Guosheng Securities Inc. has released a research report noting that demand in the pharmaceutical industry has yet to show a clear recovery, with cost reduction, efficiency enhancement, and refined expense management becoming key supports for the profit side. The pharmacy sector's operational focus is gradually shifting from store closures to improving existing store efficiency and resuming growth, and improvements in same-store and per-store profitability warrant close attention going forward. Traditional pharmaceutical revenue and profits still face short-term pressure, but expense reductions and cash flow improvements provide some support for future earnings recovery. In the second half of the year, attention should be paid to the phased demand catalyst brought by the flu season.
Guosheng Securities Inc.'s main viewpoints are as follows: In the first half of 2026, the pharmaceutical sector remains in an adjustment period overall, with pressure on the revenue side continuing, but improvements in operational quality are gradually emerging. The traditional pharmaceutical segment saw revenue decline 1.2% year-on-year in the first half, with the second quarter decline widening to 2.6%. Gross margins came under some pressure, but sales expense ratios continued to decline, providing some support to profits. The Chinese traditional medicine (TCM) segment saw revenue decline 4.4% in the first half and 8.8% in the second quarter, with significant pressure on net profit attributable to parent, but the decline in non-GAAP profit narrowed noticeably, showing relatively stronger resilience in core operations. Overall, industry demand has yet to recover significantly, and cost reduction, efficiency enhancement, and refined expense management have become important supports for the profit side.
The pharmacy sector is showing relatively leading fundamental improvements, with revenue returning to growth and profit growth continuing to outpace revenue. In the first half of 2026, the pharmacy sector's revenue grew 2.0% year-on-year, accelerating to 4.2% in the second quarter. Both net profit attributable to parent and non-GAAP net profit achieved double-digit growth, while the sales expense ratio continued to decline. On the store front, the earlier wave of concentrated store closures and optimization of low-efficiency outlets is gradually coming to an end. Leading companies' direct-operated store openings and acquisitions have resumed, while franchising continues to contribute the main incremental growth. The industry's operational focus is shifting from store clearance to improving existing store efficiency and resuming growth, and improvements in same-store and per-store profitability deserve close attention going forward.
The traditional pharmaceutical segment faces short-term earnings volatility, but expense reductions and cash flow improvements are building momentum for earnings recovery. In the first half of 2026, the traditional pharmaceutical segment's gross margin remained relatively stable overall, but in the second quarter of 2026, it declined 1.7 percentage points year-on-year to 49.9%. Both revenue and gross margin exerted pressure on the profit side, reflecting the ongoing impact of centralized procurement price cuts and product mix changes. On the expense side, a downward trend was evident, with the sales expense ratio falling 1.6 percentage points year-on-year in the second quarter. On the profit side, in the first half of 2026, net profit attributable to parent and non-GAAP net profit declined 0.5% and 6.7% year-on-year, respectively. In the second quarter, net profit attributable to parent and non-GAAP net profit declined 5.0% and 10.6% year-on-year, respectively, indicating core earnings remain in an adjustment phase. On the positive side, cash flow remained generally stable, with operating cash flow of RMB 40.4 billion in the first half, an operating cash flow to net profit ratio of 118%, and accounts receivable declining approximately 3% year-on-year at period end. Payment collection was generally stable with good quality. Overall, the segment's revenue and profits still face short-term pressure, but expense reductions and cash flow improvements provide some support for future earnings recovery.
In the second half of the year, attention should be paid to the phased demand catalyst brought by the flu season. Currently, the proportion of influenza-like illness cases in the south has taken the lead in rising, while the north remains at a relatively low level overall. As autumn and winter approach, there is potential for further increases in flu activity. If flu intensity continues to rise, terminal sales of cold, cough, sore throat, and antiviral-related categories are expected to improve, with both TCM OTC and retail pharmacies having some upside flexibility. Related targets include Sunshine Lake Pharma, Changchun High-Tech, Yifeng Pharmacy, Kelun Pharmaceutical, Yipinhong, Hengrui Medicine, Shu Tai Shen, and Teso Bio. Risk warnings: 1) Negative pharmaceutical policy exceeding expectations; 2) Industry growth below expectations; 3) Risk of intensified industry competition.
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