Source: Gelonghui

Today, Hong Kong's A-share traditional Chinese medicine sector is active. As of press release, A-share Pien Tsai and Jianmin Group both rose and stopped; Xintian Pharmaceutical rose 655%; Baiyunshan, Foci Pharmaceutical, and Qianjin Pharmaceutical rose more than 5%. Ma Yinglong, Chengyitong, and Panlong Pharmaceutical followed suit. Also, the traditional Chinese medicine ETF is worth 1%.

Most of the Hong Kong traditional Chinese medicine stocks rose. Shenwei Pharmaceutical rose more than 8%, Tongrentang Sinopharm rose 5.66%, and Baiyunshan rose 3.12%.

According to the news, in terms of individual stocks, the price of Pien Tsai increased again after a lapse of three years. Each tablet of tablets was increased by 170 yuan, the biggest increase in history.

At the sector level, policies in the traditional Chinese medicine industry continue to improve. On May 4, an expert working group of the State Drug Administration was set up and the Chinese Herbal Medicine GAP Supervision and Implementation Promotion Work Meeting. The conference discussed the direction of work to promote the implementation of the Chinese herbal medicine GAP and supervise the implementation of the model construction plan, and studied and deployed the next key tasks.

Furthermore, the State Administration of Traditional Chinese Medicine recently issued the “Specification for Traditional Chinese Medicine Health Care Services (Trial)”, which regulates the content of traditional Chinese medicine health services and personnel providing traditional Chinese medicine health care services.

Price increases in Pien Tsai are expected to bring growth elasticity to pharmaceutical manufacturing revenue

Regarding Pien Tsai Kai's price increase, institutions generally believe that the biggest price increase in history is due to the company's costs and performance pressure.

In terms of performance, the net sales interest rate for Pianzai series products in 2022 fell from 64.4% in 2022 to 53.6% in 1Q23.

On the cost side, according to public information, the ingredients used in Pien Tsai Kai include musk, oxalis, snake gall, and 374-flavored traditional Chinese medicines, all of which are scarce and famous Chinese herbal medicines. According to data from the Chinese Herbal Medicine World Network, between January 1, 2020 and May 1, 2023, the price of natural beef yolk rose from 430,000 yuan/kg to 800,000 yuan/kg, a significant increase, while the company's terminal retail price of Pianzai tablets has not been adjusted in the past three years.

In response, Dongwu Securities commented that Pien Tsai raised prices sharply by 29% after three years, demonstrating scarcity and value, and bringing flexibility to performance. The price adjustment was the largest in history. The retail price of Pianzai tablets increased by 29% in the domestic market. The price increase mainly came from expensive medicinal herbs such as natural musk/natural oxalis on the cost side. Pien Tsai tablets dominate revenue, and prices for the rest of the products are expected to increase as a result.

Referring to past price adjustments, the company's business situation generally showed steady growth. In 2022, Pien Tsai Yi's sales revenue was 3.6 billion yuan. Assuming that the price of Pien Tsai's series products increased by the same margin, only the price increase is expected to bring 18% growth elasticity to the revenue of the pharmaceutical manufacturing industry in 2023 (price adjustments will begin in May 2023, affecting 2/3 of the whole year). Traditional brands of traditional Chinese medicine are highly recognized by consumers, and there is room for volume and price increases.

The fundamentals of the performance of the traditional Chinese medicine sector are steadily improving

It is worth mentioning that the brilliant performance of traditional Chinese medicine companies is also driving up stock prices to a certain extent.

According to the “Economic Operation of the Pharmaceutical Industry in 2022” issued by the China Pharmaceutical Enterprise Management Association, pharmaceutical industry enterprises over the scale of 2022 achieved a total operating income of 3363.37 billion yuan, an increase of 0.5% over the previous year. Among them, the revenue of the two sub-industries of proprietary Chinese medicine production and traditional Chinese medicine tablet processing increased 5.6% and 5.5% respectively, which are the two fastest growing sub-industries.

Judging from the performance of listed Chinese medicine companies in 2022, 74 listed companies achieved revenue of 349.549 billion yuan and realized profit of 24.108 billion yuan, with an average net profit margin of 6.9%. The revenue of the traditional Chinese medicine sector in the first quarter of 2023 was 88.02 billion yuan, an increase of 14.53% over the previous year, and Guimu's net profit was 13.945 billion yuan, an increase of 54.67% over the previous year.

It can be seen from this that the revenue of the traditional Chinese medicine sector increased steadily, and 2023Q1 achieved rapid growth.

Furthermore, out of 74 traditional Chinese medicine concept stocks, 51 achieved positive revenue growth, and 58 achieved profits in 2022. In terms of revenue scale, there are 7 traditional Chinese medicine concept stocks that have exceeded 10 billion dollars, and 49 that have exceeded 1 billion yuan, with total revenue exceeding 100 million yuan.

In terms of innovation, in the past five years, China has approved a total of 27 new traditional Chinese medicines for sale, showing a new pattern of blowout. According to statistics from Pharmaceutical Intelligence Network, since 2023, 7 new Chinese medicines in China have submitted marketing applications, and 26 new traditional Chinese medicines have been declared for clinical use, far exceeding the same period in previous years.

Policies continue to increase

An important reason for the repeated activity of the traditional Chinese medicine sector since this year is the continued favorable policy.

In February 2023, the General Office of the State Council issued the “Implementation Plan for Major Projects for Revitalization and Development of Traditional Chinese Medicine”, which clearly promoted the basic principles of revitalization and development of traditional Chinese medicine, and coordinated the deployment of 8 key projects and 26 construction projects.

On the other hand, the “Regulations on the Protection of Chinese Medicine Varieties (Revised Draft for Comments)” provides more intuitive support for protected varieties of traditional Chinese medicines to enjoy a monopoly period in the market. It is conducive to increasing terminal demand for advantageous varieties, further stimulates the enthusiasm of pharmaceutical companies to apply for protected varieties of traditional Chinese medicine, and enhances terminal sales capacity.

At the end of last year, with the full liberalization of the COVID-19 pandemic, demand for household medicines such as anti-viral and anti-colds increased by a blowout, and price increases for some products pushed up the stock prices of traditional Chinese medicine companies.

However, the collective rise in traditional Chinese medicine concept stocks this time is more of a point-and-run, catalyzed by the invisible hand of cycle regulation.

The Shanghai Securities Research Report said that from a time and space perspective, the valuation of the pharmaceutical biology industry continued for 22 months (from July 1, 21 to the present, the biggest decline in the range reached 40%), and the industry rebound since October 22 can be seen as the end of this round of adjustments and a replacement stage at the beginning of a new cycle. Currently, the A-share SW pharmaceutical sector is valued at 25 times (TTM), which is the lowest valuation since January 2010, and the industry rebound is expected to continue.

Further, in terms of market size, according to the analysis of the growth rate of the country's implementation of the “14th Five-Year Plan” Pharmaceutical Industry Development Plan, the overall size of China's traditional Chinese medicine market will exceed trillion dollars after 2023. According to the analysis of the average growth rate of the traditional Chinese medicine industry of 12% during the “14th Five-Year Plan” period, it is estimated that the overall size of China's traditional Chinese medicine market will reach more than 1.5 trillion yuan by 2026.

Dongguan Securities believes that on May 5, Pien Tsai issued an announcement to raise the retail price of Pien Tsai tablets in the domestic market from 590 yuan/tablet to 760 yuan/tablet. There is a possibility that prices will rise for other major varieties of proprietary Chinese medicines in the future. As the “China Special Evaluation” investment logic continues to be interpreted, the policies in the Chinese medicine sector are friendly, and most companies benefit from the “China Special Evaluation” logic. Subsequent suggestions focus on continuing to focus on investment opportunities in the Chinese medicine sector.

Looking ahead to the market, Dongwu Securities said that the second quarter is likely to be the best time to strategically lay out the pharmaceutical sector: the pharmaceutical sector grew fast in the first Q2 quarter and continued to grow rapidly in 2023; the impact of its second procurement on prescription drugs and devices basically ended, and as new products were approved, the valuation of its three pharmaceutical sectors was quite attractive, with only the traditional Chinese medicine sector showing significant excess earnings. The performance of the traditional Chinese medicine sector in 23Q1 exceeded expectations, and the main line of state-owned enterprise reform ushered in a double blow in performance+valuation: the overall performance of the traditional Chinese medicine sector in 23Q1 exceeded expectations.

Editor/Somer