Zhongtai: Profit in the pharmacy sector in Q1 of 2026 continued to grow at a double-digit rate year-on-year. Pay attention to the accelerating warming trend in Q2 due to the elimination of the base effect of the flu season.

Zhongtai released a research report stating that in mid-May 2026, the Medical Insurance Bureau held talks with some offline chain pharmacies. Due to the impact of consumer stimulation pressure and the diversion of funds from strong sectors, the stock prices of offline pharmacies are still under pressure. From the perspective of Yifeng valuation review, the current dynamic PE valuation of ~13X is close to the 10-year historical low point of 12.4X in 24Q3. From the conclusion, the bank believes that the reliability of the pharmaceutical industry's year-on-year performance in 26 is relatively high. Based on the current historical valuation center and dividend yield perspective, the pharmaceutical sector has both upward elasticity in valuation recovery and dividend defense properties. Zhongtai's main points are as follows: Profit growth without revenue growth in Q1 26, some leading stores readjusting back to historical stability The income and gross profit performance of 25 full year and Q1 26 remained basically flat/low single-digit growth. Profit growth in the double digits year-on-year benefited from the continued advancement of refined cost control. 1) On the revenue side: The offline pharmacy sector's operating income year-on-year in 25 full year/26 Q1 was 1.9%/-0.1%. In 25, it achieved steady growth under the pressure of medical insurance cost control and consumption recovery trends. The year-on-year growth rate in 26 Q1 declined mainly due to the periodic mismatch caused by the flu. 2) On the profit side: In 25 full year/26 Q1, the sector's net profit attributable to shareholders achieved significant growth rates of 22.7%/10.6%. The driver of profit growth in 25 exceeding income was mainly due to the fine optimization of sales expenses; the sales expense ratio of the sector continued to decline in 26 Q1, and the sum of asset-related disposal gains and impairment losses narrowed year-on-year from 25 Q1. The growth sustainability under the background of revenue growth without profit growth: Cost reduction still has room for continuous decline, and income growth is expected to be seen sequentially in 26. 1) The flatness in Q1 26 is mainly due to the two-way base effect of the flu: In Q1 26, the sector achieved a basically flat year-on-year basis on the revenue side under the double pressure of the digestion of the flu drugs inventory in 25 Q4 and the high base of flu drug sales in 25 Q1. This bank expects that excluding the impact of the four types of flu drugs, the sector's regular product sales have shown signs of recovery, and the revenue growth rate is expected to be seen continuously after the digestion of the flu in Q2. 2) The sustainability of refined cost reduction: In 25 full year/26 Q1, the sector's net profit attributable to shareholders achieved significant growth rates of 22.7%/10.6%. The driver of profit growth in 25 exceeding income was mainly due to the fine optimization of sales expenses (the expense ratio decreased by 1.1 percentage points year-on-year); the sales expense ratio of the sector continued to decline in 26 Q1 (a decrease of 0.3 percentage points year-on-year). Looking at the detailed items, the decrease in sales expenses mainly originated from the decline in employee compensation (inefficient store closures, sales team contraction), and the continuous decline in rent and property fees. From the performance of recent years, the average rent per square meter of the leading stores in the sector in 25 showed a decline in the range of 1.9%-9.9% compared to 21, while the average rent reduction in China's top 100 cities reached 23.4% during the same period. Referring to the average performance of sample cities, there is still considerable room for rent reduction in the future stores of the pharmacy sector. Updated medium and long-term logic: The industry's medium and long-term logic is steadily being realized in the face of challenges, with the possibility of improvement in second-order trends expected. Referring to the stability of mature markets and the ecological attributes of the pharmacy industry, the domestic offline pharmacy's medium and long-term logic still revolves around industry concentration improvement, the promotion of medical-Pharmaceutical separation driving prescription flow outside, and the climb in the proportion of non-drug sales in three dimensions. In the recent data updates, in the domestic retail market: 1) Concentration: In 25, the sales of 8 listed companies in the industry accounted for 26.6% of the industry's sales, an increase of 1.1 percentage points year-on-year (Japan has long maintained a range of 70-80%); 2) Prescription flow outside: In 24, the distribution of prescription drugs inside and outside hospitals was 79%:21%, with the industry's prescription drug sales gradually climbing in 25 and Q1 26. The growth rate is between 2-4% year-on-year (according to the 22 data of Japan and the US, the proportion of prescription drugs in the external market in these markets is in the range of 70-90%); 3) Non-drug adjustment: In 25, the sales of physical pharmacies and traditional Chinese medicine accounted for 89.1% of the total sales (in the US, the share of consumer health business revenue in CVS pharmacies is 29.4%, and in Japan the prescription dispensing business of pharmacy industry has been maintaining around 15.0% in recent years). Listed pharmacies in China are actively promoting non-drug adjustments in their stores. Valuation views and investment recommendations: The current valuation levels are close to historical lows, and attention is paid to the valuation recovery performance brought about by the improvement in performance. As of May 2026, with the normalizing process of mounting pressure on consumer recovery and medical insurance compliance inspections, Yifeng's dynamic PE has fallen to around 13 times, putting the valuation level at the 0.8th percentile since 2016, at a historically low level. At a time when the pace of closure of leading stores is paused in the short term and sector profits are expected to continue to grow in double digits, the bank remains optimistic about the future industry concentration improvement and the ongoing benefits of prescription flow. Leading companies are expected to enhance their industry competitiveness and deliver quality financial results through their compliance advantages in store networks, supply chains, and prescription acceptance capabilities. The current valuation of the sector is at a historical low, with both defensive characteristics from the perspective of dividend yield and upward valuation recovery elasticity. The bank maintains a "buy" rating on DaShenLin Pharmaceutical Group and Yifeng Pharmacy Chain. Risk warnings: Risks of information lag or delayed updates in public information, risks of changes in industry policies, risks of intensified market competition, risks of rising operating costs, risks of demand recovery falling short of expectations.