Liberalizing the restrictions on production and sales channels is conducive to the expansion of the market of traditional Chinese medicine formula granules. Compared with traditional Chinese medicine decoction pieces, traditional Chinese medicine formula granules have the advantages of safety, effectiveness, convenience, stable and controllable quality. After long-term national policy guidance and support, China's traditional Chinese medicine formula granules industry has gradually become standardized. The pilot work was completed in November 2021, the production and sales restrictions were liberalized, and the industry ushered in broad development space. Medical insurance side: we believe that from the current medical insurance situation and policy trend, with the implementation of national standards and the listing of formula particles on Provincial platforms, more provinces will incorporate traditional Chinese medicine formula particles into provincial medical insurance in the future, which is expected to eventually be incorporated into the national medical insurance system. The expansion of medical insurance coverage is conducive to enhancing the terminal payment capacity; Demand side: expand the sales scope to the grass-roots terminal market, and cater to the daily consumption habits of traditional Chinese medicine.
Build a moat in four dimensions, and the industry leaders under the national standard have competitive advantages. As of March 2022, the state has published 196 national standards for formula granules, which puts forward higher supervision and quality control requirements for the quality and production process of raw medicinal materials. On the premise of ensuring the consistency of industrial quality standards, the production cost of traditional Chinese medicine formula granules has been greatly increased. We believe that the formation of a certain entry threshold for the industry is conducive to the leading enterprises with a complete industrial chain and a complete traceability system, which is conducive to improving the industry concentration. At present, the industry is in a "6 + n" competition pattern, with Chinese traditional medicine as the industry leader, followed by Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) and China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) market share. We believe that leading enterprises build a moat in the four dimensions of "production process + cost control + traceability system + market coverage", and it is difficult for new competitors to catch up in the short term.
Under the logic of simultaneous increase in volume and price, the market scale has several times the expansion potential. With the gradual liquidation of the inventory of the old standard products of the enterprise in 2022, the formula granular products produced according to the new standard will be put on the shelves one after another. The standard switching also provides a good opportunity for the enterprise to form a new price system. We expect that all enterprises may increase the ex factory price to alleviate the pressure of the rising cost of medicinal materials and the increase of unit dosage. According to the data of China business intelligence network, in 2020, the market scale of Chinese traditional medicine formula particles accounted for about 11% of Chinese traditional medicine decoction pieces, while in 2019, Japanese Chinese prescription particles accounted for about 60% of Chinese traditional medicine decoction pieces. We expect that when the volume of the Chinese market reaches a relatively stable level under the logic of simultaneous increase in volume and price, the penetration rate of Chinese traditional medicine formula particles is expected to increase to 20-30%, corresponding to several times the potential of capacity expansion.
Suggested targets: Chinese traditional medicine, Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) , China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) , Shijiazhuang Yiling Pharmaceutical Co.Ltd(002603)
The national standard puts forward higher requirements on the production capacity and reserve varieties of enterprises. We suggest paying attention to leading enterprises such as Chinese traditional medicine, Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) , China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) and enterprises with brand potential energy and industrial chain advantages and growth potential in the new business of formula particles.
1) Chinese traditional medicine: complete industrial chain coverage and significant channel advantages. The company is a large comprehensive modern pharmaceutical enterprise under Sinopharm group and the core platform of the parent company's traditional Chinese medicine industry. The company has a perfect industrial chain and its main business covers traditional Chinese medicine decoction pieces, formula particles, Chinese patent medicine, traditional Chinese medicine great health and other related fields. We believe that the company has the advantages of the whole industry chain, the moat is deep, the release of formula particle license does not change the leading position of the company, and the growth certainty of the industry leader is strong.
2) Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) : significant achievements in multi sector innovation and potential for performance growth. The company's business spans six major fields, including finished drugs, traditional Chinese medicine formula particles, raw and auxiliary materials, medical devices, medical and health services and intelligent supply chain of medicine and equipment, and attaches great importance to scientific research innovation and scientific research transformation. As one of the earliest national pilot enterprises, the company continues to consolidate the layout of the industrial chain and has the first mover advantage in terms of variety, channel and quality.
3) China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) : the brand has significant channel advantages and the intelligent manufacturing level of formula particles is high. With the further improvement of the company's brand concentration and the expansion of online channels in the future, CHC's business performance is expected to be promoted; After the implementation of the new national standard, the company has obvious first mover advantages as the old six pilot enterprises, and the formula particle business is expected to become a new performance growth point.
4) Shijiazhuang Yiling Pharmaceutical Co.Ltd(002603) : Take Hebei as the starting point to develop the formula granule business, which is expected to expand outside the province. The company builds scientific research barriers with the theoretical system of "syndrome treatment of collateral diseases". The existing large varieties and second-line varieties have good brand strength and clinical curative effect, and the market space is large to support long-term development. It is optimistic about sales reform and promote large-scale production of core products. The formula particle business benefits from the policy environment and the company's competitiveness, and has potential for future growth. With the improvement of the approval environment and payment environment of traditional Chinese medicine innovative drugs, we are also optimistic about the gradual realization of the company's traditional Chinese medicine innovative drugs and chemical and biological drugs, and the company's valuation has the potential to improve.
Core view: the end of the pilot of the traditional Chinese medicine formula granule industry, the liberalization of production and sales restrictions, and the expansion of medical insurance coverage are conducive to enhancing the terminal payment capacity. The grass-roots terminal market more caters to the consumption preference of traditional Chinese medicine. It is expected that the industry will usher in a large-scale opportunity, the ex factory price of national standard switching is expected to rise, and the industry has several times the capacity expansion potential. Leading enterprises build a moat in the four dimensions of "production process + cost control + traceability system + market coverage". We suggest paying attention to leading enterprises such as Chinese traditional medicine (0570. HK), Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) ( Tianjin Chase Sun Pharmaceutical Co.Ltd(300026) . SZ), China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) ( China Resources Sanjiu Medical & Pharmaceutical Co.Ltd(000999) . SZ), and enterprises with brand potential and industrial chain advantages and growth potential of new business of formula particles such as Shijiazhuang Yiling Pharmaceutical Co.Ltd(002603) ( Shijiazhuang Yiling Pharmaceutical Co.Ltd(002603) . SZ).
Risk factors: market competition risk, pharmaceutical industry policy change risk, epidemic rebound risk, raw material price rise risk, R & D risk.
