China Post Securities: The retail pharmacy industry continues to clear out, and the ongoing coordination is expected to bring performance growth

According to the Zhitong Finance APP, China Post Securities released a research report stating that data from Zhongkang shows that the number of closed pharmacies nationwide in 2024 Q1 is 6,778, Q2 is 8,791, Q3 is 9,545, and Q4 is 11,414, indicating an acceleration in closures. Additionally, Q4 saw a net decrease in the industry (-3,395), with a total of 39,228 closures for the year. It is expected that after the industry clears out, the customer flow of leading pharmacies will further recover. Leading retail pharmacies have a first-mover advantage in local market outpatient coordination, which has a siphoning effect on customer flow, attracting more customers. The increase in medical insurance consumption and related product consumption brought about by coordination is expected to enhance the average transaction value, and outpatient coordination is likely to bring performance increments.

The main points of China Post Securities are as follows:

Industry clearing accelerates, leading pharmacies' customer flow and profit margins are expected to improve in 2025

Since 2024, influenced by external factors such as weak consumer power, medical insurance cost control, strengthened regulatory measures, and delays in the implementation of outpatient coordination, the industry has begun to differentiate, with the survival environment for small and medium pharmacies becoming increasingly harsh, leading to industry consolidation. Zhongkang data shows that the number of closed pharmacies nationwide in 2024 Q1 is 6,778, Q2 is 8,791, Q3 is 9,545, and Q4 is 11,414, indicating an acceleration in closures. Additionally, Q4 saw a net decrease in the industry (-3,395), with a total of 39,228 closures for the year. It is expected that after the industry clears out, the customer flow of leading pharmacies will further recover. Furthermore, leading pharmacies are actively responding to the industry cycle by optimizing stores, disposing of loss-making stores in 2024, and adopting a conservative strategy for store opening plans in 2025 to reduce pressure on profits, which is expected to improve profit margins.

Coordination continues to be implemented, expected to bring performance increments

Leading retail pharmacies have a first-mover advantage in local market outpatient coordination, which has a siphoning effect on customer flow, attracting more customers. The increase in medical insurance consumption and related product consumption brought about by coordination is expected to enhance the average transaction value, and outpatient coordination is likely to bring performance increments.

Policies are actively promoting prescription outflow, with many regions issuing documents to promote the inclusion of retail pharmacies in coordinated medical insurance management. For example, on June 5, the Yunnan Provincial Medical Security Bureau issued a notice soliciting opinions on the "Implementation Opinions on Promoting Provincial Coordination of Basic Medical Insurance in Yunnan Province (Draft for Comments)," clearly stating that "by the end of 2025, a management method for provincial coordination adjustment funds for urban and rural residents' basic medical insurance (hereinafter referred to as residents' medical insurance) will be introduced. Starting in 2026, the collection and distribution of provincial coordination adjustment funds for residents' medical insurance will be implemented. By the end of 2027, a unified standard for residents' medical insurance benefit policies across the province will be established."

China Post Securities expects that the inclusion of retail pharmacies in outpatient coordination will continue to be implemented. Previously, the National Medical Insurance Administration issued documents to standardize the management of external prescriptions for medical insurance drugs, aiming to further promote prescription outflow and strengthen the compliance of prescription outflow.

Actively exploring diversified operations to continuously enhance market competitiveness

Leading retail pharmacies are seeking innovation and change in store operations to continuously enhance market competitiveness, which is expected to help them stand out in the process of accelerating industry concentration. For example, Yifeng Pharmacy is actively exploring a transformation into a service complex, YIXINTANG is creating new types of stores to explore new consumption scenarios, and SYPM is collaborating with Dashi Pharmacy to open a new store "Dashi SYPM." The exploration of new store operation models is expected to attract more customer flow and drive consumption of related products Recommended and Beneficial Targets

We are optimistic about retail pharmacy leaders that actively respond to industry cycles and have superior refined management capabilities. Recommended targets: Yifeng Pharmacy (603939.SH), DSL (603233.SH). Beneficial targets: Lao Bai Xing (603883.SH), YIXINTANG (002727.SZ), JZJ (605266.SH), etc.

Risk Warning

Risks of store profitability not meeting expectations, risks of intensified market competition, risks of coordinated policy implementation falling short of expectations