Zhongtai: Chinese herbal medicine companies' performance under pressure in the third quarter of 24, with a slight recovery in demand at the consumer end.

Zhongtai released a research report stating that, according to statistics, in the third quarter of 2024, the total revenue of Chinese medicine enterprises for the first three quarters was 260.8 billion yuan, a year-on-year decrease of 3.25%; non-GAAP net profit was 27.6 billion yuan, a year-on-year decrease of 8.59%; operating cash flow was 19.43 billion yuan, a year-on-year decrease of 17.59%; the gross profit margin of the sector for the first three quarters was 42.19%, a year-on-year decrease of 2.51 percentage points; non-GAAP net profit margin was 10.59%, a year-on-year decrease of 0.62 percentage points; the decline in gross profit margin is related to the decrease in centralized procurement prices and the increase in prices of upstream Chinese medicinal materials. In terms of terminal demand, the national retail pharmacy market rebounded in July-September, with the scale increasing month-on-month for three consecutive months, with a slight year-on-year increase of 0.9% in September. In terms of investment targets, it is recommended to focus on state-owned enterprise reform-related stocks and two major directions of improving operating trends and performance elasticity brought by key varieties. Zhongtai's main points are as follows: Phase Q3 performance pressure, gross profit margin expected to recover from the 25-year According to Zhongtai's statistics, excluding ST and companies with abnormal performance fluctuations, the performance of 63 Chinese medicine companies for the third quarter of 2024: total revenue for the first three quarters was 260.8 billion yuan, a year-on-year decrease of 3.25%; non-GAAP net profit was 27.6 billion yuan, a year-on-year decrease of 8.59%; operating cash flow was 19.43 billion yuan, a year-on-year decrease of 17.59%. The gross profit margin of the sector for the first three quarters was 42.19%, a year-on-year decrease of 2.51 percentage points; non-GAAP net profit margin was 10.59%, a year-on-year decrease of 0.62 percentage points; the decline in gross profit margin is related to the decrease in centralized procurement prices and the increase in prices of upstream Chinese medicinal materials. Since the beginning of 2024, the rate of increase in Chinese medicinal materials has been slowing down, especially since the middle of the year, the prices of Chinese medicinal materials have been basically stable. Zhongtai predicts that with the digestion of high-priced medicinal materials from the previous period, the cost pressure of the Chinese medicine sector is expected to gradually ease from 2025, welcoming an upward repair of the gross profit margin. Stable improvement in operating quality, continuous optimization of sales expense ratio The median period expense rate of the Chinese medicine sector for the first three quarters of 2024 was 44.4%, a decrease of 1.8 percentage points from 23; the median sales expense ratio was 31.9%, a decrease of 1.5 percentage points from 23. Against the background of stricter industry regulation, many Chinese medicine companies have explored new models in marketing promotion, achieving significant optimization of the sales expense ratio. As of the third quarter of 2024, the accounts receivable + notes receivable/total revenue and inventory/total assets of the Chinese medicine sector were 32.8% and 13.0% respectively. The proportion of accounts receivable to total revenue has increased slightly, but has slightly decreased compared to the proportion in the first half of 2024, indicating a slight improvement in receivables in the third quarter. The growth rate of contract liabilities + revenue turned negative from the first half of 2024, and the decline in the third quarter narrowed, which may be related to the warming of terminal demand. Slight warming of terminal demand, waiting for industry turning point According to Zhongkang data, the retail scale of physical pharmacies in China (medicine + non-medicine) from January to September 2024 was 384.8 billion yuan, a decrease of 2.2% year-on-year, which is expected to be due to multiple factors such as policy regulation, consumption downgrading, and changes in medication demand. Monthly analysis shows that the national retail pharmacy market rebounded in July-September, with the scale increasing month-on-month for three consecutive months, with a slight year-on-year increase of 0.9% in September. With the digestion of terminal pharmacy policies, the marginal impact of channel inventory on upstream Chinese medicine companies is decreasing, and it is expected that the revenue end of the Chinese medicine sector will see a rebound in 2025. Investment recommendations: Looking forward to 2025, the Chinese medicine sector, after experiencing cyclical fluctuations in demand and inventory post-COVID, is expected to return to normal growth and see revenue end warming. At the same time, the alleviation of cost pressures on Chinese medicinal materials will also drive an upward repair of gross profit margins. Recommend focusing on the following two directions: 1) State-owned enterprise reform-related stocks, which are expected to continue to perform well in the last year of the 14th Five-Year Plan, with a focus on China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Dong-E-E-Jiao (000423.SZ); recommendation to focus on Chongqing Taiji Industry (600129.SH), KPC Pharmaceuticals, Inc. (600422.SH), Beijing Tongrentang (600085.SH), etc .; 2) Positive operating trends and performance elasticity brought by key varieties, focusing on Hunan Fangsheng Pharmaceutical (603998.SH), Zhejiang Jolly Pharmaceutical (300181.SZ), etc. Risk warning: Risks related to fluctuations in raw material prices, changes in medical policies, risks related to outdated research report information, and risks related to distorted third-party data.