CMSC: Profit performance is better than revenue. Top OTC brands are more resilient.

CMSC released a research report stating that in the first half of 2024, high-end resources with scarcity and Chinese OTC companies with brands and channel barriers performed well, while internal Chinese medicine companies were under short-term pressure due to industry policies. Due to the high base of cold and respiratory, gastrointestinal, and blood-tonifying products in the same period last year, as well as the decrease in pharmacy foot traffic in the first half of the year, the revenue of the external OTC sector decreased by 1.06% in 2024H1, but the decrease was better than the overall Chinese medicine sector, reflecting a certain operational resilience. Net profit attributable to shareholders increased by 9.3% year-on-year, maintaining a growth trend despite the decrease in revenue through the increase in gross profit margin and the decrease in expense ratio. The main points of CMSC are as follows: CMSC pointed out that in the first half of 2024, affected by factors such as the high base of the same period and internal and external policies, listed companies in the Chinese medicine industry achieved revenue of 189 billion, a year-on-year decrease of 3.2%; net profit attributable to shareholders was 22.2 billion, a year-on-year decrease of 9.1%. In terms of specific sub-sectors, high-end resources with scarcity and Chinese OTC companies with brands and channel barriers performed better, while internal Chinese medicine companies were under short-term pressure due to industry policies. Brand OTC companies outperformed the industry, the core assets of the Chinese medicine sector Affected by the high base of the same period last year for cold and respiratory, gastrointestinal, and blood-tonifying products, and the decrease in pharmacy foot traffic in the first half of 2024, the revenue of the external OTC sector decreased by 1.06%, but the decrease was better than the overall Chinese medicine sector, reflecting a certain operational resilience; net profit attributable to shareholders increased by 9.3% year-on-year, maintaining a growth trend despite the decrease in revenue. China Resources Sanjiu Medical & Pharmaceutical, Henan Lingrui Pharmaceutical, Yunnan Baiyao Group, and Jiangzhong Pharmaceutical, among other leading brand OTC companies, achieved year-on-year increase in gross profit margin, highlighting a more obvious industry-leading effect, showing a stronger ability to cross the cycle. High-end resources achieve counter-cyclical growth with solid operations In the first half of 2024, high-end resources were a sub-sector of the Chinese medicine industry that still maintained positive growth, benefiting from unique brand, channel, and scarcity advantages, coupled with the continuous improvement of residents' health awareness and supplement needs. In the first half of the year, the revenue of high-end resource companies increased by 4.6% year-on-year, and net profit attributable to shareholders increased by 9.6% year-on-year, achieving counter-cyclical growth against the backdrop of industry pressure. Internally, Chinese medicine is under short-term pressure, and companies benefiting from collective procurement perform well Affected by internal policies and collective procurement, internal Chinese medicine companies were still under pressure in the first half of the year, with a revenue decrease of 10.6% in 2024H1 and a net profit decrease of 24.0% year-on-year. The gross profit margin also decreased due to factors such as the increase in the cost of Chinese medicinal materials and the decline in procurement prices. However, companies with advantages in product categories that benefited from collective procurement achieved good growth. Zhejiang Jolly Pharmaceutical's core product, Wulingsu Capsules, achieved high-speed growth by exchanging price for quantity through collective procurement in blank provinces; Hunan Fangsheng Pharmaceutical's main products, Tenghuang Jiangu Pian and Yizhe Maibu Pian, were included in collective procurement, with the latter benefiting from increased procurement volume and sales revenue in the first half of the year increased by over 110%. At the same time, traditional Chinese medicine innovative drugs Xuanqi Jiangu Pian and children's Jingtai Cough Granules steadily increased sales volume, reaching a historical high in half-year sales. In the second half of the year, the base effect of the Chinese medicine sector will gradually weaken, and with the implementation of catalytic events such as state-owned enterprise reforms and the National Essential Medicine List, the overall trend of the Chinese medicine sector is clear. It is recommended to pay attention to the following three types of companies: Brand OTC companies with strong brands, channels, and product capabilities are still the core assets of Chinese medicine, related companies: China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Dong-E-E-Jiao (000423.SZ), Henan Lingrui Pharmaceutical (600285.SH), Yunnan Baiyao Group (000538.SZ), Chongqing Taiji Industry (600129.SH), Jiangzhong Pharmaceutical (600750.SH), Sunflower Pharmaceutical Group (002737.SZ), Zhejiang Conba Pharmaceutical (600572.SH), etc. Internal Chinese medicine companies with innovative capabilities, rich pipelines, and the potential to quickly exchange price for quantity through collective procurement and essential medicines, related companies: Hunan Fangsheng Pharmaceutical (603998.SH), Zhejiang Jolly Pharmaceutical (300181.SZ), Tasly Pharmaceutical Group (600535.SH), Shijiazhuang Yiling Pharmaceutical (002603.SZ), Jiangsu Kanion Pharmaceutical (600557.SH), Guizhou Sanli Pharmaceutical Co., Ltd. (603439.SH), etc. Traditional Chinese medicine companies with deep moats and expected state-owned enterprise reforms, related companies: Beijing Tongrentang (600085.SH), Zhangzhou Pientzehuang Pharmaceutical (600436.SH), TianjiPharmaceutical companies such as Da Ren Tang Group Corporation (600329.SH) and KPC Pharmaceuticals, Inc. (600422.SH).Risk warning: Market and policy risks, fluctuations in raw material prices and supply risks, risks of research and development failures or delays, intensified market competition risks, etc.