Guosen: Continuously recommend innovative medical devices and focus on investment opportunities in medical equipment.

Guosen released a research report stating that domestic medical demand continues to rise, and the macro economy is expected to gradually improve. Currently, the industry is undergoing a more intense supply-side structural reform, and the centralized procurement of drugs and medical devices is nearing completion, with a new growth cycle expected to begin in the next 25 years. Amid geopolitical disturbances, the country is expected to increase its support for self-controllable industries, and it is recommended to prioritize investments in innovative drugs, medical devices, and medical equipment, as well as focus on investment opportunities in AI healthcare and M&A reorganization. Guosen's main viewpoints are as follows: Demand side: The demand for the pharmaceutical industry is growing steadily and shows a trend of demand upgrading. From 2019 to 2023, China's total health expenditure increased from 6.5196 trillion yuan to 9.0578 trillion yuan, with a CAGR of 8.6%, higher than the nominal GDP compound growth rate; from 2019 to 2023, the compound growth rate of medical institution visits in China was 5.4%. From the perspective of prices, although facing overall cost control pressures and the collapse of price systems of existing products due to factors such as centralized procurement and technological progress, the change in medical treatment structure and higher prices of innovative products have kept the price level in the healthcare sector stable with a slight increase, showing a continuous upward trend in domestic medical demand. Supply side: The industry is undergoing a more intense supply-side structural reform and is expected to enter a new growth cycle in the next 25 years. Since 2019, the industry's loss ratio has been increasing year by year, stabilizing at over 30% this year. The medical industry continues to be influenced by external factors such as the macro economy, geopolitics, medical insurance cost control policies, post-epidemic sequelae, and industry regulation, with leading companies showing strong resilience in this round of industry consolidation period, further increasing market share. After the industry hits bottom and rebound, it will demonstrate stronger competitiveness. Payment side: A diverse payment system is expected to drive the continuous increase of healthcare expenditure as a percentage of GDP. The proportion of medical insurance expenditure in total healthcare expenditure is expected to maintain a level of 25-30%. Against the background of economic recovery and policy encouragement, the proportion of commercial health insurance, fiscal expenditure, and personal expenditure is expected to increase in the coming years. Innovative drugs, Innovative Medical Management devices, medical equipment, and high-quality medical services are expected to benefit from the increased purchasing power brought about by a diverse payment system. Policy side: The centralized procurement of drugs and medical devices is nearing completion, and service-side reform will be the last link. The reform of medical service prices will be the key focus of the 25-year medical insurance reform and also the final link of the medical insurance reform under the framework of DRG/DIP2.0 policy. The normalization and rectification of the medical industry environment will be conducive to the healthy and standardized development of the industry. The equipment renewal policy, which was slower to implement than expected in 2024, is expected to accelerate with the support of fiscal policies. Under the drive of the restructuring of medical insurance and the incremental support of commercial insurance, innovative drugs, and innovative devices will be the mainstay of the upgrading of the domestic pharmaceutical industry. Investment recommendations: Recommended targets A shares: Shenzhen Mindray Bio-Medical Electronics (300760.SZ), WuXi AppTec (603259.SH), Aier Eye Hospital Group (300015.SZ), Shanghai United Imaging Healthcare (688271.SH), ShenZhen New Industries Biomedical Engineering (300832.SZ), China Resources Sanjiu Medical & Pharmaceutical (000999.SZ), Xiamen Amoytop Biotech (688278.SH), Chongqing Genrix Biopharmaceutical (688443.SH), Mehow Innovative (301363.SZ), Sonoscape Medical Corp. (300633.SZ), Eyebright Medical Technology (Beijing) Co., Ltd. (688050.SH), Amoy Diagnostics (300685.SZ), Shanghai Aohua Photoelectricity Endoscope (688212.SH), GemPharmatech (688046.SH); H shares: SKB BIO-B (06990), AKESO-B (09926), HUTCHMED (00013), KEYMED BIO-B (02162), AK MEDICAL (01789). Risk warning: Risks of R&D failures, commercialization falling short of expectations, geopolitical risks, policy risks exceeding expectations.