Morgan Stanley: Yunnan Baiyao’s third-quarter revenue accelerates, but profit remains below expectations

Why did accelerating revenue not drive net profit growth?

In the third quarter of 2026, Yunnan Baiyao reported revenue of 10.4 billion yuan, up 10.4% year on year and 5.2% above Morgan Stanley’s forecast. Net profit was 1.121 billion yuan, down 2% year on year and 7.3% below the bank’s forecast. Profit excluding non-recurring items was 1.112 billion yuan, up 2.2% year on year.
Year-on-year revenue growth rose from negative 1.3% in the second quarter to positive 10.4% in the third quarter. However, the overall gross margin fell 1.1 percentage points year on year to 27.2% in the third quarter. Together with a 10.3% increase in accounts receivable from the end of 2025, this led Morgan Stanley to conclude that the distribution business may have driven the revenue acceleration.
Operating cash flow rose 55.2% year on year in the third quarter.

Morgan Stanley noted that, amid consumer downtrading, traditional Chinese medicine sales at peers and pharmacy chains were weak, while Yunnan Baiyao’s relatively balanced product portfolio and marketing capabilities help support its retail performance.
The company is developing additional clinical uses for marketed products including Yunnan Baiyao Plaster, Baiyao Capsules and Qixuekang Oral Liquid to expand the potential market for its core products. Research and development spending rose 23.9% year on year in the first three quarters of 2026.
Baiyao toothpaste maintained its leading position in the Chinese market in the first half of 2026.

Management guided for full-year net profit growth in 2026. The company had lowered its guidance in the first half from an earlier target of high-single-digit growth.
Morgan Stanley views Yunnan Baiyao as a defensive choice, citing its expected 2027 price-to-earnings ratio of 15 times and relatively high dividends. The company’s special dividend in the first half of 2026 was equivalent to 50% of profit, and its trailing dividend yield was approximately 4.7%.
The bank has an overweight rating and a target price of 60 yuan; the closing price on 3 November 2026 was 55.60 yuan.