The pharmaceutical industry continues to increase innovation, and we are optimistic about the Chinese medicine market's growth potential in 2026.

Huachuang Securities released a research report stating that the essential reason for the pharmaceutical industry globally reaching new highs after enduring various challenges in the bear market is the continuous demand from humans for the pharmaceutical industry and an increasing number of new and unmet needs, as well as pharmaceutical companies continuously increasing research and development investment to meet human needs. Only through continuous innovation and achieving innovative results can pharmaceutical companies maintain sustainable growth and achieve explosive revenue and stock price growth. Huachuang Securities' main points are as follows: Innovative Drugs: China's research and development of therapeutic drugs are growing in both quantity and quality at a rate far exceeding the global average. China has become an important participant in global innovative drug development. Since 2021, the total amount of overseas authorization for domestic new drugs has exceeded 10 billion US dollars for the first time, and the heat of overseas authorization has been continuously increasing, driving Chinese innovative drugs to share the global market. The industry has entered a revenue era driven by innovation, forming a benign situation where traditional pharmaceutical companies and emerging forces coexist. Pharmaceutical Industry: Innovative layouts are yielding results, and performance is expected to accelerate growth. Innovation upgrades as one of the core themes of the industry, and after many years of research and development accumulation, various companies have begun to reap the rewards of innovation. Some companies have completed the transition of growth momentum, and the current phase is just the beginning of rewarding. At the same time, many companies' transformations are expected to yield results and enter the stage of innovation-driven growth, with performance and valuation expected to resonate. CXO: Starting from the second half of 2024, global pharmaceutical research and development demand gradually recovers, with leading CXO companies seeing increasing orders and revenue. New types of molecules such as peptides, small nucleic acids, and ADCs have strong research and development demand, driving continued high prosperity in the CDMO sector of the industry chain. At the same time, the bank expects that as the difficulty and barriers of drug research and development increase, the value of leading CRO companies will be further emphasized. Active Pharmaceutical Ingredients: The core business of API companies is mainly based on non-American exports (Europe/India), and current demand remains strong. Head companies have achieved positive results in the expansion of their CDMO business due to their perfect EHS, GMP systems, and manufacturing advantages. In addition, most companies have expanded into the related domestic market of API formulations, which is expected to benefit from easing centralized procurement. Medical Devices: The pressure on high-value consumables in the field of centralized procurement is easing, and performance is expected to return to a high-speed growth channel. Innovative attributes will continue to drive the industry's development and value reassessment. Bidding for medical equipment continues to recover, and a turning point in the sector is approaching. Chinese equipment technology upgrades and overseas expansion are promising in the long term. The IVD industry is under pressure, but policy disturbances are gradually being resolved, with Chinese companies' market share steadily increasing, and increasing local presence overseas. Leading Chinese companies in the low-value consumables sector continue to expand their product pipelines to break through the market ceiling and address international geopolitical risks through overseas factories. Chinese Herbal Medicine: Breaking out of the dilemma, ready for the Fifteenth Five-Year Plan. At the current point in time, Huachuang Securities believes that the factors driving the Chinese herbal medicine sector upwards are far greater than those driving it downwards: based on a significant optimization of the chip structure, continuous policy friendliness, clearance of channel inventory, and a slowdown in the integration of pharmacy channels, the bank is optimistic about the recovery of the Chinese herbal medicine industry in 2026. The expected sequence of recovery pace for the sub-sector segments is as follows: hospital-based Chinese medicine > four categories of medicine OTC general medicine > tonic therapy and high-value consumer Chinese medicine. Recommending attention to targets benefiting from policies and improving performance. Medical Services: The bank expects that with the issuance of positive policies at the macro level, consumer expectations are expected to recover. Additionally, if favorable local fiscal policies are implemented, the bad debt and repayment cycles of private hospitals' medical insurance will also be substantially alleviated, alleviating market concerns. Pharmaceutical Retail: Since 3Q24, performance in the pharmaceutical retail industry has been under pressure, primarily due to a decrease in demand for the four categories of medicine, consumer downgrading, increased industry competition, and the impact of fluctuations in medical insurance policies. Pharmacies are offsetting industry changes by closing stores and reducing costs. As the high base gradually dissipates, the top chain stores' same-quarter income growth rate has shown stable improvement in 3Q25. We believe that changes in the macroeconomy and policy side will accelerate the return of the competitive landscape of the pharmacy industry to a rational state, with top chain stores having better risk resistance and adaptability, and are expected to lead the recovery. Blood Products: Despite short-term performance pressure, the clear essential need for blood products suggests that industry supply and demand are expected to rebalance. The rapid increase in the variety of products from various companies, such as layer chromatography is expected to drive industry growth. Market share is also continuing to concentrate on leading companies based on the operational characteristics of the blood products industry. Life Science Services: Industry demand is recovering, and with the deepening of local alternatives and continuous overseas expansion, the sector's quarterly revenue is expected to turn positive starting from the fourth quarter of 2024. The net profit margin of the sector has gradually increased over the past four quarters, with consistent profitability growth. It is expected that the profit release of leading sub-sectors still has considerable potential elasticity. Risk Warning: 1) The time for rectification in the medical sector exceeds expectations; 2) Product price reductions exceed expectations; 3) The recovery of optional medical services is lower than expected; 4) Geopolitical negative factors exceed expectations.