories, with traditional Chinese medicine becoming one of the key focus areas.
YSB believes that one-third of the market for traditional Chinese medicine comes from outside hospitals, and there are inefficiencies in various aspects of the Chinese medicine industry chain such as transportation and storage.
This also presents a market opportunity.
&#34;We will focus on expanding products such as traditional Chinese medicine slices, increasing the coverage of traditional Chinese medicine slice varieties, and collaborating with leading enterprises and cooperatives in the production areas to improve product quality, providing downstream buyers with high-quality medical and health products and services.&#34; YSB stated.
In 2023, YSB provided over 110,000 SKUs of traditional Chinese medicine slices to downstream customers, achieving around 13 billion yuan in revenue from traditional Chinese medicine slices, a YoY increase of 113%.
<h2>Impact of Pharmacy Mergers Wave</h2>
In recent years, the vigorous wave of mergers initiated by the leading listed pharmacy chains has been posing more challenges to the business model of YSB.
The unique advantage of the YSB business model has always been its aggregation of different categories of medicines, directly addressing the pain point of the lack of sufficient bargaining power for upstream distributors when individual pharmacies and grassroots medical institutions purchase small quantities of medicines, thus reducing the procurement costs for these groups.
However, the wave of mergers by chain pharmacies may further shrink the scale of individual pharmacies, directly impacting the customer base served by YSB.
As of the end of September 2023, the total number of stores for Dashenlin (603233.SH), Laobaixing (603883.SH), Yifeng Pharmacy (603939.SH), and Yixin Tang (002727.SZ) has reached 13,000, 13,100, 12,400, and 10,000 respectively.
Moreover, the top chain pharmacies are extending their reach to the county-level sinking markets. For example, Laobaixing is attracting pharmacies from county-level towns to join through franchising.
&#34;The sinking market has become a key focus for the company. Franchising, as an effective sinking method, allows the company to reach the county-level town markets that are difficult to access through professional managers. Franchisees who have long been rooted in grassroots markets can better help the company conduct business with local customer stickiness and resource advantages,&#34; Laobaixing pointed out.
Under the wave of mergers, chain pharmacies with scale advantages can bypass YSB as an &#34;intermediary&#34; in procurement, directly negotiate with upstream manufacturers, and even achieve &#34;self-production and self-sales&#34; in certain categories of medicines.
Taking the traditional Chinese medicine decoction pieces business that YSB plans to develop vigorously as an example, some chain pharmacies have already built their own traditional Chinese medicine planting bases or engaged in the production of traditional Chinese medicine decoction pieces.
Several subsidiaries under Yixin Tang, such as Yunnan Hongxiang Traditional Chinese Medicine Technology Company, are mainly engaged in traditional Chinese medicine research, seedling cultivation, and other businesses; Guangdong Ziyunxuan Traditional Chinese Medicine Technology Co., Ltd., a subsidiary of Yifeng Pharmacy, is responsible for the production of traditional Chinese medicine decoction pieces.
All of these may bring more challenges to the existing model of YSB.
However, some industry experts believe that individual pharmacies and chain pharmacies are not in a zero-sum game relationship.
&#34;Although the trend of integration in the off-hospital market continues, the absolute number of individual pharmacies is still increasing every year. Therefore, chain and individual pharmacies are not in a zero-sum game relationship. Both have found their own development space in the market,&#34; a pharmacy industry investor in South China told Xinfeng (ID: TradeWind01).
Zhao Heng, the founder of Latitude Health, also told Xinfeng (ID: TradeWind01) that due to the importance of medical insurance as a payment method, the market share of individual leading chain pharmacies in China has a certain ceiling.
&#34;Relying on the internal growth of a single store is certainly slow, so mergers are the most convenient method. Moreover, the retail pharmacy market is indeed fragmented and needs to be reshuffled through mergers. However, due to medical insurance being the main reimbursement method, the increase in market concentration will not be similar to the United States, but more like Japan. Overall, the market share of a single leading chain will not exceed 5%, and the top ten market shares will not exceed 40%,&#34; Zhao Heng explained.
A professional in the retail pharmacy industry in Guangdong further pointed out that even for super chain stores, it is not guaranteed that all SKUs can be obtained through direct sourcing. For example, categories with slightly smaller demand or essential needs still need to be purchased through wholesale or e-commerce channels, which also presents a market opportunity for YSB.
Whether chain pharmacies can become important customers of YSB along with standalone pharmacies remains to be verified.

After setting a target of a trillion GMV, YSB aims to play the card of traditional Chinese medicine decoction pieces.