Zhongtai: Traditional Chinese medicine performance in the first half of 2024 is under short-term pressure, with the main focus on improving quality and efficiency.

Zhongtai released a research report stating that in the first half of 2024, the traditional Chinese medicine sector has seen a slowdown in profits due to the weak demand from retail end-users. The sector achieved a total revenue of 181.9 billion yuan, a year-on-year decrease of 3.32%. Companies have adopted measures to improve quality and efficiency, resulting in a 2.06pp decrease in the sales expense ratio, which has ensured the stability of profit margins. The non-GAAP net profit margin of the sector in the first half of 2024 was 11.6%, only a slight decrease of 0.3pp. The growth rate in the hospital market has slowed down, retail channels are under pressure, and over-the-counter (OTC) sales have shown more resilience. Demand for cough and phlegm expectorants in the first half of the year remains strong, while the demand for health supplements, bone health products, and orthopedic patches remains stable. The concentration of leading OTC products continues to increase. On the financial side, profits are slowing down, with a focus on improving quality and efficiency. After excluding abnormal data, the total revenue for the traditional Chinese medicine sector in the first half of the year was 181.9 billion yuan, a year-on-year decrease of 3.32%; the non-GAAP net profit was 21.1 billion yuan, a year-on-year decrease of 5.76%. Overall, the sector has seen a slowdown in profits due to weak demand from retail end-users. The gross profit margin for the first half of the year was 43.06%, a decrease of 2.11pp year-on-year. Companies have taken measures to improve quality and efficiency, with a 2.06pp decrease in the sales expense ratio, which has ensured the stability of profit margins. In the first half of 2024, the non-GAAP net profit margin for the sector was 11.6%, only a slight decrease of 0.3pp. With major products and strong sales support, some companies also showed impressive performance 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 profits on a quarter-on-quarter basis in the second quarter. Products such as Dong-E-E-Jiao's compound donkey-hide gelatin syrup, Henan Lingrui Pharmaceutical's Tongluo Qu Tong Gao, and Zhejiang Jolly Pharmaceutical's Wuling capsules have all seen rapid growth driven by policies and demand. Retail channels are under pressure, with OTC products displaying more resilience. 1) In the hospital market: The year-on-year growth rates in the pharmaceutical market in the first and second quarters of 2024 were -1.4% and -0.2%, respectively; with the growth rates for Chinese patent medicines in the quarter at 1.3% and -4.3%, showing a slowdown in growth compared to the previous quarter, which Zhongtai predicts is due to a high base in the same period of 2023. 2) In the 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 the first and second quarters of 2024, respectively; sales growth rates for Chinese OTC products and Chinese prescription drugs in the first half of the year were 2.0% and -4.9%, showing more resilience compared to prescription drugs. Financially, in the second quarter, the median revenue and non-GAAP net profit growth rates for 22 Chinese medicine enterprises focused on OTC products were -0.9% and -3.5%, respectively, showing a slight slowdown compared to the previous quarter but still faster than the overall traditional Chinese medicine sector. The demand for cough and phlegm expectorants remains strong in the first half of the year, while the demand for health supplements, bone health products, and orthopedic patches remains stable. Zhongtai analyzed the terminal sales of various subcategories in the first half of the year, with the cough and phlegm expectorants category being one of the few categories that showed growth in the first half of the year. In addition, the demand for health supplements and bone health products has remained stable, while there has been a noticeable decline in the demand for medication for colds, myocardial ischemia angina, and gastrointestinal diseases. Overall, there is a clear trend of increasing concentration in the OTC channel, with high-profile brands like Ganmaoling Granules (China Resources Sanjiu Medical & Pharmaceutical), compound donkey-hide gelatin syrup (Dong-E-E-Jiao), rapid-acting cardioplegic pills (Tianjin Pharmaceutical Da Ren Tang Group Corporation), and Tongluo Qu Tong Gao (Henan Lingrui Pharmaceutical) steadily increasing their market share. Investment recommendation: With the high base in the first half of 2023, the performance of the traditional Chinese medicine sector may be under short-term pressure, but 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 two key areas: 1) stocks with reasonable valuation and continued steady growth in performance and dividends; 2) companies with improving operational trends and strong performance driven by key products. Risk warning events: Risks related to fluctuations in raw material prices, changes in medical policy, risks of delayed updates in research reports, and risks of data distortion from third parties.