GF Securities: The total number of retail pharmacies nationwide continues to grow. There is great potential for increasing the chain rate and industry concentration.

GF Securities released a research report, stating that according to Zhongkang data, the nationwide retail pharmacy total sales volume reached 539.4 billion yuan in 2023, with a growth rate of 22.26% from 2018 to 2023. The years 2021 to 2022 were affected by various local epidemic factors, and the year 2024 will be influenced by industry policy changes such as price comparison policy. The current valuation of the sector has reached a historical low. In the past five years, the total number of retail pharmacies in the country has continued to grow, but the chain rate and industry concentration still have room for significant improvement. After experiencing the turmoil caused by the epidemic, various pharmacies are expected to resume normal expansion pace, with the possibility of speeding up store openings. The specialization of stores and the gradual improvement of category management capabilities will lead to further increase in industry concentration in the future. Review of the retail pharmacy sector performance. According to Zhongkang data, the nationwide retail pharmacy total sales volume reached 539.4 billion yuan in 2023, with a growth rate of 22.26% from 2018 to 2023. The growth rate was higher in 2022 due to epidemic factors, but slowed down in 2023 due to the higher base in 2022. From the perspective of the retail pharmacy sector, starting from 2023, sales of epidemic-related drugs gradually declined, and due to the high base in Q4 of 2022, the revenue and profit growth of various listed companies in Q4 of 2023 slowed down. The first quarter of 2024 is gradually recovering. From the revenue side, in Q4 of 2023, Yifeng Pharmacy Chain and DaShenLin Pharmaceutical Group maintained positive revenue growth, and in the first quarter of 2024, they both resumed normal growth. In Q2 of 2024, various pharmacies' performances were affected to a certain extent by industry policy changes such as price comparison policy. According to the mid-year report of various pharmacies, in Q2 of 2024, Yifeng Pharmacy Chain, DaShenLin Pharmaceutical Group, and LBX Pharmacy Chain Joint Stock achieved positive revenue growth, with year-on-year growth rates of 6.45%, 9.07%, and 0.56%, respectively. Except for Yifeng Pharmacy Chain, the non-GAAP net profit attributable to the parent of other companies in Q2 of 2024 all declined compared to the same period last year. The sector's valuation is currently at a historical low. Reviewing the market performance of the pharmacy sector from 2020 to 2023, it can be seen that the stock performance of the sector is highly correlated with the quarterly performance of the companies. According to the third quarter reports of various companies in 2020, the non-GAAP net profit attributable to the parent of Yifeng Pharmacy Chain and DaShenLin Pharmaceutical Group in Q3 of 2020 increased by 58.05% and 62.17% year-on-year, respectively, leading to a historical high in the sector's valuation level. The years 2021 to 2022 were affected by various local epidemic factors, leading to fluctuation in performance and a decline in valuation levels. In 2024, due to industry policy changes such as price comparison policy, the sector's valuation is currently at a historical low. Industry concentration is expected to continue to rise in the future, and each listed company's expansion speed is relatively stable. In the past five years, the total number of retail pharmacies nationwide has continued to grow, but the chain rate and industry concentration still have significant room for improvement. In the first half of 2024, the expansion pace of each listed company was relatively stable. According to the mid-year report of various companies, Yifeng Pharmacy Chain, LBX Pharmacy Chain Joint Stock, DaShenLin Pharmaceutical Group, and Yixintang Pharmaceutical added a net total of 1,486, 1,395, 2,077, and 1,036 stores respectively in the first half of 2024. Yifeng Pharmacy Chain, DaShenLin Pharmaceutical Group, and LBX Pharmacy Chain Joint Stock are all vigorously developing franchise business. According to the mid-year report of various pharmacies, as of the end of June 2024, the franchise stores accounted for 23.25%, 33.30%, and 33.71% of Yifeng Pharmacy Chain, DaShenLin Pharmaceutical Group, and LBX Pharmacy Chain Joint Stock, respectively. Designated pharmacies being included in outpatient overall management, further accelerating the outflow of prescriptions. Retail pharmacies that have been included in outpatient overall medical insurance management have seen a significant increase in the number of customers and sales. The main reasons are as follows: (1) Most retail pharmacies included in the outpatient overall management system implement the same medical insurance treatment policies as local designated primary medical institutions, enjoying relatively high reimbursement rates; (2) The full category and convenience advantages of retail pharmacies have led to an increase in the number of customers at outpatient overall pharmacies; (3) The national policy of centralized drug procurement continues to promote the outflow of prescriptions. Investment strategy. The concentration of the retail pharmacy industry is still low, and various pharmacies are expected to resume normal expansion pace after the turmoil caused by the epidemic. Store specialization and category management capabilities are gradually improving. Recommended stocks to watch are Yifeng Pharmacy Chain (603939.SH), DaShenLin Pharmaceutical Group (603233.SH), LBX Pharmacy Chain Joint Stock (603883.SH), and Yixintang Pharmaceutical (002727.SZ). Risk tips. Deterioration of competitive landscape; industry policy risks; risks of cross-regional operations.