CICC Reinstates Coverage on TRAD CHI MED (00570) with Neutral Rating, Target Price HK$2.40

CICC has released a research report reinstating coverage on TRAD CHI MED (00570) with a Neutral rating and a target price of HK$2.40, corresponding to 34.5x/16.3x P/E for 2026/2027. Currently, the company has established a business layout centered on Traditional Chinese Medicine (TCM) formula granules, encompassing the production of Chinese medicinal materials, prepared slices of Chinese medicines, proprietary Chinese medicines, and TCM-based health products. Over the long term, China National Pharmaceutical Group has facilitated the integration of its entire industrial chain through mergers and acquisitions. CICC's primary views are as follows: Policy support for the development of the TCM industry. In January 2021, the General Office of the State Council issued the "Several Policy Measures on Accelerating the Characteristic Development of Traditional Chinese Medicine," and the institution believes policy support for TCM development is continuously strengthening, with the TCM service system expected to improve steadily. Regarding the "15th Five-Year Plan," policies are anticipated to further propel the advancement of TCM. The company has a strong layout within the TCM industrial chain, but its business is currently in a period of adjustment. For 2024-2026, affected by policies such as the centralized procurement of formula granules, the institution expects the company's main business to be in a phase of structural realignment, as it undertakes marketing reforms and business reorganization to promote synergistic development across various segments. Strengthening the technological innovation system. Presently, to address industry policies like centralized procurement and healthcare insurance cost control, the company is focusing on tapping endogenous potential, emphasizing innovative TCM drugs and the secondary development of proprietary Chinese medicines, while steadily advancing the coordinated growth of all TCM segments. The institution believes that research and development are likely to enhance the company's academic competitiveness and strengthen its pipeline of new products. The key difference from the market's view. While the market is concerned that centralized procurement will lead to profit declines, the institution argues that the company is actively intensifying marketing reforms and evidence-based medical research, suggesting that in the long term, the expense ratio is controllable. Potential catalysts: Effective implementation of marketing reforms and new breakthroughs in the R&D of innovative TCM drugs. Earnings forecast and valuation. The institution forecasts the company's EPS for 2025-2027 to be -HK$0.11, HK$0.06, and HK$0.13, respectively. The current stock price corresponds to a 2026/2027 P/E of 31.0x/14.7x. Considering the company's business is in an adjustment period and its 2026/2027 P/E ratios are higher than the average for Hong Kong-listed TCM stocks, the institution reinstates coverage with a Neutral rating and a target price of HK$2.40 (corresponding to 2026/2027 P/E of 34.5x/16.3x), implying an 11.1% upside potential. Risk reminders: Risks include declining product prices, fluctuations in raw material costs, intensified market competition exceeding expectations, an increase in working capital turnover days, an adjustment pace for the formula granules business exceeding expectations, profitability exceeding expectations, and the development of new product categories by the company.