Zhongtai Securities: The gross profit margin of the Chinese medicine sector is expected to recover in H2 2025, optimistic about leading brands in OTC and innovative pipelines

According to the Zhitong Finance APP, Zhongtai Securities released a research report stating that as the high-priced medicinal materials accumulated in the early stage are digested, the cost pressure in the Chinese medicine sector is expected to gradually ease in the second half of 2025, leading to an upward correction in gross profit margins. The firm indicated that OTC demand is weak, and operational pressures on enterprises still exist, but the logic of increasing market share for branded OTC products is strengthening, and they are optimistic about leading OTC companies with brand and channel advantages. Meanwhile, some Chinese medicine companies are continuously increasing R&D investment, and their innovative pipelines are expected to be revalued.

The main points of Zhongtai Securities are as follows:

Performance in the first half of 2025 is under pressure, but gross profit margins are expected to recover. Excluding ST and companies with abnormal performance fluctuations, the firm has compiled the performance of 64 Chinese medicine companies for the first half of 2025: total revenue of 172.9 billion yuan, a year-on-year decrease of 4.95%; net profit excluding non-recurring items of 19.1 billion yuan, a year-on-year decrease of 9.31%; operating cash flow of 16.96 billion yuan, a year-on-year increase of 30.77%. Overall, the decline in revenue and profit in the Chinese medicine sector has narrowed compared to 2024, indicating that the industry’s prosperity is gradually recovering. The gross profit margin for the sector in the first half of 2025 is 42.05%, a year-on-year decrease of 1.01 percentage points; the net profit margin excluding non-recurring items is 11.04%, a year-on-year decrease of 0.56 percentage points. Since mid-2024, the prices of medicinal materials have remained stable, and there has been a significant decline in prices since May 2025. The firm expects that as the high-priced medicinal materials accumulated in the early stage are digested, the cost pressure in the Chinese medicine sector in the second half of 2025 is expected to gradually ease, leading to an upward correction in gross profit margins.

Expense side remains stable, cash flow improves. The median expense ratio for the Chinese medicine sector in the first half of 2025 is 44.5%, an increase of 1.5 percentage points compared to the same period in 2024; the median sales expense ratio is 31.6%, a decrease of 0.1 percentage points compared to the same period in 2024, indicating that expenses are basically stable. As of the first half of 2025, accounts receivable + notes receivable/total revenue and inventory/total assets are 48.8% and 12.3%, respectively, with the proportion of accounts receivable to total revenue increasing compared to the same period in 2024. The indicator of operating net cash flow/operating revenue has declined since 2023 but has slightly improved year-on-year in the first half of 2025, indicating that the collection of payments by Chinese medicine companies has strengthened.

Weak OTC demand, transformation of pharmacy channels is expected to push up concentration. The firm has compiled the core operating data for the first half of 22 Chinese medicine companies primarily focused on OTC products, showing median revenue and net profit excluding non-recurring items growth rates of -7.6% and -19.7% for Q2 2025, respectively, with a larger decline compared to Q1. Compared to the overall Chinese medicine sector, the operational pressure on OTC companies is more pronounced. Data from Yimian Network shows that the retail scale of physical pharmacies in China (medicines + non-medicines) in the first half of 2025 was 296.1 billion yuan, a year-on-year decrease of 2.2%, further confirming the weak OTC demand. The firm believes that although short-term demand is under pressure, the clearing of retail pharmacies is expected to accelerate the increase in upstream OTC concentration. The market share of CR Sanjiu's cold medicine granules increased from 22.79% in 2024 to 24.34% in Q1 2025, and Jiangzhong Pharmaceutical's digestive tablets increased from 8.35% in 2024 to 9.62% in Q1 2025, indicating that the market share of leading OTC products is continuously increasing Risk Warning: Raw material price fluctuation risk, pharmaceutical policy change risk, untimely research report information update risk, third-party data distortion risk