To The Moon

2025 Outlook for China's Traditional Chinese Medicine (TCM) Industry Profitability: A Bottoming-Out Trend Emerges, but Industry Differentiation Intensifies

$TRAD CHI MED(00570)$  

Key Conclusion

Against the backdrop of deepening volume-based procurement (VBP) policies and structural adjustments in the industry, China's TCM industry is expected to see a gradual recovery in profitability from its bottom in 2025. However, it is crucial to monitor policy implementation, companies' cost control capabilities, and the progress of innovation and transformation. Key analysis is provided below:

I. Policy Environment: VBP Optimization and Support Go Hand in Hand, Marginally Relieving Profitability Pressure

- Easing Impact of VBP Price Cuts

- The third round of VBP for traditional Chinese medicine (TCM) preparations (completed by the end of 2024): the average price reduction was 68%, with the highest reaching 97.5%. However, the policy clearly emphasizes "optimizing VBP rules," introducing quality stratification, revival mechanisms, etc., to prevent malicious bidding (source).

- Narrowing Price Reduction: Compared to the first two rounds of VBP (such as the average price reduction of 42% in the first round of VBP for TCM preparations in Hubei), companies are gradually adapting to the rules, leading to marginal narrowing of the reduction and reduced pressure on profit margins.

- Policy Benefits Offset Price Reduction Pressure

- Medical Insurance Support: The 2024 version of the medical insurance catalog added 11 unique TCM preparations, with preferential reimbursement for innovative drugs (source).

- Expanding Demand: The government work report emphasizes "promoting the inheritance and innovation of TCM." Primary healthcare coverage and consumer upgrades drive market scale. It is estimated that the TCM market size will exceed 1 trillion yuan in 2025 (source).

II. Cost Side: Raw Material Prices Fall, Profitability Recovery Expected

- Declining TCM Material Prices: Surging TCM material prices in 2024 put pressure on industry profitability. However, the price index fell to 101.7 in January 2025 (peaking at 114.3 in September 2023), gradually easing cost pressure (source).

- Supply Chain Optimization: Leading companies have enhanced their pricing power through joint base construction and digitalized procurement. Small and medium-sized enterprises still face challenges in cost control.

III. Company Performance: Leading Companies Show Resilience, Innovation Drives Long-Term Growth

- Increased Profitability Stability for Leading Companies

- Tongrentang $Beijing Tong Ren Tang Co.,Ltd.(600085)$  : P/E 31.18, ROE 10.05%. The high valuation reflects market recognition of its brand premium and channel reform.

- Yunnan Baiyao $Yunnan Baiyao Group Co.,Ltd.(000538)$  : P/E 23.06, ROE 10.82%. Driven by a two-wheel strategy of "pharmaceuticals + health products," non-net profit increased by 25.09% year-on-year in 2024 (source).

- Innovation and Internationalization Open Up Growth Space

- Increased R&D Investment: The 2025 government work report explicitly supports new TCM drugs, and companies are accelerating their deployment of innovative drugs (such as anti-tumor TCM injections).

- Overseas Market Expansion: Exports of TCM slices to Southeast Asia and the number of registered varieties in Europe and the United States are increasing, offsetting the risk of domestic VBP.

IV. Risk Reminders

- Unexpected Policy Implementation: If the scope of VBP expands to include high-margin products such as TCM formula granules, short-term profitability may be pressured.

- Fluctuations in Raw Material Prices: Extreme weather or speculative behavior could lead to a rebound in TCM material prices.

- Intensifying Industry Differentiation: Small and medium-sized enterprises may face elimination due to scale disadvantages, while leading companies increase market share, leading to increased risk of industry concentration.