Founder: Traditional Chinese medicine sector's H1 performance under short-term pressure, OTC company's performance outperforms industry as a whole.

Founder publishes research reports claiming that due to the high base in the same period of 23Q2 and external factors such as centralized procurement and standardized pricing policies, the performance of the Chinese medicine sector in Q2 was under pressure compared to the same period last year, and also declined compared to Q1. As the pressure from factors such as high bases in the same period, centralized procurement, and price reductions gradually diminish, and with the help of cost control reforms by Chinese medicine companies, the overall performance in 2024H2 is expected to improve. Among them, the performance of branded OTC companies is better than the industry average, with revenues of 133.848 billion yuan, a decrease of 1.43% year-on-year. Branded OTC companies have strong price control capabilities and a solid financial foundation, with minimal disturbance from policies. They are expected to benefit from state-owned enterprise reforms, reduce costs, increase efficiency, gradually release brand effects, accelerate the mass production of core products, and achieve long-term growth. In 2024H1, the Chinese medicine sector as a whole achieved revenues of 181.877 billion yuan, a decrease of 3.87% year-on-year, net profit attributable to shareholders of 22.08 billion yuan, a decrease of 9.71% year-on-year, and non-net profit of 21.084 billion yuan, a decrease of 6.63% year-on-year. In 2024Q2, the Chinese medicine sector as a whole achieved revenues of 84.699 billion yuan, a decrease of 6.96% year-on-year and a decrease of 12.84% quarter-on-quarter; net profit attributable to shareholders reached 9.457 billion yuan, a decrease of 12.20% year-on-year and a decrease of 25.09% quarter-on-quarter; non-net profit of 9.063 billion yuan, a decrease of 6.69% year-on-year and a decrease of 24.61% quarter-on-quarter. Due to external factors such as the high base in the same period of 23Q2, centralized procurement, and standardized pricing policies, the performance of the Chinese medicine sector in Q2 was under pressure compared to the same period last year, and also declined compared to Q1. As the pressure from factors such as high bases in the same period, centralized procurement, and price reductions gradually diminish, and with the help of cost control reforms by Chinese medicine companies, the overall performance in 2024H2 is expected to improve. In 2024H1, the average gross profit margin of the Chinese medicine sector was 42.28%, a decrease of 2.87 percentage points year-on-year, a decrease of 2.03 percentage points from the end of 2023; the net profit margin was 12.14%, a decrease of 1.67 percentage points year-on-year, an increase of 2.03 percentage points from the end of 2023. The average sales expense ratio was 21.00% (-1.96 percentage points), the management expense ratio was 4.96% (+0.14 percentage points), and the financial expense ratio was -0.09% (-0.05 percentage points). In terms of profitability, the gross profit margin of the Chinese medicine sector has declined due to the rise in upstream raw material prices, price reductions in Chinese patent medicines from centralized procurement, and the disturbance from the epidemic in 23H1. However, the net profit margin has increased quarter-on-quarter compared to the end of 23, mainly due to continuous efforts by Chinese medicine enterprises to reduce costs and increase efficiency, leading to a significant decrease in sales expenses due to more standardized promotion work. State-owned enterprise reforms continue to deepen, and performance is expected to continue to be realized. After the start of state-owned enterprise reforms, Chinese medicine state-owned enterprises have begun to adjust their equity structures, optimize management systems, focus on their main businesses, control expenses, improve operational efficiency and profitability, and have introduced a series of equity incentive plans to assess performance. In the background of deepening reforms, Founder expects that companies will focus on realizing their performance and achieving long-term growth. Branded OTC products are less affected by policy disturbances, and long-term growth is expected. In 2024H1, the performance of branded OTC companies was better than the industry average, with revenues of 133.848 billion yuan, a decrease of 1.43%; net profit attributable to shareholders was 17.619 billion yuan, a decrease of 2.57%; non-net profit was 16.638 billion yuan, a decrease of 2.83%. Although there was a slight decline in the year-on-year comparison due to the high base, it rebounded significantly compared to the end of 2023, showing a significant improvement in operating conditions and performance generally exceeding expectations. The main reason is that leading branded OTC companies continue to push for cost reduction and efficiency improvement, gradually release brand effects, and rapidly increase the sales of high-margin core products. Looking at the whole year and the long term, pricing and standardized pricing policies may put pressure on some Chinese OTC prices, but top branded OTC companies have strong channel and price control capabilities, with relatively stable prices and small price differentials between channels. Against the backdrop of sustained demand and the ongoing release of brand effects, they are expected to achieve long-term growth. The Chinese medicine sector continues to have a high dividend yield and high investment value. In 2023, among the top 20 companies with the highest dividend yield in the Chinese medicine sector, 12 companies had a dividend yield of over 3%, with branded OTC products accounting for over 50%. In the long term, the Chinese medicine industry has a relatively long product life cycle, OTC single products are less affected by policy disturbances, and the stability and continuity of profitability and free cash flow are relatively high. A high dividend yield is expected to continue, and it has a high investment value. Investment recommendation: Against the background of the high base caused by the opening of the epidemic in Q1 2023, the short-term performance of some Chinese medicine companies may be under pressure, but many companies, including branded OTC companies, still have satisfactory performance. Founder believes that under the interference of policies such as centralized procurement and standardized pricing, branded OTC companies have strong price control capabilities and a solid financial foundation, with minimal disturbance from policies and are expected to benefit from state-owned enterprise reforms by reducing costs, increasing efficiency, gradually releasing brand effects, accelerating the mass production of core products, and achieving long-term growth. It is recommended to pay attention to leading branded OTC companies such as China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Dong-E-E-Jiao (000423.SZ), Zhangzhou Pientzehuang Pharmaceutical (600436.SH), Zhejiang Jolly Pharmaceutical (300181.SZ), Mayinglong Pharmaceutical Group (600993.SH), Yunnan Baiyao Group (000538.SZ), Beijing Tongrentang (600085.SH), Henan Lingrui Pharmaceutical (600285.SH), etc. Risk warning: Risks such as state-owned enterprise reforms falling short of expectations, policy fluctuations, OTC product promotions falling short of expectations, fluctuations in the prices of Chinese medicinal materials, intensified market competition, delays in new product research and development, statistical errors, etc.