According to HSBC Global Research, profits of mainland pharmaceutical distributors were under pressure in the first quarter of this year. However, the bank still predicts high double-digit growth for the industry's revenue this year, based on increased industry integration, more horizontal mergers between drug manufacturers and retail pharmacies, accelerated vertical integration of contract sales organizations and vaccine and medical beauty distribution businesses, and the fading of the high base effect of the epidemic.

The bank said that even though volume-based drug procurement has put pressure on short-term gross profit margins, it still believes that Shanghai Pharmaceuticals (02607.HK) is attractively valued, based on a current forecast P/E ratio of only 7.9 times, which is one standard deviation lower than the historical average, as well as improved operating performance under the integration of South and North distribution centers, potential stock return on investment and net profit margin improvement under the evaluation indicators of state-owned enterprise performance compared to high dividends of peers.

The bank maintained its "buy" rating on Shanghai Pharmaceuticals, but lowered its target price from 18.6 yuan to 17.6 yuan. It also maintained its "hold" rating on China National Pharmaceutical Group Corporation (01099.HK) with a target price lowered from 23 yuan to 21.4 yuan, based on efficiency improvements and differences in product portfolios between the two companies.