Maintain Overweight: same-store recovery and faster franchising support Yifeng Pharmacy's earnings recovery

Overview

This report is J.P. Morgan's earnings review of Yifeng Pharmacy's A-shares. The report believes the company's FY25 and 1Q26 results demonstrated operating resilience against a backdrop of weak consumption, the impact of healthcare insurance reform, and industry competition. Cost rationalization measures have begun to deliver results, including proactive store closures, lease area optimization, store relocations, and precise staffing, which lowered the selling expense ratio. The analysts maintain a Rmb33 target price and an Overweight rating, with the core view that same-store sales are entering a clearer recovery cycle, while franchise expansion, non-drug categories, community health services, and potential M&A provide additional growth flexibility.

Core views

The core views include: first, the 5%+ same-store sales growth target for 2026 is credible, as the impacts from weak consumption and healthcare insurance reform have largely been absorbed, with future growth more likely to come from operating improvements in ticket size and customer traffic; second, non-drug functional foods, innovative drug penetration, and Health Hub services will enhance ticket size and community traffic; third, both the quality and scale of franchise expansion are improving simultaneously, and the 1,500+ franchise store target for 2026 shows management's confidence in recovery; fourth, large-scale M&A amid industry consolidation could materially increase market share; fifth, although FY26/27 EPS forecasts were cut by 6.5%/6.7%, the rating and target price remain unchanged, indicating that valuation is still considered to underestimate visible earnings growth.

Analysis framework

The report forms its judgment by combining the FY25/1Q26 earnings call, management operating guidance, same-store sales trends, store expansion plans, changes in costs and expenses, financial forecast revisions, and DCF valuation. The valuation uses a DCF framework and derives the Dec-2026 target price through assumptions on WACC, terminal growth rate, cash flow forecasts, net cash, and debt.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The Dec-2026 target price of Rmb33 is derived from DCF analysis, with key assumptions including 11.0% WACC, a 1.5% terminal growth rate, enterprise value of Rmb39,115mn, and equity value of Rmb39,501mn.

• earnings_reviewFY25/1Q26 results review

  Earnings review

  The company's operating resilience and recovery path are assessed through revenue, adjusted net profit, selling expense ratio, same-store sales, and EPS forecast revisions.

• operating_metricssame-store sales growth

  Same-store sales growth

  The report treats SSSG as the core indicator for assessing the recovery of pharmacy store operations, with the FY25 quarterly trend improving from low levels to 4.0% quarter by quarter, while management's target is 5%+ in 2026.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 603939.SS

  coverage_subject

  Strengths

  Strong operating discipline, with cost rationalization already taking effect; improving same-store sales trend; franchise expansion and potential M&A provide growth flexibility; DCF target price indicates substantial upside.

  Weaknesses

  FY26/27 EPS forecasts were lowered, and near-term revenue growth remains moderate; non-drug and Health Hub are still in the expansion validation stage.

  Comparison

  The current 15.6x FY26E P/E is viewed by the report as not fully reflecting visible earnings growth and accelerating franchising; the share price performance chart shows the stock is still below prior highs over the past year.

  Risks

  Policy changes, weaker-than-expected prescription outflow, intensifying competition, store expansion or franchise development falling short of expectations, and insufficient management of network expansion and digital integration.

Key data

• Report date2026-04-24Date on the report cover page.
• RatingOverweightJ.P. Morgan maintained its rating unchanged.
• Target priceRmb33.00Dec-2026 target price, based on DCF valuation.
• Current priceRmb24.70Closing price as of 2026-04-23.
• Implied upside33.6%Calculated from the Rmb33.00 target price and the current price of Rmb24.70.
• FY25 revenue growth1.5% YoYThe company's FY25 revenue grew year over year, in line with J.P. Morgan's expectations.
• 1Q26 revenue growth1.3% YoY1Q26 revenue grew year over year.
• FY25 adjusted net profit growth7.6% YoYReflects cost optimization and operating resilience.
• 1Q26 adjusted net profit growth12.6% YoYAdjusted net profit growth outpaced revenue growth.
• FY25 same-store sales growth+1.5%Quarterly trend was +0.4%, +0.2%, +3.0%, and +4.0%.
• 2026 same-store sales target5%+Management target, driven jointly by ticket size and customer traffic.
• 2026 store expansion targetabout 500 self-built stores, 1,500+ franchise storesFranchise expansion is an important signal of confidence in recovery.
• Non-drug store transformation target1,000+ stores2026 target, with most execution expected to be concentrated in 3Q26.
• FY26E adjusted P/E15.6xThe report believes the current valuation underestimates earnings growth and accelerating franchising.
• FY26/27 EPS forecast revision-6.5% / -6.7%EPS forecasts were lowered after the model update, but the rating and target price were maintained.

Impact & implications

The report's investment implication for Yifeng Pharmacy is broadly positive: same-store sales recovery, expense ratio optimization, and franchise expansion together improve earnings visibility; if non-drug and Health Hub businesses execute smoothly, they may improve ticket size, customer traffic, and gross profit mix; if large-scale M&A is completed at a reasonable price, it may expand share during industry reshuffling. However, the forecast cuts indicate that near-term earnings are still constrained by the industry and consumer environment, and the investment case depends on delivery against the 2026 same-store target and expansion execution.

Risks

• Industry policy adjustments may adversely affect pharmacy retail.
• Prescription outflow may be smaller than expected, limiting incremental demand on the pharmacy side.
• Intensifying market competition may pressure the company's growth, margins, store expansion, and franchise development.
• Inadequate management of network expansion and digital project integration may weaken operating efficiency.
• If large-scale M&A is conducted at overly high valuations or integration is not smooth, it may bring execution and financial risks.
• If the rollout of non-drug categories and Health Hub services is slower than expected, improvement in same-store sales and gross margin may be delayed.

What to watch

• Whether same-store sales in 2026 can reach the 5%+ target, especially whether improvement accelerates in 2H26.
• The sales mix and gross margin performance after non-drug transformation stores expand from 105 stores to 1,000+ stores.
• Whether Health Hub services can deliver verifiable improvements in community traffic and ticket size.
• The actual store openings, quality, and profitability of the 2026 targets of about 500 self-built stores and 1,500+ franchise stores.
• Whether one to two potential large-scale M&A deals are completed, whether pricing is reasonable, and whether integration proceeds smoothly.
• Whether the decline in the selling expense ratio can continue, and whether the expense efficiency from precise staffing, lease optimization, and store closures remains stable.