According to Zhixun Finance and Economics APP, GF Securities released a research report stating that according to Zhongkang data, the total sales of retail pharmacies reached 539.4 billion yuan in 2023, with a growth of 22.26% from 2018 to 2023. Influenced by the epidemic in 2021-2022 and industry policy changes such as the bid price policy in 2024, the current valuation of the sector has reached a historical low. The total number of retail pharmacies nationwide has continued to increase in the past five years, but the chain rate and industry concentration still have considerable room for improvement. After experiencing the impact of the epidemic, pharmacies are expected to resume normal expansion, with the possibility of speeding up the opening of new stores, and the professionalization of stores and the gradual improvement of category structure management capabilities. The industry concentration is expected to continue to rise in the future.

Review of the performance of the retail pharmacy sector. According to Zhongkang data, the total sales of all categories of retail pharmacies reached 539.4 billion yuan in 2023, with a growth of 22.26% from 2018 to 2023. In 2022, due to the epidemic, the growth rate was relatively high, and in 2023, due to the high base in 2022, the growth rate slowed down. Looking at the retail pharmacy sector, from 2023, the sales of epidemic-related drugs gradually declined. Influenced by the high base in Q4 of 2022, the revenue and profit growth of listed companies in Q4 of 2023 have both slowed down, gradually recovering in Q1 of 2024.

From the revenue perspective, in Q4 of 2023, Yifeng Pharmacy, Dashenlin, and LBX Pharmacy Chain maintained positive revenue growth, with Q1 of 2024 returning to normal growth. In Q2 of 2024, affected by industry policy changes such as the bid price policy, the performance of various pharmacies was affected. According to the interim reports of various pharmacies in 2024, in Q2 of 2024, Yifeng Pharmacy, Dashenlin, and LBX Pharmacy Chain achieved positive revenue growth, with year-on-year growth rates of 6.45%, 9.07%, and 0.56% respectively. Except for Yifeng Pharmacy, the non-net profit attributable to the mother of other companies in Q2 of 2024 has all declined compared to the same period last year.

The valuation of the sector has reached a historical low. Reviewing the performance of the pharmacy sector from 2020 to 2023, it can be seen that the stock price performance of the sector is highly correlated with the quarterly performance of the companies. According to the third-quarter data of various companies in 2020, the non-net profit attributable to the mother of Yifeng Pharmacy and Dashenlin increased by 58.05% and 62.17% respectively, driving the valuation level of the sector to a historical high. Influenced by the epidemic from 2021 to 2022, normal operations of pharmacies across the country were affected to different degrees, and performance fluctuated greatly, leading to a decline in the valuation level of pharmacies. Influenced by industry policy changes such as the bid price policy in 2024, the current valuation of the sector has reached a historical low.

The future industry concentration will continue to rise, and the expansion speed of various listed companies is relatively stable. The total number of retail pharmacies nationwide has continued to increase in the past five years, but the chain rate and industry concentration still have considerable room for improvement. In the first half of 2024, the expansion pace of various listed companies was relatively stable. According to the interim reports of various companies in 2024, Yifeng Pharmacy, LBX Pharmacy Chain, Dashenlin, and Yixintang added a net total of 1486/1395/2077/1036 stores in the first half of 2024. Yifeng Pharmacy, Dashenlin, and LBX Pharmacy Chain all vigorously developed franchising. According to the interim reports of various pharmacies, as of the end of June 2024, the proportion of franchise stores of Yifeng Pharmacy, Dashenlin, and LBX Pharmacy Chain is 23.25%, 33.30%, and 33.71% respectively.

Designated pharmacies included in outpatient overall planning management, further accelerating the outflow of prescriptions. Retail pharmacies that have been included in outpatient overall planning management have shown a significant increase in the number of customers and sales. The main reasons are as follows: (1) Most retail pharmacies included in outpatient overall planning management implement the same medical insurance treatment policies as local designated grassroots medical institutions, enjoying relatively high reimbursement ratios; (2) The full range of categories and convenience advantages of retail pharmacies have increased the number of customers in outpatient planning pharmacies. (3) The national volume-based procurement policy continues to promote the outflow of prescriptions.

Investment strategy. The concentration of the retail pharmacy industry is currently low, with each pharmacy chain experiencing turbulence due to the epidemic and gradually returning to normal expansion pace, with store openings expected to accelerate. Store specialization and category structure management capabilities are gradually upgrading. Recommended stocks to watch: Yifeng Pharmacy Chain (603939.SH), Dashenlin Pharmaceutical Group (603233.SH), LBX Pharmacy Chain Joint Stock (603883.SH), Yixintang Pharmaceutical (002727.SZ).

Risk warning. Deterioration of competitive landscape; Industry policy risks; Risks of cross-regional operations.