According to Zhichun Finance APP, HAITONG SEC released a Research Report stating that the gentle trend of price reductions in Traditional Chinese Medicine varieties continues. The Traditional Chinese Medicine Industry is under pressure for external OTC sales due to factors such as the sales pressure at pharmacy terminals and inventory pressure, and it is expected to improve in 2025. Additionally, constant technological changes in the pharmaceutical industry and IPO initiatives are driving the optimization of company governance.mergers and acquisitions.Reorganization development and shareholder-level initiatives to promote company governance optimization are the main reasons driving mergers and acquisitions in the industry. In terms of sectors, mergers and reorganizations are expected to occur intensively in sub-sectors such as medical instruments, Traditional Chinese Medicine, Medical Services, Blood Products, and research services.

The main points of Haitong Securities are as follows:

The market size of Chinese Patent Medicine is close to 500 billion yuan, with the external market share increasing to over 30%.

In 2023, the total market size of the Traditional Chinese Medicine industry exceeded 700 billion yuan. Among the three core categories, the market size of Chinese Patent Medicine reached nearly 500 billion yuan, the market size of Traditional Chinese Medicine decoction pieces was 217.3 billion yuan, and the market size of Traditional Chinese Medicine formula granules exceeded 50 billion yuan. From 2017 to 2023, the CAGR growth rate of the external market for Chinese Patent Medicine was 3.0%. Influenced by restrictions on the use of Traditional Chinese Medicine injections in hospitals, the internal market size grew relatively limited. Except for disturbances during the COVID-19 pandemic, the external market share gradually increased from 28% in 2017 to 32% in 2023.

The Industry demand side is growing steadily, while the supply side competition pattern is relatively stable.

Supply side: The launch period for new products in the Traditional Chinese Medicine sector is relatively long, and there are numerous exclusive varieties of Traditional Chinese Medicine, which have high brand and product barriers. Overall, the supply side structure is relatively stable.

Demand side: Overall affected by the consumer environment, but the industry's rigid demand has strong resilience. From 2019 to 2023, most key Traditional Chinese Medicine enterprises achieved good growth in revenue and profits. Due to the increasing aging population, the demand related to the silver economy and chronic disease medications is favorable; benefiting from the continuous increase in the concentration of retail channels outside hospitals, the Traditional Chinese Medicine brand OTC sector is promising in terms of medication types.

State-owned assets occupy a leading position in the industry, and State-owned Enterprise Reform injects new power into industry development.

State-owned enterprises occupy an important position among Traditional Chinese Medicine listed companies. Among 21 Traditional Chinese Medicine listed companies on the A-share market, the actual controllers are state-owned backgrounds, accounting for 30% (excluding ST or ST*). In 2023, the revenue share was 63%, the net income attributable to shareholders share was 61%, and the market cap share was 60%. The revenue scale and profitability of state-owned enterprises in Traditional Chinese Medicine have absolute advantages in the industry. In recent years, many state-owned Traditional Chinese Medicine companies have gradually achieved revitalization and performance growth through six key measures: asset optimization, management reforms, incentive plan releases, brand value and product capability reshaping, marketing reforms, and cost reduction and efficiency enhancement.

Having a high level of dividends, the industry continues to grow steadily.

In 2023, the overall dividend rate of the SW CSI SWS Health Care index sector was 47.6%, while the dividend rate of the SW Traditional Chinese Medicine sector was 60.4%, which is significantly higher than the overall level of the Biomedical industry. The total revenue of the Traditional Chinese Medicine sector increased from 148.6 billion yuan in 2013 to 372.1 billion yuan in 2023, with a ten-year compound growth rate of 9.6%. The total net income attributable to shareholders of the sector increased from 16.6 billion yuan in 2013 to 33.6 billion yuan in 2023, with a ten-year compound growth rate of 7.3%. This organization believes that the Traditional Chinese Medicine industry combines steady growth with high dividend attributes, making it a high-quality cash-like asset.

In the first three quarters of 2024, the Traditional Chinese Medicine sector faced growth pressure, but some enterprises still showed growth resilience.

In the first three quarters, the total operating income of the SW Traditional Chinese Medicine Sector was 270.6 billion yuan, a year-on-year decrease of 3%, and the net income attributable to the parent company was 29.9 billion yuan, a year-on-year decrease of 9%. This is mainly due to the optimization of COVID-19 pandemic prevention measures in the same period of 2023, which led to a surge in demand for various traditional Chinese medicine categories such as respiratory, tonic, and gastrointestinal medicines, resulting in high growth for the sector in 2023. However, since Q2 of 2024, the external retail terminal channels have been significantly affected, impacting the sales of Traditional Chinese Medicine OTC varieties. Nevertheless, some companies, such as Dong-E-E-Jiao, Zhejiang Jolly Pharmaceutical, and Guizhou Sanli Pharmaceutical Co.,Ltd., achieved high growth against the trend by expanding their core product channels. The firm believes that in 2024, due to pressures on retail sales at pharmacies and inventory pressures, the external OTC sales of Traditional Chinese Medicine will face cyclical pressure, but it is expected to recover positively in 2025.

The decrease in the industry collective procurement is relatively moderate, and the advantages of exclusive varieties of Traditional Chinese Medicine are obvious.

In November 2024, multiple regions released relevant collective procurement documents for the Traditional Chinese Medicine industry: Guangdong's Chinese Patent Medicine Alliance renewed its collective procurement contract. For the exclusive varieties of Traditional Chinese Medicine that were selected in the previous round, a price reduction of ≥1% in this round will qualify them for selection; Shandong released the collective procurement documents for Traditional Chinese Medicine decoction pieces, clearly stating that companies must have a price reduction of ≥20% in the second round of quotes to qualify for selection; Anhui updated the collective procurement catalog for Chinese Patent Medicines, removing the variety 'Cold Remedy' from the comprehensive medical insurance catalog. The firm believes that the continued moderate price reduction in collective procurement of Traditional Chinese Medicine products bears little risk for OTC non-insurance varieties.

The domestic pharmaceutical industry is expected to usher in a wave of mergers and acquisitions, with growth driven by mergers becoming one of the important themes in the future.

The continuous changes in technology within the pharmaceutical industry, the shift toward mergers and acquisitions in IPOs, and the drive for corporate governance optimization at the shareholder level are the main reasons promoting industry mergers. In various fields, mergers and acquisitions are expected to occur intensively in sectors such as medical instruments, Traditional Chinese Medicine, Medical Services, Blood Products, and research services. In recent years, large-scale merger projects among listed pharmaceutical companies have gradually increased, such as China Resources Sanjiu Medical & Pharmaceutical acquiring KPC Pharmaceuticals, Inc. and Shenzhen Mindray Bio-Medical Electronics acquiring APT Medical Inc. At the same time, cross-industry mergers are also worth noting, such as Jiangsu Kanion Pharmaceutical's acquisition of the biopharmaceutical innovation company Sinopharm, and Henan Lingrui Pharmaceutical acquiring Silver Pharmaceutical.

Risk Reminder: Risks from changes in industry policies, uncertainties in the advancement of State-owned Enterprise Reform, etc.