Zhongtai: Short-term performance of the traditional Chinese medicine sector under pressure, focusing on improving quality and efficiency.

Zhongtai released a research report stating that in the background of a high base in 2023 H1, the performance of the Chinese medicine sector may be under short-term pressure, but with the fading of the base effect and the coming of the peak season in autumn and winter, the sector's performance is expected to gradually improve. It is recommended to focus on the following two directions: stocks with reasonable valuation and continuous steady growth in performance, with a focus on China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Dong-E-E-Jiao (000423.SZ), Henan Lingrui Pharmaceutical (600285.SH), Hubei Jumpcan Pharmaceutical (600566.SH), etc.; companies with improving operating trends and performance elasticity brought by strong sales of key products, with a focus on Hunan Fangsheng Pharmaceutical (603998.SH), Zhejiang Jolly Pharmaceutical (300181.SZ), Mayinglong Pharmaceutical Group(600993.SH), etc. Report Summary: Profit growth is slowing down, focusing on enhancing quality and efficiency After excluding abnormal data, the total revenue of the Chinese medicine sector in the first half of the year reached 181.9 billion yuan, a year-on-year decrease of 3.32%; non-GAAP net profit was 21.1 billion yuan, a year-on-year decrease of 5.76%. Overall, the sector's profitability slowed down due to the weak demand in the retail end market. In the first half of the year, the sector's gross profit margin was 43.06%, a year-on-year decrease of 2.11 percentage points; companies adopted measures to enhance quality and efficiency, resulting in a 2.06 percentage point decrease in the sales expense ratio, ensuring the stability of profit margins. In 2024 H1, the sector's non-GAAP net profit margin was 11.6%, a slight decrease of 0.3 percentage points. Large categories and strong sales boost, some companies also performed well in Q2 Five companies including Dong-E-E-Jiao, Tasly Pharmaceutical Group, Henan Lingrui Pharmaceutical, Zhejiang Jolly Pharmaceutical, and Hunan Fangsheng Pharmaceutical all achieved positive growth in revenue and non-GAAP profits in the second quarter. Products such as the compound donkey-hide gelatin syrup of Dong-E-E-Jiao, the Tong Luo Qu Tong Gao of Henan Lingrui Pharmaceutical, and the Wu Ling Capsules of Zhejiang Jolly Pharmaceutical, benefited from policy support and increased demand, resulting in rapid sales growth. Retail channel under pressure, OTC shows more resilience In-hospital market: The year-on-year growth rates of the hospital drug market in Q1 and Q2 were -1.4% and -0.2% respectively; among them, the quarter-on-quarter growth rates of Chinese patent medicines were 1.3% and -4.3% respectively, with a slowing growth rate, which is expected to be related to the high base in the same period of 2023 Q2. Retail market: The total size of the retail market in the first half of the year was 105.7 billion yuan, with year-on-year growth rates of 1.5% and -4.0% in Q1 and Q2 respectively; the sales growth rates of Chinese OTC and prescription medicines in the first half of the year were 2.0% and -4.9% respectively, showing more resilience compared to prescription medicines. From a financial perspective, in the second quarter of 2024, the median growth rates of revenue and non-GAAP net profit of 22 Chinese medicine enterprises focusing on OTC products were -0.9% and -3.5% respectively, showing a slight slowdown compared to the previous period, but still faster than the overall Chinese medicine sector. Demand for cough and phlegm relieving medicines remains strong in the first half of the year, while demand for nutritious health products and orthopedic adhesive plasters remains stable, and the concentration of leading brands in the OTC sector continues to increase According to Zhongtai's analysis of the retail sales situation of various segmented categories in the first half of the year, cough and phlegm relieving medicines were one of the few categories that saw growth in the first half of the year. In addition, the demand for nutritious health products and orthopedic adhesive plasters remained stable, while the demand for medicines for cold, fever, coronary heart disease, and gastrointestinal diseases declined significantly. Overall, the trend of increasing concentration in the OTC channel is clear, with the market shares of well-recognized Chinese medicine major products such as Ganmaoling Granules (China Resources Sanjiu Medical & Pharmaceutical), compound donkey-hide gelatin syrup (Dong-E-E-Jiao), quick-acting heart-saving pills (Tianjin Pharmaceutical Da Ren Tang Group Corporation), and Tong Luo Qu Tong Gao (Henan Lingrui Pharmaceutical) steadily increasing. Risk events: Risk of fluctuations in raw material prices, risk of changes in pharmaceutical policies, risk of outdated research information, risk of distortion in third-party data.