Zhongtai: Traditional Chinese medicine sector performance is expected to gradually improve, focus on two directions.

Zhongtai has released a research report stating that in the background of a high base in the first half of 2023, the performance of the traditional Chinese medicine sector may be under short-term pressure. However, as the base effect fades and the peak season of autumn and winter approaches, the sector's performance is expected to gradually improve. It is recommended to focus on the following two directions: 1) Stocks with reasonable valuation and sustained steady growth in performance with high dividends; 2) Companies with improving business trends and strong performance brought by key products. Key points from Zhongtai are as follows: Financial side: Profits are slowing down gradually, focusing on improving quality and efficiency. After excluding abnormal data, the total revenue of the traditional 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 has slowed down due to weak retail demand at the end. The gross profit margin of the sector in the first half of the year was 43.06%, a decrease of 2.11 percentage points year-on-year; companies have taken measures to improve quality and efficiency, with a 2.06 percentage point decrease in the sales expense ratio, ensuring the stability of the profit margin. The non-GAAP net profit margin of the sector in the first half of 2024 was 11.6%, a slight decrease of 0.3 percentage points. Strong sales performance from key products and leading companies in the second quarter. Five companies, including Dong-E-E-Jiao, Tasly Pharmaceutical Group, Henan Lingrui Pharmaceutical, Zhejiang Jolly Pharmaceutical, and Hunan Fangsheng Pharmaceutical, achieved positive growth in revenue and non-GAAP profit on a quarter-on-quarter basis in the second quarter. Dong-E-E-Jiaos compound donkey-hide gelatin syrup, Henan Lingrui Pharmaceuticals Tongluo Qu Tong plaster, and Zhejiang Jolly Pharmaceuticals Wuling Capsules, among other key products, have achieved rapid growth driven by policies and demand. Retail channels are under pressure, with OTC products showing more resilience. 1) In-hospital market: The year-on-year growth rates of the hospital pharmaceutical market in the first and second quarters of 2024 were -1.4% and -0.2%, respectively; among them, the quarterly year-on-year growth rates of traditional Chinese medicine were 1.3% and -4.3%, showing a slowdown in growth compared to the previous quarter, likely due to the high base in the same period in 2023. 2) Retail market: The total scale of the retail market in the first half of the year was 105.7 billion yuan. The year-on-year growth rates of the retail market in the first and second quarters of 2024 were 1.5% and -4.0%, respectively; the sales growth rates of traditional Chinese OTC products and prescription medicines in the first half of the year were 2.0% and -4.9%, respectively, showing more resilience compared to prescription medicines. Financial data shows that the median revenue and non-GAAP net profit growth rates of 22 traditional Chinese medicine enterprises primarily focused on OTC products in the second quarter of 2024 were -0.9% and -3.5%, showing a slowdown compared to the previous quarter but still faster than the sector as a whole. Demand for cough-relief and phlegm-clearing products remains strong in the first half of the year, while demand for nourishing health products and orthopedic patches remains stable. The concentration of leading brands in the OTC market continues to increase. An analysis of the terminal sales of various subcategories in the first half of the year shows that the cough-relief and phlegm-clearing category is one of the few categories that saw growth in the first half of the year. In addition, demand for nourishing health products and orthopedic patches has remained stable, while demand for products for colds, myocardial ischemia, angina, and gastrointestinal diseases has declined significantly. Overall, there is a clear trend of increasing concentration in the OTC market, with high-visibility traditional Chinese medicine key products such as Ganmaoling Granules (China Resources Sanjiu Medical & Pharmaceutical), Compound Donkey-hide Gelatin Syrup (Dong-E-E-Jiao), Quick Heart-saving Pill (Tianjin Pharmaceutical Da Ren Tang Group Corporation), and Tongluo Qu Tong plaster (Henan Lingrui Pharmaceutical) steadily increasing market share. Risk indicators: Risk of fluctuating raw material prices, risk of changes in pharmaceutical policies, risk of outdated research report information, risk of distorted third-party data.