J.P. Morgan: Yifeng Pharmacy’s same-store growth accelerated in the third quarter, while gross margin remained under pressure

Where did third-quarter growth come from?

Yifeng Pharmacy reported third-quarter revenue of 6.11 billion yuan, up 9.7% year over year, and net profit attributable to shareholders of 392 million yuan, up 12.9%; both were broadly in line with J.P. Morgan’s expectations. Recurring net profit rose 18.9% year over year.
Same-store sales growth rose from 1.5% in the first quarter and 6.0% in the second to 7.5% in the third, broadly returning to pre-pandemic levels. Third-quarter customer traffic grew 4% year over year, and average transaction value also rose by about 1%.
Management attributed about 5.5% revenue growth in the first nine months of 2026 mainly to a contribution of 4.5 percentage points from existing stores. New and recently opened stores, franchise distribution, and B2C contributed 0.7, 1.2, and 0.6 percentage points, respectively, while store closures reduced growth by 1.5 percentage points.

Third-quarter gross margin fell 1.6 percentage points year over year, coming in slightly below J.P. Morgan’s expectations. Factors included deeper promotional discounts and a higher revenue share from innovative drugs, chronic-disease medications, franchise distribution, and online channels, all of which have lower gross margins.
Cost controls provided a cushion: the selling expense ratio fell 2.1 percentage points year over year, and the overall expense ratio declined 2.5 percentage points, mainly thanks to lower rental costs and improved labor efficiency. J.P. Morgan believes improvements in store productivity and operating leverage can help continue to drive earnings growth while gross margin is under pressure in the near term.

Innovative drugs and chronic-disease medications are important drivers of the same-store recovery. In the first nine months of 2026, prescription drugs’ share of company revenue rose from 41.9% a year earlier to 44.7%; the company is also expanding customer acquisition and chronic-disease management in areas including weight management, sleep disorders, and lipid-lowering treatments.
O2O sales rose 25% year over year in the first nine months, with the net margin remaining above 3%. Customer traffic, revenue, and gross profit growth at the first 105 remodeled stores outperformed comparable stores, but had not fully met management’s expectations; the company plans to test two upgraded store formats in the fourth quarter before accelerating their rollout.

The company’s new equity incentive plan sets net profit growth targets of 10% for 2026 and 15% for 2027. Management expects existing operations to contribute about 10% earnings growth in 2027, with acquisitions adding about 5%; the company plans to acquire at least 500 stores in 2026 and expects dealmaking to accelerate in 2027.
J.P. Morgan cut its revenue forecasts for 2026 and 2027 by 1% and 1.6%, respectively, because acquisitions were progressing more slowly than expected. Factoring in slightly greater gross margin pressure, it also cut its earnings-per-share forecasts for the two years by 3.2% and 3.45%, respectively, although cost controls partly offset the impact. The bank maintained its Overweight rating and its December 2027 price target of 33 yuan per share.