Zhongtai: The profit margin of the pharmacy sector continued to increase by double digits year-on-year in the first quarter of 2026. Pay attention to the accelerated warming trend in the second quarter as the base of flu cases is eliminated.

Zhongtai released a research report stating that in mid-May 2026, the Medical Insurance Bureau held talks with some offline chain pharmacy companies. Due to the combined influence of consumer stimulus pressure and fund diversion from strong sectors, the stock prices of offline pharmacies are still under pressure. From the perspective of Yi Feng's valuation review, the current ~13X dynamic PE valuation is close to the ten-year historical low point of 12.4X in the third quarter of 24. At this point in time, this report uses recent annual report update data to briefly discuss the sustainability of short-term profit growth and the medium to long-term growth logic of offline pharmacies. In conclusion, the reliability of the pharmacy industry's performance growth in 26 is relatively high compared to the previous year. Based on historical valuation and dividend yield perspectives, the pharmacy sector has both upward elasticity in valuation recovery and defensive dividend attributes. It maintains a "buy" rating for DaShenLin Pharmaceutical Group (603233.SH) and Yifeng Pharmacy Chain (603939.SH), and recommends paying attention to LBX Pharmacy Chain Joint Stock, Yixintang Pharmaceutical, and JZJ Chain Drugstore Corporation for bottoming out and recovery performance. Zhongtai's main points are as follows: Sector performance and store expansion pace update: 26Q1 sector profit did not increase, and some leading stores adjusted to return to historical stability. The income and gross profit performance of the whole year of 25 and 26Q1 were basically flat/low single-digit growth, and the double-digit year-on-year increase in profit was due to the continuous refinement of cost control. 1) Income end: The operating income of the offline pharmacy sector in 25Q1/26Q1 increased by 1.9%/-0.1% year-on-year. In 25, the sector achieved modest growth under the pressure of medical insurance cost control and consumption recovery trends, and the year-on-year growth rate in 26Q1 was mainly affected by the cyclical impact of the flu; 2) Profit end: In the whole year of 25/26Q1, the net profit attributable to shareholders of the sector achieved significant growth of 22.7%/10.6%. The driver of profit growth in 25 was mainly due to the fine optimization of sales expenses; the sales expense ratio of the sector continued to decline in 26Q1, and the total value of asset-related disposal income and impairment losses narrowed compared to 25Q1 year-on-year. Sustainability of growth under the background of increased income without increased profit: There is still room for continued cost reduction, and income growth is expected to gradually show in 26. 1) The flatness in 26Q1 is mainly due to the two-way impact of the flu: In 26Q1, under the dual pressure of inventory digestion of flu drugs in 25Q4 and the high base of sales of flu drugs in 25Q1, the sector achieved a basically flat year-on-year income end, and it is expected that after deducting the impact of the four types of flu drugs, the conventional product sales of the sector have shown signs of recovery, and the income growth rate is expected to gradually show after the digestion of the flu base in Q2; 2) The sustainability of fine cost reduction: In 25FY/26Q1, the net profit attributable to shareholders of the sector achieved significant growth of 22.7%/10.6%. The driver of profit growth in 25 was mainly due to the fine optimization of sales expenses (the expense ratio decreased by 1.1% year-on-year); the sales expense ratio of the sector continued to decline in 26Q1 (decreasing by 0.3% year-on-year). In terms of detailed items, the decrease in sales expenses mainly came from the decrease in employee compensation (inefficient store closures, sales team shrinking), and the continued decline in rent and property fees. In terms of recent rental reductions, in 25, the average rent and property fees per square meter of the leading stores in the sector decreased by 1.9%-9.9% compared to 21, while the average rental reduction for commercial properties in 100 cities in China reached 23.4%. Referring to the average performance of the sample cities, there is still considerable room for rent reduction in the future for the pharmacy sector stores. Updates on medium to long-term logic: The industry's long-term logic is steadily being realized, and the potential improvement of second-order derivatives is expected. Referencing the stability of mature markets and the ecological characteristics of the pharmacy industry, the long-term logic of domestic offline pharmacies is still focused on industry concentration, the separation of medical treatment and medicine promoting the outflow of prescriptions, and the climbing percentage of non-drug sales in three dimensions. According to recent data updates, in the domestic retail market: 1) Concentration: In 25, the income of 8 listed companies accounted for 26.6% of the industry sales, an increase of 1.1 percentage points year-on-year (Japan has maintained a range of 70-80% for a long time); 2) Prescription outflow: In 24, the distribution of prescription drugs inside and outside hospitals was 79%:21%, and the industry's sales of prescription drugs have been gradually climbing in 25 and 26Q1 (year-on-year growth rate ranging from 2-4%) (In Japan and the US in 22, the share of prescription drugs in the outpatient market ranged from 70-90%); 3) Non-drug adjustment: In 25, the sales of physical pharmacies and traditional Chinese medicine decoction pieces accounted for 89.1% (In the US, CVS pharmacy's revenue from consumer health business accounted for 29.4%, while in Japan, the prescription dispensing business of the pharmacy industry has always been around 15.0%), listed domestic pharmacies are actively promoting non-drug adjustments in their stores. Valuation points and investment recommendations: The current valuation is close to historical lows, and attention is given to the valuation recovery performance brought by improved performance. As of M5 in 26, with the normalization of consumption stimulus pressure and the advancement of medical insurance compliance inspections, the Yi Feng dynamic PE has fallen to around 13 times, the valuation is at the 0.8th percentile since 16, and it is at an extremely low historical valuation level. At a time when the short-term pace of leading store closures has paused and sector profits are expected to continue to grow at a double-digit rate, it is optimistic about the sustained release of industry benefits from the increasing industry concentration and prescription outflow. Leading companies are expected to continue to increase their industry competitiveness and deliver quality financial results relying on the compliance advantages of their store networks, supply chains, and prescription acceptance capabilities. Risk warning: R&D progress is slower than expected, clinical advancement is slower than expected, product sales are slower than expected, significant risks in epidemic prevention and control, and risks of outdated information updates in research reports.