Guosheng: Revenue side of the pharmaceutical sector remains under pressure; watch for catalysts from the flu season.

Guosheng released a research report stating that demand in the pharmaceutical industry has not yet clearly recovered, and cost reduction, efficiency enhancement, and refined expense management have become important supports for the profit side. The operating focus of the pharmacy industry is gradually shifting from store clearance to efficiency improvement of existing stores and restoration of growth, and subsequent improvements in same-store and per-store profitability deserve close attention. Traditional pharmaceuticals still face short-term pressure on revenue and profit, but expense reduction and cash flow improvement provide some support for subsequent profit recovery. In the second half of the year, attention should be paid to the phased demand catalyst brought by the peak flu season. Guosheng's main views are as follows: In 2026H1, the pharmaceutical sector as a whole remained in a period of adjustment, with pressure on the revenue side continuing, but improvements in operating quality gradually emerging In H1, revenue in the traditional pharmaceutical sector fell 1.2% year on year, with the decline widening to 2.6% in Q2, and gross margin under some pressure, but the selling expense ratio continued to decline, providing some support for profit; in the traditional Chinese medicine sector, H1 revenue fell 4.4% year on year and Q2 revenue fell 8.8% year on year, with relatively large pressure on net profit attributable to parent, but the decline in non-GAAP profit narrowed significantly, indicating relatively stronger resilience in core business operations. Overall, industry demand has not yet clearly recovered, and cost reduction, efficiency enhancement, and refined expense management have become important supports for the profit side. Fundamentals in the pharmacy sector improved relatively earlier, with revenue resuming growth and profit growth continuing to outpace revenue In 2026H1, revenue in the pharmacy sector increased 2.0% year on year, with growth accelerating to 4.2% in Q2, while net profit attributable to parent and non-GAAP profit both achieved double-digit growth, and the selling expense ratio continued to decline. At the store level, the earlier concentrated store closures and optimization of inefficient stores have gradually come to an end, leading direct-operated store openings and M&A have reappeared, while franchising continued to contribute the main increment. The industry's operating focus is gradually shifting from store clearance to efficiency improvement of existing stores and restoration of growth, and subsequent improvements in same-store and per-store profitability deserve close attention. Short-term performance disruptions in the traditional pharmaceutical sector, while expense reduction and cash flow improvement build strength for profit recovery In 2026H1, gross margin in the traditional pharmaceutical sector was generally relatively stable, but in 2026Q2 it fell 1.7 pct year on year to 49.9%, with both revenue and gross margin putting pressure on the profit side, reflecting the continued impact of centralized procurement price cuts and changes in product mix. On the expense side, the trend was one of reduction, with the selling expense ratio in 2026Q2 falling 1.6 pct year on year. On the profit side, in 2026H1 net profit attributable to parent and non-GAAP net profit fell 0.5% and 6.7% year on year, respectively, and in Q2 net profit attributable to parent and non-GAAP net profit fell 5.0% and 10.6% year on year, respectively, with core profitability still in a stage of adjustment. On the positive side, cash flow remained generally stable, with H1 operating cash flow of RMB 40.4 billion, operating cash flow/net profit at 118%, and accounts receivable at period-end down about 3% year on year, with collections generally stable and collection quality good. Overall, the sector's revenue and profit still face short-term pressure, but expense reduction and cash flow improvement provide some support for subsequent profit recovery. In the second half of the year, attention should be paid to the phased demand catalyst brought by the peak flu season At present, the proportion of influenza-like illness cases in the south has already risen first, while the north overall remains at a relatively low level. As autumn and winter arrive, influenza activity may rise further. If influenza intensity continues to increase, terminal sales of related categories such as cold medicines, cough remedies, throat remedies, and antivirals are expected to improve, and traditional Chinese medicine OTC and retail pharmacies both have some benefiting elasticity. Related tickers: Guangdong Zhongsheng Pharmaceutical, Changchun High-Tech Industry, Yifeng Pharmacy Chain, Sichuan Kelun Pharmaceutical, ApicHope Pharmaceutical Group, Jiangsu Hengrui Pharmaceuticals, Staidson, Xiamen Amoytop Biotech Risk warnings: 1) Negative pharmaceutical policies exceed expectations; 2) Industry growth falls short of expectations; 3) Risk of intensified industry competition.