According to the research report released by Sinolink Securities, the medical sector will see improved performance in Q3, considering the improvement of the medical insurance settlement cycle, the expectation of policy improvement, and the recovery of performance, as well as the fact that the institutional pharmaceutical holdings are low. Additionally, the defensive sectors such as blood products and some traditional Chinese medicine have performed well, as seen from the performance of some companies that have already released their half-year reports. Meanwhile, the target objects of bottom reversals in their business performance, such as Jafron Biomedical and Meinian Onehealth Healthcare Holdings, have also gained wide attention from the market.

Sinolink Securities' main points are as follows:

Investment Logic:

As the industry enters the interim period, it is observed from the partial disclosed forecasts and interim reports that the defensive sectors such as blood products and some traditional Chinese medicine have performed well, which is consistent with the overall perception of the sub-sectors during the first half of the year. At the same time, companies such as Jafron Biomedical and Meinian Onehealth Healthcare Holdings that are already at the bottom of their previous prosperity have also gained wide attention from the market.

Continuing our previous point of view, we believe that the medical sector will see improved performance in Q3, considering the improvement in the medical insurance settlement cycle, the expectation of policy improvement, and the recovery of performance, as well as the fact that the institutional pharmaceutical holdings are low. Additionally, the defensive sectors such as blood products and some traditional Chinese medicine have performed well, as seen from the performance of some companies that have already released their half-year reports. Meanwhile, the target objects of bottom reversals in their business performance, such as Jafron Biomedical and Meinian Onehealth Healthcare Holdings, have also gained wide attention from the market.

Innovation drugs: This week, the data of many innovative drug companies have been released, and their innovative strength continues to be realized. We predict that with the increase in the probability of a U.S. interest rate cut and the repair of the valuation of innovative assets in emerging markets, combined with breakthroughs in China's innovation and research and development, the market is expected to usher in a good investment opportunity for the innovative drug sector in the second half of the year.

Biological products: The blood products industry has performed well, as the industry has passed the period of high base in Q1 2023, and the supply-demand prosperity has remained high with strong certainty in the later period. We are bullish on the overall growth rate of the blood products industry in the second quarter.

Medical instruments: The technological gap between domestic manufacturers and foreign behemoths in the high-end subdivision areas of medical instruments will gradually narrow. Domestic products' clinical recognition is expected to gradually improve. We are bullish on the domestic medical instrument top manufacturers, as hospital procurement demand is expected to resume with policies such as equipment updates gradually landing in the second half of the year.

Chinese medicine and pharmacies: (1) Traditional Chinese medicine, for the in-hospital direction, we suggest paying attention to companies that have the potential to enter the basic drug list and clear procurement risk. For the out-of-hospital direction, companies with strong brand influence are recommended as they have more certain growth in performance. (2) For pharmacies, we are optimistic about the large space for the promotion of outpatient integration, and the recommended companies are those with good compliance attributes and strong risk control capabilities. Given the recent "price comparison" policy, the industry is expected to usher in integration and elimination, and the competition pattern is expected to be optimized.

(1) Medical services: The impact of the high base in 1H24 is about to disappear, and we are optimistic that the terminal demand will be concentrated during summer vacation. (2) Medical beauty: This week, the National Medical Products Administration released a notice on further clarifying the requirements for RF therapeutic equipment and other products, and registration of medical devices such as RF therapeutic equipment is expected to be more standardized.

CXOs and upstream: The unadjusted CPI in the United States in June increased by 3% year-on-year (down 0.1% month-on-month), the first decline since May 2020, and core inflation also slowed down. The monetary environment is expected to improve, and CXOs and the medical industry chain upstream that are sensitive to interest rates are expected to benefit.

Investment advice:

We maintain our previous point of view that the performance and prosperity trends in the third and fourth quarters are more worthy of market attention than short-term achievements in the second quarter. At the same time, from the perspective of asset allocation, as the sector with both policy and performance rebound, and with the increasing enthusiasm of funds to invest in the medical sector, the style of defensive sectors having absolute advantage may change in the second half of the year and shift towards innovative growth and value growth. We recommend focusing on two major directions: (1) benefiting from the global innovative assets with high prosperity, such as GLP-1 drugs, ADC/dual-antibody drugs, electrophysiology/endoscopic track, etc. (2) Reviving the medical equipment with high cost-effectiveness in the hospital: bio-products (long-acting interferon, third-generation insulin, blood products, etc.), refined narcotic drugs, chemiluminescence diagnosis, medical devices, raw materials (such as vitamins, antibiotics, etc.), glove industry, etc.

Being the beneficiary of global innovative assets prosperity, such as GLP-1 drugs, ADC/dual-antibody drugs, electrophysiology/endoscopic track, etc.

Reviving the medical equipment with high cost-effectiveness in the hospital: bio-products (long-acting interferon, third-generation insulin, blood products, etc.), refined narcotic drugs, chemiluminescence diagnosis, medical devices, raw materials (such as vitamins, antibiotics, etc.), glove industry, etc.

Key symbols:

Jiangsu Hengrui Pharmaceuticals, Xiamen Amoytop Biotech, Akeso, Zhejiang Garden Biopharmaceutical, and Intco Medical Technology.

Risk Warning: Exchange risk, domestic and foreign policy risk, investment and financing cycle fluctuations risk, merger and acquisition integration risk beyond expectations, etc.