EB SECURITIES has released a research report stating that the Traditional Chinese Medicine (TCM) sector is currently experiencing a convergence of multiple positive factors, including intensive policy implementation, declining upstream costs, approaching earnings recovery, and low valuations and positioning. This creates significant mid-term investment value and a positive outlook for the sector. The report suggests focusing on three categories of companies: 1) Those benefiting from the volume expansion of exclusive National Essential Medicine List (NEML) varieties, poised for medium-to-high-speed growth; 2) Companies where operational restructuring efforts are bearing fruit, potentially leading to a turnaround; 3) Leading brand TCM companies known for their stable operations and high dividends.
Market Outlook and Investment Strategy for July
The TCM sector has seen a sustained rally recently. The firm attributes this to a combination of factors: a flight to safety among investors, favorable policies, earnings catalysts, and historically low valuations. Given the significant mid-term investment value, the outlook remains optimistic. It is advisable to prioritize TCM stocks with stable operations, solid fundamentals, or attractive dividend yields.
Defensive Appeal Amidst Low Valuations
As market risk appetite has declined, the defensive characteristics of the TCM sector have become more attractive, positioning it as a potential safe haven for capital. As of July 14, 2026, the price-to-earnings ratio (P/E TTM) of the Shenwan TCM III Index stood at 23.56 times, which is at a relatively low level compared to the past five years. Many individual stocks have P/E ratios between 10 and 16 times, with dividend yields exceeding 5%, laying a foundation for potential valuation recovery.
Policy Catalysts Driving Long-Term Industry Upgrading
On July 9, the National Health Commission released the 2026 edition of the NEML, which newly included 48 TCM products. Approximately 37 of these are exclusive (patented) varieties. These will benefit from policy incentives such as preferential Class-A medical insurance reimbursement and prioritized procurement by public medical institutions. This is expected to significantly boost the market penetration and mid-to-long-term revenue potential of the related hospital-based products.
On July 10, the State Council publicly approved the "15th Five-Year Plan for the Revitalization and Development of Traditional Chinese Medicine." This plan holds a high strategic position, requiring local governments to treat TCM revitalization as a key task for economic and social development during the 15th Five-Year Plan period, detailing implementation measures to ensure the plan's goals and policies are effectively carried out. It also encourages regions to leverage their comparative advantages and innovate development measures based on local conditions.
Although the full text of the plan has not been disclosed, it is anticipated that related tasks may be incorporated into local government performance assessments (KPIs), accompanied by supporting measures such as special fiscal funds, industrial loans, project support, and optimization of medical insurance payment mechanisms. These are expected to drive quality upgrades and systematic improvements across the TCM industry chain, accelerate the phase-out of outdated capacity, and thereby advance the modernization and global promotion of TCM. Furthermore, the "15th Five-Year Plan for National Health" and the "15th Five-Year Plan for Expanding Consumption" also mention TCM, suggesting leading brands and integrated industry chain companies will continue to benefit from valuation re-rating.
Stable Industry Fundamentals with Divergent Company Performance
Based on mid-year performance forecasts and research, the hospital market in the first half of 2026 faced significant pressure from policies like the deepening of DRG/DIP payment reforms, medical insurance cost control, expanded centralized procurement, and anti-corruption campaigns in healthcare. In contrast, the retail market outside hospitals performed more steadily. Additionally, with a notable decline in the cost of upstream Chinese herbal medicines, the gross profit margins of TCM manufacturers have generally improved. Companies with lighter channel inventory and more substantial operational reforms are expected to deliver stronger financial results.
Key Risk Factors to Consider
Potential risks include policy implementation falling short of expectations, drug centralized procurement price cuts exceeding forecasts, risks associated with new drug R&D failures, and volatility in the prices of Chinese herbal medicines and active pharmaceutical ingredients.
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