According to the research report released by China International Capital Corporation, the pharmaceutical sector has entered the value investment range after three years of systematic adjustments. With the gradual stabilization of domestic policies and the introduction of policies related to innovative drugs, the domestic innovative drug industry chain and overseas markets are worth paying attention to in the second half of 2024. China International Capital Corporation believes that the restoration of bidding under the background of the new normal in the second half of the year is expected to gradually release the demand that has been suppressed in the past year. With the uncertain expectation of global economic growth, Chinese manufacturing products with good quality and low price may be more cost-effective. This is reflected in the increase of domestic market share and the acceleration of exports in overseas markets.

CICC's main points are as follows:

Dividend stocks resist cycles, and traditional blue-chip stocks are stable investments. The reorganization of the medical industry will continue in the first half of 2023, with weak domestic demand, high base effect and other factors leading to pressure on pharmaceutical company financial reports in the first half of 2024. In the second half of the year, with the manifestation of the base effect, we expected the pharmaceutical industry to have some marginal improvement. Until the expectation is clear or systematic risks are eliminated, we still recommend defensive asset allocation as an asset class. We believe that the stable cash flow of traditional medical blue chips and the dividend payout of dividend stocks will to some extent weaken the impact of the cycle; at the same time, the asset consolidation of large pharmaceutical companies at the bottom of the cycle is also worth looking forward to.

Innovative drugs and industry chains, structural segmentation, and good money prevails. The transformation and upgrading of traditional medicine to innovative medicine is an important development trend for China's industrial system to break through under the trend of the times. The concept of new quality production forces has highly condensed the industrial upgrading. The first wave of innovative drug tide has spawned a large number of industrial talents and supply chain ecology. The micro-adjustment of drug review and approval reform and the increase of access conditions have laid the foundation for the benign development of the industry. In the short term, the activation of industrial capital from the source and how to make payment side value for money are the core contradictions of the next wave of innovation, and we look forward to breakthroughs in domestic policy and the completion of innovation to expel bad money with good money. We believe that the oversupply on the supply side is still the main contradiction, and the rise of domestic demand is the key. The GLP-1 lack of supply and demand brings structural opportunities to the polypeptide industry.

Domestic upgrading and going global, bidding recovery is expected in the second half of the year. The one-year domestic medical system industry reorganization has affected the bidding pace of domestic hospitals. We believe that the restoration of bidding under the background of the new normal in the second half of the year is expected to gradually release the demand that has been suppressed in the past year. With the uncertain expectation of global economic growth, Chinese manufacturing products with good quality and low price may be more cost-effective. This is reflected in the increase of domestic market share and the acceleration of exports in overseas markets.

Focus on medical system reform, and internal demand is the key contradiction in the service sector. Affected by the domestic economic environment and the dual pressure of the financial market, sectors such as medical services driven by relative domestic demand continue to be under pressure. The valuation has been significantly adjusted. From a medium- to long-term perspective, some assets with α have become cost-effective, and we recommend paying more attention to them and configuring them at a low point.

Risk

The risk of clinical failure, lower-than-expected price reduction in medical insurance negotiations, and commercialization and business expansion are not as expected.