Leading Chinese pharmacy chains enter a phase of synchronized same-store recovery and industry consolidation

Overview

This report focuses on the operating inflection point among listed Chinese pharmacy chains. Based on recent pharmacy conference calls and channel expert views, J.P. Morgan concludes that the pace of same-store sales recovery in 2Q26 was faster than during the previously weak period, with traffic improvement as the core driver. The report believes that the industry shakeout over the past two years is reshaping the competitive landscape. The peak of approximately 700,000 stores formed by excessive expansion during the pandemic is expected to gradually contract, while surviving stores, particularly those operated by leading chains, should gain more traffic and achieve higher operating quality.

Core views

The core view is that the worst phase of the Chinese pharmacy industry has passed and that leading companies have the foundation for higher-quality growth. Three structural tailwinds reinforce one another: first, industry consolidation will increase market share; second, franchising is becoming an asset-light expansion engine, particularly as the valuation of small and mid-sized chains has fallen to 0.3-0.5x P/S, creating more favorable conditions for leading companies to acquire existing stores; third, non-pharmaceutical category expansion, product-mix improvement, and cost reduction should support margin resilience. However, OEM/private-label medical insurance coverage and local acceptance remain constrained, while service-oriented non-pharmaceutical formats still require validation of their returns on investment.

Analysis framework

The report's conclusions are primarily based on management conference calls from listed pharmacy chains, channel expert feedback, and estimates of industry store supply and demand. The analysis covers same-store growth, traffic and average transaction value decomposition, store-count contraction, franchise signing structures, M&A valuations, category expansion, and the regulatory environment. It treats regulatory pressure not merely as a risk but also as a driver of industry consolidation and increased concentration among leading companies.

Methodology notes

• Industry cycle and concentrationIndustry shakeout and share redistribution

  Store-count contraction drives traffic concentration in surviving stores

  The report views the contraction in pharmacy store count from approximately 700,000 to 400,000-500,000 as a multiyear industry consolidation process, which should increase the population served per store and improve same-store growth at leading chains.

• Operating metricsSame-store sales decomposition

  Same-store growth is driven by traffic rather than average transaction value

  Yifeng, LBX Pharmacy Chain, and Dashenlin all indicated that the improvement in 2Q26 mainly came from traffic growth, while average transaction values were broadly flat or stable. This suggests that the quality of recovery depends more on industry supply contraction.

• Business modelFranchise-driven asset-light expansion

  Absorbing existing supply from small and mid-sized pharmacies through franchising and M&A

  Against a backdrop of increasing seller pressure, fewer bidders, and declining valuations, leading pharmacy chains can expand their networks through franchising and M&A while reducing pressure on capital expenditures for directly operated stores.

• Margin analysisCategory mix and cost optimization

  Non-pharmaceutical categories and service-oriented formats offset pressure on medical-insurance categories

  The report believes that functional foods, personal care, household living, nutrition consulting, health testing, traditional Chinese medicine therapy, and AI diagnosis could improve customer stickiness, although commercialization remains at an early stage.

Asset mapping & comparison

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

• Yifeng - A (603939.SS)

  One of the leading Chinese pharmacy chains in the report's coverage universe, with approximately 6% same-store growth in 2Q26.

  Strengths

  Recovering same-store growth, with monthly results showing strong momentum throughout 2Q26; positioned to benefit from industry store shakeout and traffic redistribution.

  Weaknesses

  Uncertainty remains regarding OEM and private-label medical insurance coverage and regional acceptance.

  Comparison

  Alongside LBX Pharmacy Chain and Dashenlin, it is one of the listed pharmacy leaders; the report emphasizes that all three companies experienced improved same-store growth.

  Risks

  Medical insurance regulation, price competition, franchise quality, and weaker-than-expected transformation toward non-pharmaceutical categories.

• LBX Pharmacy Chain - A (603883.SS)

  One of the leading Chinese pharmacy chains in the report's coverage universe, with approximately 5%-6% same-store growth in 2Q26.

  Strengths

  Operating quality across approximately 15,000 stores has improved significantly versus 1-2 years ago; after ending rapid expansion, the company is more focused on the productivity of existing stores; its non-pharmaceutical product line is relatively broad among the three companies.

  Weaknesses

  Personal care and nutritional supplement categories face pressure from consumption downgrading.

  Comparison

  Compared with Yifeng and Dashenlin, the report says its non-pharmaceutical product line is more extensive.

  Risks

  Non-pharmaceutical category expansion remains at an early stage, while medical insurance regulation and prescription controls may continue to suppress certain categories.

• Dashenlin Pharmaceutical Group - A (603233.SS)

  One of the leading Chinese pharmacy chains in the report's coverage universe, with same-store growth accelerating sequentially in 2Q26.

  Strengths

  Channel experts view its franchise model as relatively mature, with unified management, control over approximately 90% of merchandise, more than 30 warehouses, and coverage across more than 20 provinces; it is actively promoting service-oriented formats such as nutritionist consulting, health testing, traditional Chinese medicine therapy, and AI diagnosis.

  Weaknesses

  New formats such as health stations and single-disease stores remain loss-making or in a stage where returns on investment have yet to be validated.

  Comparison

  The report considers its integrated, directly operated-style franchise model to be relatively mature among the three companies.

  Risks

  Returns from service-oriented non-pharmaceutical formats are uncertain, while the complexity of regional expansion and franchise management is relatively high.

Key data

• Yifeng 2Q26 same-store growthApproximately 6%The report says Yifeng's 2Q26 same-store growth reaccelerated, at approximately +7% in April, +5% in May, and +6% in June.
• LBX Pharmacy Chain 2Q26 same-store growth5%-6%The report says LBX Pharmacy Chain's same-store growth improved significantly from the low-single-digit levels in 4Q25-1Q26.
• Industry store-count peakApproximately 700,000 storesThe report says the number of pharmacies in China approached this peak during COVID.
• Expected future store count400,000-500,000 storesChannel experts expect the industry store count to decline to this range over the next 3-5 years.
• Average population served per storeIncreasing from approximately 2,000 to approximately 3,000 peopleThe report links store-count contraction with increased traffic per store.
• Small and mid-sized chain valuations0.3-0.5x P/SThe report says declining valuations among small and mid-sized pharmacy chains make M&A and franchising opportunities more attractive to leading companies.
• New franchise signing structureApproximately 70%-80% from conversions of existing storesBoth LBX Pharmacy Chain and Dashenlin indicated that new franchise signings increasingly come from existing stores rather than newly opened greenfield stores.
• LBX Pharmacy Chain non-pharmaceutical SKUs250+ added year to dateCovering categories such as functional foods, personal care, and household living.

Impact & implications

For investment implications, the report shifts the central industry focus from regulatory and pricing pressure toward increased concentration among leading companies and improved operating quality. If store shakeout continues, leading pharmacy chains may achieve same-store growth without relying materially on higher average transaction values, while expanding their networks through franchising with relatively low capital investment. However, valuation re-rating will still depend on the sustainability of same-store recovery, the quality of franchise integration, the pace of profit generation from non-pharmaceutical businesses, and the marginal impact of medical insurance regulation.

Risks

• Medical insurance regulation, flight inspections, whitelists, drug traceability, and prescription controls continue to pressure small and some chain pharmacies.
• Online price parity and comparisons with in-hospital prices may affect pharmacies' terminal pricing power and market sentiment.
• If the pace of industry store shakeout falls short of expectations, same-store traffic recovery may slow.
• The quality of franchise-store integration, supply-chain control, and operational standardization may fall short of expectations.
• The proportion of OEM/private-label products covered by medical insurance may decline, with uneven regional acceptance.
• Non-pharmaceutical categories and service-oriented formats remain at an early stage, and some models have yet to achieve profitable returns on investment.

What to watch

• Whether Yifeng, LBX Pharmacy Chain, and Dashenlin can sustain their subsequent quarterly same-store sales growth.
• Whether traffic growth continues to provide the main incremental contribution and whether average transaction values remain stable.
• Whether the number of pharmacies nationwide declines at a net closure rate of 30,000-50,000 stores per year.
• The proportion of existing-store conversions among franchise signings, franchise-store operating quality, and merchandise-control capabilities.
• Whether M&A valuations for small and mid-sized chains remain near 0.3-0.5x P/S.
• Revenue contribution and profitability pathways for new businesses such as non-pharmaceutical SKUs, health-service stores, and AI diagnosis.
• Marginal changes in medical insurance catalogs, whitelists, drug traceability, and prescription policies.