SINOLINK SECURITIES·2025-12-26 08:55Investment Rating - The report suggests a positive outlook for the pharmacy and traditional Chinese medicine sectors, anticipating a recovery in 2026 after a weak performance in 2025 [2][5]. Core Insights - The pharmacy sector is expected to benefit from market consolidation, with leading companies likely to increase their market share through mergers and acquisitions during the industry clearing phase [3][11]. - The traditional Chinese medicine sector is projected to stabilize and potentially recover, driven by an increase in flu incidence and the upcoming update of the essential drug list [57][60]. Summary by Sections Pharmacy Sector - Market Review: The pharmacy sector faced significant challenges in 2025, with a decline in same-store sales and an overall reduction in the number of operating stores since Q4 2024 [5][20]. - Policy Environment: Regulatory measures are promoting a more compliant and healthier industry ecosystem, which is expected to benefit leading companies [14][15]. - Market Size: In the first ten months of 2025, the sales scale of physical pharmacies was 501.3 billion yuan, a year-on-year decrease of 1.6%, primarily due to a decline in non-pharmaceutical sales [16][21]. - Competitive Landscape: The number of pharmacies in China reached approximately 684,000 by the end of 2024, with a notable increase in store closures, particularly among smaller chains [20][24]. - Marginal Performance: There has been a slight recovery in retail sales data, with leading companies showing improved performance through cost reduction and efficiency measures [32][34]. - Outlook for 2026: Focus on market consolidation and the development of non-pharmaceutical products is recommended, as leading companies are expected to enhance their market share [44][52]. Traditional Chinese Medicine Sector - Market Review: The traditional Chinese medicine sector experienced overall weak performance in 2025, with some companies seeing temporary valuation increases due to innovative pipelines [57][58]. - In-Hospital Opportunities: The upcoming update of the essential drug list is expected to benefit companies with products that have the potential to be included [60]. - Out-of-Hospital Opportunities: An increase in flu incidence in Q4 2025 is anticipated to aid in inventory digestion, with some companies expected to see improved performance [60]. - High Dividend Stocks: Companies such as Lingrui Pharmaceutical, Jichuan Pharmaceutical, and Dong'e Ejiao are highlighted as stable high-dividend investment opportunities [60].