CITIC Securities points out that the traditional Chinese medicine (TCM) sector is expected to see short-term base pressure ease. Companies are actively promoting channel reforms and improving quality and efficiency, with channel adjustments accelerating the clearing-out process. Both year-on-year and quarter-on-quarter performance are anticipated to improve. In the long term, it is advisable to monitor policy catalysts such as updates to the National Essential Medicines List and the progress of industry transformation and upgrading. The active pharmaceutical ingredient (API) sector is likely to experience a gradual clearing of capacity. Corporate transformation may create opportunities in specialty APIs, potentially weakening the cyclical nature of earnings. For the blood products sector, attention should be paid to plasma station construction plans under the "15th Five-Year Plan" and industry consolidation through mergers and acquisitions. A recovery in downstream demand and progress in new product R&D are anticipated. The vaccine sector faces ongoing performance pressure. Focus should be on the sales improvement of key products, progress in innovative pipeline development, and industry M&A activity. The pharmaceutical retail sector exhibits clear upcoming inflection points in both performance and valuation, warranting attention for subsequent diverse catalysts. The pharmaceutical distribution sector shows steady and positive revenue trends, with the effects of payment collection policies gradually materializing. Continued optimism is maintained for large central state-owned enterprises and targets with expectations for operational improvement. CITIC Securities' main views are as follows:
TCM: Transitioning from Volume Growth to Quality Enhancement, with Growth and Adjustment Proceeding in Parallel As the TCM industry shifts from volume-driven growth to quality-focused enhancement, future industry growth will proceed alongside adjustments, with transformation and upgrading being an inevitable trend. Base pressure in the TCM sector for 2026 is expected to gradually ease. Coupled with some companies actively advancing channel reforms and improving quality and efficiency, channel adjustments are accelerating the clearing-out process. Most companies are expected to achieve improvement on a low base, both year-on-year and quarter-on-quarter. Long-term focus should be on policy catalysts like the National Essential Medicines List and industry transformation progress. TCM sector valuations are at historically low levels with low institutional holdings. As the industry bottoms out and recovers, it is advisable to focus on leading companies with stable operations.
API: Moving from Bottoming Out to Recovery, Focus on Capacity Clearing and Transformation Progress The API sector continued to adjust throughout 2025, maintaining a trend of trading price for volume. Prices for most API varieties have gradually bottomed out. Some companies are proactively optimizing their profit structures. The sector's profitability showed significant quarter-on-quarter recovery in Q1 2026, and market capacity is expected to be gradually cleared out. From a medium-term perspective, the patent cliff is expected to bring opportunities in specialty APIs. Transformation into finished dosage forms is gradually weakening the cyclicality of earnings. A cautiously optimistic outlook is maintained for the sector going forward.
Blood Products: Supply Growth Accompanied by Industry M&A, Awaiting Gradual Recovery in Demand The number of domestic plasma stations has been increasing in recent years. It is expected that various regions will successively release plasma station setup plans for the "15th Five-Year Plan" period, potentially leading to further growth in station numbers. China's blood products industry is highly concentrated, and industry consolidation through M&A is continuously advancing, with further progress anticipated. On the demand side, hospital cost controls and DRG payment reforms have temporarily suppressed some clinical demand, while clinical value recognition for some products remains limited. With continued sales promotion and academic education efforts by companies, demand for blood products is expected to gradually recover. Ongoing progress in new product R&D is expected to drive continuous improvement in profit per ton of plasma.
Vaccines: Performance Under Continued Pressure, Focus on Product Sales, Innovative Pipelines, and M&A The vaccine sector's performance showed a downward trend in 2025, mainly due to pressure on terminal sales from macroeconomic factors and increasingly intense competition for some products. For 2026, some key vaccine varieties with large market potential and favorable competitive landscapes are still expected to maintain sales growth trends. In 2025 and Q1 2026, several new products or new indications were approved for market, bringing new increments to the vaccine market. Some innovative vaccine varieties are expected to achieve new R&D progress in 2026. Additionally, some companies underwent changes in controlling ownership in 2025. Attention should be paid to subsequent industry M&A and integration progress.
Pharmaceutical Retail: Industry Traffic Redistribution, Focus on Dual Inflection Points in Performance and Valuation In recent years, influenced by factors such as price comparisons and medical insurance inspections, the stock prices of listed pharmacy companies have reacted relatively fully in the earlier period. Valuations recovered somewhat in 2026 but remain at historical lows. Looking ahead to 2026, considering traffic diversion characteristics, two distinct inflection points are anticipated in the pharmacy sector: 1) Performance Inflection Point: a) Same-store sales growth accelerates, with industry scale stabilizing and improving; traffic diversion and restructuring allow leading companies to capture more market share. b) Some leading pharmacy chains enter expansion cycles, with the new store rate expected to rise. c) Cost reduction and efficiency improvements continue, with net profit growth potentially outpacing revenue growth. Leading companies are expected to see net profit growth faster than revenue growth. 2) Valuation Inflection Point: a) Store adjustments and renovations enhance valuations. b) M&A and external expansion increase market capitalization.
Pharmaceutical Distribution: Steady Revenue Improvement, Effects of Payment Collection Policies Gradually Materializing In the second half of 2024, DRG reforms were gradually implemented across regions, impacting per capita drug spending in hospitals. However, with standards now largely unified, companies' revenue streams are expected to return to stable growth trends. Listed pharmaceutical companies are actively promoting business transformation and innovation, focusing on their core distribution business and developing synergistic operations to optimize overall profitability. Key areas to monitor in the distribution sector include: 1) The implementation pace of the "15th Five-Year Plan." 2) Expected improvement in payment collections, potentially alleviating corporate impairment pressure. 3) Several companies are successively entering the commercial insurance sector, seeking new payers, which may bring new growth increments. Continued optimism is held for large central state-owned enterprises and targets with expectations for operational improvement.
Risk Warnings: Industry policy risks; R&D progress falling short of expectations; regulatory approval delays.
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