China Securities Co., Ltd.: The growth and adjustment of the pharmaceutical industry are parallel, focusing on the bottoming out and recovery turning point.

China Securities Co., Ltd. released a research report stating that the short-term pressure on the traditional Chinese medicine industry is expected to ease, with companies actively promoting channel reform and improving quality and efficiency. Channel adjustments are accelerating, and both performance and year-on-year comparisons are expected to improve. Long-term recommendations include focusing on policy catalysts such as the Essential Medicine List and the progress of industry transformation and upgrading. The capacity of the raw material drug industry is expected to gradually clear out, with opportunities for specialty raw material drugs brought about by company transformation, weakening the cyclical nature of performance. In the blood product industry, attention is on the "15th Five-Year Plan" for plasma station construction and industry mergers and acquisitions, with expectations for a recovery in demand and new product development. The vaccine industry is monitoring improvements in the sales of key products, progress in innovative pipeline research and development, and industry mergers and acquisitions. The pharmaceutical retail industry shows clear inflection points in performance and valuation, with a focus on multiple catalysts in the future. The pharmaceutical distribution industry has seen steady revenue growth, with the effects of payment policies gradually being felt, and a positive outlook on large state-owned enterprises and targets with anticipated operational improvements. China Securities Co., Ltd.'s main points are as follows: Traditional Chinese medicine: from quantity increase to quality improvement, growth and adjustment go hand in hand As the traditional Chinese medicine industry develops from quantity increase to quality improvement, the future industry growth will go hand in hand with adjustments, as industry transformation and upgrading are the overall trends. The pressure from the 26-year base of the traditional Chinese medicine industry is expected to gradually ease, with some companies actively promoting channel reform, improving quality and efficiency, accelerating channel adjustments, and most companies are expected to improve both quarter-on-quarter and year-over-year under a low base. Long-term recommendations include focusing on policy catalysts such as the Essential Medicine List and the progress of industry transformation and upgrading. Valuations in the traditional Chinese medicine industry are at historically low levels, with institutional holdings low, signaling a rebound in the industry and a focus on top-performing companies with stable operations. Raw materials drugs: from bottoming out to recovery, attention on capacity clearing and transformation progress The raw materials drug industry continues to adjust in 2025, with the industry maintaining a trend of exchanging price for quantity throughout the year. Prices of most raw material drugs are gradually bottoming out, with some companies actively optimizing their profit structures. The industry's profitability in the first quarter of 2026 is significantly improved compared to the previous quarter, and market capacity is expected to gradually clear out. In the medium term, the patent cliff is expected to bring about opportunities for specialty raw material drugs, with the transformation of formulations gradually weakening the cyclical nature of performance, leading to a cautious optimistic outlook on the sector's future. Blood products: supply growth accompanied by industry mergers and acquisitions, expectations for gradual demand recovery In recent years, the number of plasma stations in China has been continuously increasing, and it is expected that various regions will gradually introduce plans for setting up plasma stations during the "15th Five-Year Plan" period, leading to a further increase in the number of plasma stations. The concentration of China's blood product industry is high, with industry mergers and acquisitions continuing to progress, and expectations for further developments in the future. From the demand side, hospital cost control and the DRG payment reform have temporarily suppressed some clinical demand, and limited clinical value recognition for some products. With continued efforts in sales promotion and academic education by companies, the demand for blood products is expected to gradually recover. Continued advancements in new product research and development are expected to drive a sustained increase in plasma profits. Vaccines: continued performance pressure, focusing on product expansion, innovative pipeline, and mergers and acquisitions The vaccine sector has shown a downward trend in performance in 2025, primarily due to market macroeconomic factors affecting the end sales of vaccines and increasing competition for some products. Expectation for 2026 is that heavyweight vaccine varieties with large market space and favorable competitive landscapes will continue to maintain sales growth. In 2025 and the first quarter of 2026, several new products or new indications have been approved for market release, bringing additional volume to the vaccine market. Some innovative vaccine varieties are expected to make progress in research and development in 2026. Additionally, some companies underwent changes in shareholding in 2025, indicating the need to follow industry mergers and acquisitions developments. Pharmaceutical retail: industry flow redistribution, focusing on dual inflection points of performance and valuation In recent years, factors such as price comparisons and medical insurance check-ups have had an impact on the stock prices of listed pharmacy companies, with 2026 valuations showing some recovery but still at historically low levels. Looking ahead to 2026, considering the characteristics of diversion, we believe the pharmacy industry may experience two clear inflection points: 1) Performance inflection point: Accelerated same-store growth, industry scale stabilizing and improving; restructuring of diversion, top enterprises obtaining more market share. Some top pharmacies enter an expansion cycle, with new store rates expected to increase. Continued cost reduction and efficiency enhancement lead to net profit growth potentially outpacing income growth, with expectations for faster net profit growth for top enterprises compared to income growth. 2) Valuation inflection point: Improvement in valuation through store adjustments; With external mergers, market value is expected to increase. Pharmaceutical distribution: steady improvement in revenue, effects of payment policies gradually appearing In the second half of 2024, DRG reforms were gradually implemented nationwide, affecting the per capita drug expenditure in hospitals. However, with current calibration methods basically uniform, companies in various sectors are expected to return to a trend of steady revenue growth. Listed pharmaceutical companies are actively promoting business transformation and innovation, focusing on optimizing overall profitability around their core distribution business. Key areas of focus for the distribution industry going forward include: 1) Pace of implementation of the 15th Five-Year Plan. 2) Improvements in payment, easing pressure on company impairments. 3) Several companies are expanding into the commercial insurance sector, seeking new payment methods to obtain additional volume. Continuous optimism for large state-owned enterprises and targets with anticipated operational improvements. Risk warning: Industry policy risks; Risks of R&D failure to meet expectations; Risks of approvals falling short of expectations; Risks of macroeconomic fluctuations.