Futu Securities released a research report stating that in Q2 2024, the revenue growth of the pharmacy industry slowed down, and profits declined. The main reasons are the compression of drug prices due to online price comparison policies, increased supervision of non-standard behaviors of pharmacies, and the dispersion of customer flow due to outpatient co-sharing policies. The reform of individual medical accounts has led to a decrease in personal account income, affecting the sales of pharmaceuticals and pharmacy business that rely on individual accounts. The medical insurance expenditures for pharmacies are expected to decrease by 9% in 2023, and this trend is expected to continue in 2024. The pharmacy industry in H1 2024 faces performance pressure, intensified competition, and a slowdown in the expansion speed of physical stores due to online price comparison, with an expected increase in market concentration.

Pharmacy Sector Performance: The 8 listed companies in the pharmacy sector achieved revenue of 57.717 billion yuan in H1 2024, an 8.06% year-on-year growth, with a net profit attributable to the parent of 2.53 billion yuan, a 16.83% year-on-year decrease, and a non-net profit attributable to the parent of 2.393 billion yuan, an 18.36% year-on-year decrease. Looking at the individual quarters, in Q1 2024, the total revenue was 29.681 billion yuan, an 11.44% year-on-year growth, with a net profit attributable to the parent of 1.515 billion yuan, a 3.13% year-on-year decrease, and a non-net profit attributable to the parent of 1.462 billion yuan, a 3.34% year-on-year decrease; in Q2 2024, the total revenue was 28.036 billion yuan, a 4.69% year-on-year growth, with a net profit attributable to the parent of 1.015 billion yuan, a 31.32% year-on-year decrease, and a non-net profit attributable to the parent of 0.931 billion yuan, a 34.37% year-on-year decrease. The decline in revenue growth and profits in the pharmacy industry in Q2 2024 is mainly due to the compression of drug prices, increased supervision of non-standard behaviors of pharmacies, and the dispersion of customer flow caused by outpatient co-sharing policies. The reform of individual medical accounts has led to a decrease in personal account income from 763.3 billion yuan in 2022 to 635.1 billion yuan in 2023, affecting the sales of pharmaceuticals and pharmacy business that rely on individual accounts. The pharmaceutical industry leader may be less affected due to scale and regulatory advantages, and leading companies are expected to continue to increase their market share.

In H1 2024, the pharmacy industry faces performance pressure, intensified competition, and a slowdown in the expansion speed of physical stores due to online price comparison, with an expected increase in market concentration. The gross margin of the pharmacy sector in H1 2024 was 31.63%, a 3.50 percentage point decrease from the previous year; the net margin was 5.12%, a 1.01 percentage point decrease; the average sales expense rate was 23.51%, an 0.88 percentage point increase, the management expense rate was 3.84%, a 0.06 percentage point increase; and the financial expense rate was 0.78%, a 0.08 percentage point increase. This is mainly due to the high proportion of new and newly acquired stores, leading to a decrease in gross margin and an increase in sales expenses. The National Medical Insurance Bureau has introduced an online drug price comparison system and collected information on medical insurance drug traceability codes, which is expected to promote the long-term development of the pharmaceutical industry towards fair competition and compliant operations, benefiting industry leaders.

The outpatient pooling policy is gradually expanding and being implemented nationwide, with the potential to drive an increase in customer flow. As of February 2024, the outpatient pooling policy had been implemented in 26 provinces and 220 cities, involving approximately 1.414 million designated medical insurance pharmacies, accounting for about 30%. From an execution perspective, Jiangsu Province has the largest number of outpatient pooling pharmacies in H1 2024, a total of 18,125, accounting for 48% of the total number of pharmacies; provinces such as Jiangsu, Liaoning, Hubei, and Inner Mongolia have over 10,000 outpatient pooling pharmacies. In terms of execution rate, Tianjin, Jiangxi, and Shanghai have a relatively high proportion of outpatient pooling pharmacies, at 100%, 88%, and 85% respectively. In comparison, Yunnan, Guangxi, Henan, Shandong, Hainan, and Guangdong have a relatively low inclusion rate, accounting for less than 3%. In the future, as the number of pharmacies covered under the outpatient pooling policy continues to increase, the trend of increasing store customer flow is expected to be sustained.

Investment Recommendations: The sector's performance growth rate slowed in H1 2024, and the policy normalization such as online price comparison is expected to accelerate market concentration. Meanwhile, leading companies are expected to be the first to benefit from the outpatient pooling policy. Currently, the valuation of offline pharmacies is low, at a historical low, with high valuation cost performance. It is recommended to focus on leading chain pharmacies with diversified business capabilities and omni-channel layout, with a focus on Yifeng Pharmacy (603939.SH), Lbx Pharmacy (603883.SH), Dashenlin Pharmaceutical Group (603233.SH), Yixintang Pharmaceutical (002727.SZ), and Yunnan Jianzhijia Health-chain (605266.SH).

Risk Warning: Unexpectedly low outflow of prescriptions, greater-than-expected drug price reductions, slower-than-expected expansion across regions, weaker-than-expected new store operations, and increased industry competition risks.