According to the Zhitong Finance APP, Zhongtai Securities released a research report stating that in mid-May 2026, the Medical Insurance Bureau will interview some offline chain pharmacy companies. Under the pressure of consumer spending recovery and the diversion of funds from strong sectors, the recent stock price performance of offline pharmacies remains relatively pressured. From the perspective of Yifeng's valuation review, the current ~13X dynamic PE valuation is close to the ten-year historical low of 12.4X in Q3 2024. At this time point, this report briefly discusses the sustainability of short-term profit growth and the medium- to long-term growth logic of offline pharmacies based on recent annual report update data. The conclusion indicates that the reliability of the pharmacy industry's performance growth in 2026 is relatively high. Based on the current point in time, from the perspective of historical valuation center and dividend yield, the pharmacy sector has both upward elasticity for valuation recovery and defensive attributes for dividends. It maintains a "buy" rating for Dacanglin (603233.SH) and Yifeng Pharmacy (603939.SH), and suggests paying attention to the bottoming recovery performance of LBX, YIXINTANG, and JZJ.

The main points of Zhongtai Securities are as follows:

Sector performance and store expansion rhythm update: In Q1 2026, the sector increased profits without increasing revenue, and some leading stores adjusted back to historical stability.

In 2025 and Q1 2026, revenue and gross profit performance remained basically flat/low single-digit growth, with double-digit year-on-year profit growth benefiting from the ongoing promotion of refined cost control. 1) Revenue side: In 2025 and Q1 2026, the offline pharmacy sector's operating revenue grew by 1.9%/-0.1% year-on-year. In 2025, it still achieved gradual growth under the trend of medical insurance cost control and consumer recovery pressure, while the expected decline in year-on-year growth in Q1 2026 is mainly due to the cyclical staggered impact caused by influenza; 2) Profit side: In 2025 and Q1 2026, the sector's net profit attributable to shareholders achieved a considerable growth rate of 22.7%/10.6%. The profit growth exceeding revenue in 2025 was mainly due to the refined optimization of sales expenses; in Q1 2026, the sector's sales expense ratio continued to decline, and the total value of asset-related disposal gains + impairment losses narrowed year-on-year compared to Q1 2025.

Sustainability of growth under the background of increasing revenue without increasing profit: Cost reduction still has room for continued decline, and revenue growth is expected to gradually manifest in 2026.

1. The flat performance in Q1 2026 is mainly due to the dual pressure of influenza's inventory digestion in Q4 2025 and the high base of influenza drug sales in Q1 2026: In Q1 2026, the sector achieved basically flat year-on-year revenue under the dual pressure of "inventory digestion" of influenza drugs in Q4 2025 and the high base of influenza drug sales in Q1 2026. It is expected that after excluding the impact of the four categories of influenza drugs, the sales of conventional products in the sector have shown signs of recovery, and revenue growth is expected to gradually manifest after the influenza base is digested in Q2;

2. Continuity of refined cost reduction: In FY 2025 and Q1 2026, the sector's net profit attributable to shareholders achieved considerable growth rates of 22.7%/10.6%, respectively. The profit growth exceeding revenue in 2025 was mainly due to the refined optimization of sales expenses (expense ratio decreased by 1.1 percentage points year-on-year); in Q1 2026, the sector's sales expense ratio continued to decline (down 0.3 percentage points year-on-year). From the detailed items, the decline in sales expenses mainly comes from the decrease in employee compensation (closure of inefficient stores, contraction of sales teams), and continuous decline in rent and property fees. From the recent rental performance, the average rent and property fees per square meter of leading buildings in the sector in 2025 decreased by 1.9%-9.9% compared to 2021, while the average rent decline for commercial properties in 100 cities in China during the same period reached 23.4% Referencing the average performance of sample cities, there is still considerable room for rent reduction in the pharmacy sector in the future.

Mid-to-long-term logic update: The mid-to-long-term logic of the industry is steadily being realized amidst challenges, with expectations for possible second-order improvements.

Based on the stable state of mature markets and the ecological attributes of the pharmacy industry, the mid-to-long-term logic of domestic offline pharmacies still revolves around three dimensions: the increase in industry concentration, the separation of medicine promoting prescription outflow, and the rising proportion of non-pharmaceutical sales. From recent data updates, in the domestic retail market: 1) Concentration: In 2025, the revenue of 8 listed companies accounted for 26.6% of the industry's sales, an increase of 1.1 percentage points year-on-year (Japan has maintained a long-term range of 70-80%); 2) Prescription outflow: In 2024, the distribution of prescription drugs in hospitals and outside was 79%:21%, with industry prescription drug sales gradually increasing in Q1 of 2025 and 2026 (data from Japan and the US in 2022 shows that the proportion of prescription drugs in the outpatient market is in the range of 70-90%); 3) Non-pharmaceutical adjustment: In 2025, the sales of drugs and traditional Chinese medicine in physical pharmacies accounted for 89.1% (in the US, CVS Pharmacy's revenue from consumer health business accounts for 29.4%, while Japan's pharmacy industry has maintained around 15.0% for prescription dispensing business). Domestic listed pharmacies are actively promoting non-pharmaceutical adjustments in their stores.

Valuation perspective and investment advice: Current valuation levels are close to historical lows, and attention should be paid to the valuation recovery brought about by performance improvement.

As of May 26, amidst the pressure of consumer recovery and the normalization of medical insurance compliance inspections, Yifeng's dynamic PE has fallen to around 13 times, with the valuation level at the 0.8 percentile since 2016, at a historically low level. With the short-term pause in the closure of leading stores and the sector's profits expected to continue double-digit growth, we are optimistic about the future release of industry dividends such as increased concentration and prescription outflow. Leading companies are expected to leverage their store networks, supply chains, and compliance advantages in prescription acceptance to continuously enhance their competitive edge and deliver quality financial results.

Risk warning: R&D progress may fall short of expectations, clinical advancement may not meet expectations, product sales may underperform, significant risks related to epidemic prevention and control, and the risk of delayed updates on research report information