The Zhitong Finance App learned that China Merchants Securities released a research report saying that in 2023, the Chinese medicine sector achieved revenue of 372.1 billion yuan, up 6.4% year on year; net profit to mother of 33.6 billion yuan, up 38.6% year on year; net profit after deducting non-return to mother was 29.1 billion yuan, up 27.4% year on year; gross margin of the sector declined slightly for the whole year, but the net profit margin level increased 2.1 pct year on year. In 2024, the Chinese medicine sector achieved revenue of 101.2 billion yuan, a year-on-year decrease of 0.7%; net profit to mother was 12.7 billion yuan, a year-on-year decrease of 8.6%. The traditional Chinese medicine industry was slightly under pressure due to high base pressure in the short term, but the level of profit and dividends performed well. In the context of policies encouraging the inheritance, innovation and development of traditional Chinese medicine, along with the reform of state-owned enterprises and the implementation of catalytic events such as the basic drug catalogue, the traditional Chinese medicine sector is still cost-effective.

The main views of China Merchants Securities are as follows:

OTC outside the hospital is still stable and is the core track for traditional Chinese medicine

In 2023, traditional Chinese medicine OTC products centered on cold breathing, gastrointestinal digestion, and blood supplementation performed excellently, and related companies achieved rapid revenue and profit growth; 2024Q1 still achieved positive growth in the context of a high base, and the performance was superior to the overall traditional Chinese medicine sector. In 2023, the revenue of traditional Chinese medicine OTC companies increased 15.0% year on year, and net profit to mother increased 32.8% year on year; Q1 revenue in 2024 increased 0.8% year on year, and net profit to mother increased 4.6% year on year, and the growth rate accelerated from month to month 2023Q4.

Traditional Chinese medicine in hospitals is affected by policies such as compliance and collection, and there is slight pressure in the short term

In 2023, revenue declined from the previous year due to factors such as compliance policies and procurement, but the profit side still achieved positive growth. In 2023, the revenue of in-hospital Chinese medicine companies decreased by 3.1% year on year, and net profit to mother increased 17.3% year on year, and the profit level increased significantly; in 2024Q1, the revenue and profit of hospital traditional Chinese medicine still declined year on year in the context of a high base. China Merchants Securities pointed out that collection and compliance policies have disrupted the company's current performance, but in the long run, it is beneficial to reduce the company's sales expenses rate. In 2023 and 2024Q1, companies such as Zuli Pharmaceutical and Kangyuan Pharmaceutical all showed significant reductions in sales expenses, and profit performance was clearly better than revenue.

High-end products continue the growth trend and improve their position in the industry

Benefiting from the brand and channel barriers of high-end resource products, as well as rising public awareness of health benefits, high-end categories centered on cardiovascular and cerebrovascular medicine and traditional Chinese medicine supplements continued a steady growth trend in 2023. In 2023, revenue from high-end Chinese medicines increased 11.0% year on year, net profit to mother increased 22.3% year on year; 2024Q1 revenue increased 7.4% year on year, up 18.8% month on month, and net profit up 17.4% year on year. The price increase of Pien Tsai was successfully completed, and Donga Ejiao's market share increased steadily.

Two notable changes are:

1) The increase in profit levels is reflected in the fact that profit is growing faster than revenue. On the one hand, the reason behind this is due to the increase in the market share of the company's core products and brand and channel capabilities, and the increase in scale advantages and industrial chain bargaining power; on the other hand, it is due to the promotion of the collection of proprietary Chinese medicines and formula granules, and the implementation of in-hospital compliance policies, which forces enterprises to pay more attention to improving quality and efficiency, refined cost management and business operations.

2) Pay more attention to dividends: In 2023, the number and quality of dividends from Chinese medicine sector companies increased significantly. Among the 55 listed Chinese medicine companies with forecasted dividends in 2023, the number of companies that increased their dividend ratio reached 71% compared to 2022; in terms of dividend quality, the proportion of companies that chose a higher dividend ratio increased significantly. In 2023, the share of companies with a cash dividend of more than 70% increased to 29%, while the proportion of companies with a dividend rate of less than 30% fell to only 15%.

It is recommended to focus on the following three types of companies:

1) OTC companies with strong channel, brand and product capabilities, such as China Resources 39 (000999.SZ), Donga Ejiao (000423.SZ), Taiji Group (600129.SH), Yunnan Baiyao (000538.SZ), Lingrui Pharmaceutical (600285.SH), and Jiangzhong Pharmaceutical (600750.SH).

2) In-hospital traditional Chinese medicine companies with innovative capabilities and rich research pipelines, such as Eling Pharmaceutical (002603.SZ), Kangyuan Pharmaceutical (600557.SH), Tianshi (600535.SH), Fangsheng Pharmaceutical (603998.SH), Zuoli Pharmaceutical (300181.SZ), etc.

3) Time-honored Chinese brands with deep moats and targets expected from state-owned enterprise reform, such as Rentang (600085.SH), Pien Tsai (600436.SH), Daren Tang (600329.SH), and Kunming Pharmaceutical Group (). 600422.SH

Risk warning: market and policy risks, raw material price fluctuations and supply risks, risk of R&D falling short of expectations, risk of increased market competition, etc.