Investment strategy of traditional Chinese medicine in 2022: Mining individual stocks of “basically facing good + great health extension after reform”

The market of traditional Chinese medicine plate rose at the end of the year, approaching the overall valuation of medicine

This year, the pharmaceutical and biological industry experienced a downward shock, the valuation of sub industries was significantly differentiated, and only the API and traditional Chinese medicine sector achieved growth. From the beginning of 2021 to December 20, the industry index of traditional Chinese medicine ranked second (+ 19.56%) in the pharmaceutical segment, second only to API (+ 25.11%). The traditional Chinese medicine segment has changed the downturn trend in recent three years, and the recent valuation has approached the overall valuation of the pharmaceutical segment.

In terms of performance, the overall performance of the targets in the traditional Chinese medicine sector in the first three quarters was brilliant, and most of the targets achieved restorative growth. In terms of market performance, from the beginning of the year to December 20, 2021, 22 of the 71 stocks in the traditional Chinese medicine sector closed down, 32 stocks increased by more than 20%, and the performance of small and medium-sized stocks was outstanding. In addition to centralized procurement, since the beginning of 2021, favorable policies have been issued one after another in the traditional Chinese medicine sector, and the sector has ushered in a historic development opportunity.

In the post epidemic era, various sub industries of medicine may be affected by various factors, such as rising prices of raw materials, centralized procurement pressure, policy support, market competition outside China and so on. In the short term, we expect that the segmentation of the pharmaceutical industry will continue to maintain the differentiation trend in 2022. In the long run, China’s population is aging, and there is still much room for improvement in the level of medicine and equipment and medical and health expenditure. As a just needed industry, medicine is optimistic about its long-term development space.

We suggest looking for potential industries in 2022 from the aspects of policy guidance and industrial chain reform. The traditional Chinese medicine industry has won top-level policy support this year. Some stocks are basically oriented well after marketing reform or management reform, and the industry margin has improved. We are still optimistic about its growth potential in 2022.

Under the dilemma of rising prices of raw materials and centralized procurement, cost control and great health extension are the way to break the situation. In terms of industrial production management, the Pharmacopoeia of the people’s Republic of China issued by the State Food and Drug Administration and the health commission

It has been implemented since December 30, 2020, with stricter production management and more standardized development.

In terms of raw materials, affected by extreme climate, the implementation of the new pharmacopoeia, the change of planting area of traditional Chinese medicine and the cyclical fluctuation of the market, the price rise trend of traditional Chinese medicine is obvious in 2021. Under the continuous extreme weather and the imbalance between supply and demand, we expect that the trend may continue, and enterprises are facing cost control and terminal price rise digestion.

From the perspective of terminal consumption, traditional Chinese medicine has significant advantages in the treatment of chronic diseases. Under the background of consumption upgrading, the great health industry has developed rapidly. The retail volume of Chinese medicine is more prosperous than that of public hospitals. Meanwhile, the cardiovascular and cerebrovascular racetrack has potential because of the rising trend of incidence rate and mortality rate of cardiovascular diseases in China.

From the perspective of centralized procurement, the centralized procurement of Chinese patent medicines in 19 provinces of Hubei Province is the largest Centralized Procurement Alliance of Chinese patent medicines in China. Compared with chemical medicine, the difficulty of centralized procurement of Chinese patent medicines lies in that the consistency of Chinese patent medicine quality is difficult to evaluate, and the proportion of exclusive varieties is relatively high. The general rise of traditional Chinese medicine raw materials combined with the decline of centralized purchase prices will further reduce the profit space of the bid winning enterprises. In addition, the proportion of Chinese patent medicines included in the medical insurance catalogue has increased in recent years, reducing the burden on residents to buy Chinese patent medicines.

We believe that the current rising prices of traditional Chinese medicine raw materials, the centralized purchase and price reduction at the public hospital side further reduce the profit space of enterprises, and the industry background of the upsurge of traditional Chinese medicine consumption caused by the aging population is good for OTC side enterprises, which is more prosperous than that at the public hospital side. In recent years, the state has issued a number of support policies to encourage the innovation of traditional Chinese medicine, and the innovation vitality of traditional Chinese medicine has been continuously released, However, investment in new drug R & D needs to be further strengthened. This year, some brand pharmaceutical enterprises launched e-commerce channel marketing, superimposed the epidemic situation, improved the influence of traditional Chinese medicine, and catalysed the formation of the consumption trend of traditional Chinese medicine.

Two main investment lines: the reform is basically oriented to good + expand the health extension industry of traditional Chinese medicine. Based on the above analysis, we are optimistic about more listed traditional Chinese medicine companies with the following characteristics: 1) build a brand moat. Brand awareness, inheritance formula and exclusive benefit; 2) Standardized control of medicinal material quality and production links. There are high-quality raw material supply bases or suppliers, and the processing technology specifications of traditional Chinese medicine; 3) the hospital market and OTC market have deep sales channels, and are good at using Internet plus Chinese medicine mode to promote marketing, actively expand the market and deal with the homogenization market competition; 4) Make use of its own advantages to layout catering, high-end daily chemicals or innovative drugs and other fields, multi wheel drive, bring new growth points to the business and deal with the weak growth of main business revenue.

We suggest looking for potential stocks along the two main lines of “making efforts to reform and basically facing the good + expanding the health extension industry of traditional Chinese medicine”. Suggestions: promote the in-depth development and integration of sales channels and sales resources, and promote the continuous and large-scale growth of trump pieces. Such as Tianjin Zhongxin Pharmaceutical Group Corporation Limited(600329) , Beijing Tongrentang Co.Ltd(600085) , Henan Lingrui Pharmaceutical Co.Ltd(600285) ; In response to the mixed reform of state-owned enterprises, we will further deepen the reform of management system, and the fundamentals can be improved continuously. Such as Tianjin Zhongxin Pharmaceutical Group Corporation Limited(600329) , Beijing Tongrentang Co.Ltd(600085) ; Actively carry out employee stock ownership and equity incentive to enhance development motivation and confidence. Such as Zhejiang Shouxiangu Pharmaceutical Co.Ltd(603896) , Jiuzhitang Co.Ltd(000989) , Renhe Pharmacy Co.Ltd(000650) ; Launch large health consumer goods related to traditional Chinese medicine to respond to the consumption trend of e-commerce, such as Beijing Tongrentang Co.Ltd(600085) , Jiuzhitang Co.Ltd(000989) , Renhe Pharmacy Co.Ltd(000650) , Jiangzhong Pharmaceutical Co.Ltd(600750) .

Investment suggestions:

This year, the market performance of the traditional Chinese medicine sector is outstanding, which is the superposition of policy support. Some stocks are basically oriented well and the industry margin is improved. We are still optimistic about their potential in 2022. However, the industry is affected by complex factors. We believe that the price rise trend of traditional Chinese medicine may continue next year, the centralized collection of traditional Chinese medicine in public hospitals will promote, and the profitability of pharmaceutical enterprises will be under pressure. Under the background of aging population, the cardiovascular and cerebrovascular track is booming, the epidemic situation catalyzes the improvement of the popularity of traditional Chinese medicine, and enterprises will make efforts to promote the consumption trend of traditional Chinese medicine through e-commerce marketing, Favorable OTC end is the target with high-quality brand effect and good cost control.

We suggest looking for potential stocks along the two main lines of “making efforts to reform and basically facing the good + expanding the health extension industry of traditional Chinese medicine”. It is recommended to pay attention to: Tianjin Zhongxin Pharmaceutical Group Corporation Limited(600329) (600329), Beijing Tongrentang Co.Ltd(600085) (600085), Zhejiang Shouxiangu Pharmaceutical Co.Ltd(603896) (603896), Jiuzhitang Co.Ltd(000989) (000989), Henan Lingrui Pharmaceutical Co.Ltd(600285) (600285), Renhe Pharmacy Co.Ltd(000650) (000650), Jiangzhong Pharmaceutical Co.Ltd(600750) (600750). Key recommendations: Tianjin Zhongxin Pharmaceutical Group Corporation Limited(600329) , Beijing Tongrentang Co.Ltd(600085) and Zhejiang Shouxiangu Pharmaceutical Co.Ltd(603896) .

Risk tips:

Market competition risk, pharmaceutical industry policy change risk, foreign business and trade policy risk, implementation risk of state-owned enterprise reform action, epidemic rebound risk.

China Greatwall Securities Co.Ltd(002939)

 

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