EB SECURITIES: The Chinese medicine sector is experiencing resonance from multiple factors, with significant mid-term value for investment allocation.

EB SECURITIES has released a research report stating that the traditional Chinese medicine sector is currently in a resonance stage of multiple factors such as "intensive implementation of policy catalysts + upstream cost reduction + approaching performance recovery + valuation/portfolio bottoming out". The mid-term allocation value is significant, and the future market outlook is optimistic. They recommend focusing on three types of targets: 1) companies with the potential for medium to high-speed growth benefiting from exclusive basic drug varieties with volume elasticity; 2) companies expected to achieve a turnaround from difficulties through operational reforms; 3) steady high dividend brands in the Chinese patent medicine industry. EB SECURITIES' main points are as follows: Market outlook and investment strategy for the Chinese medicine sector in July Recently, the Chinese medicine sector has continued to rise, mainly driven by market risk aversion, policy support, performance catalysts, and valuation bottoming out, among other factors. The mid-term allocation value is significant, and the future market outlook is optimistic. They recommend prioritizing the layout of stable-operating, solid-performance, or high-dividend Chinese medicine targets. With decreased market risk appetite, the sector is at historically low valuation levels. Currently, as market risk aversion sentiment rises, the Chinese medicine sector's defensive attributes are strong and it is expected to become an important direction for capital risk aversion. As of July 14, 2026, the PE-TTM of the Shenwan Chinese Medicine III index was 23.56 times, at a lower PE level in the past five years, with many individual stocks having a PE of 10-16 times and a dividend yield of 5%+, providing a basis for valuation recovery. Recent intensive policy catalysts have driven medium to long-term industry quality improvement On July 9, the National Health Commission released the 26th edition of the basic drug catalog, including 48 new Chinese patent medicines, of which about 37 are exclusive (patented) varieties. These will enjoy policy benefits such as preferential reimbursement under the Category A medical insurance and priority provision at all levels of public medical institutions, which are expected to significantly increase the penetration rate and long-term revenue elasticity of relevant in-house varieties. On July 10, the State Council publicly approved the "Fifteen-Five Plan for the Revitalization and Development of Traditional Chinese Medicine" positioning it at a high level, specifying that all provincial, autonomous region, and municipal people's governments should regard the revitalization and development of traditional Chinese medicine as an important task during the local "Fifteen-Five" period of economic and social development, fully implementing measures, ensuring the realization of the goals and policies of the plan, and encouraging local areas to leverage comparative advantages and innovate measures for the revitalization and development of traditional Chinese medicine according to local conditions. Although the text of the plan has not been disclosed, the bank expects that relevant tasks may be included in the KPI assessment of various provinces and cities, supported by special financial, industrial loans, project support funds, and optimization of medical insurance payment mechanisms, promoting quality improvement and system perfection of the traditional Chinese medicine industry from upstream to downstream, accelerating the elimination of backward production capacity, and thereby accelerating the modernization of traditional Chinese medicine and promoting its global expansion. In addition, the "Fifteen-Five Plan for National Health" and the "Fifteen-Five Plan for the Expansion of the Consumer Industry" also mention traditional Chinese medicine, and leading brands and full industry chain companies will continue to enjoy valuation recovery. Overall industry fundamentals are stable, with significant performance differentiation among individual stocks Combining interim report forecasts and research information, in the first half of 2026, the in-house market was under pressure from policies such as DRG/DIP medical insurance payment reforms, medical insurance cost control, expanded centralized procurement, and medical anti-corruption, while the out-of-hospital retail market performance was relatively stable. In addition, with the significant decline in upstream Chinese herbal medicine costs, the gross profit margins of Chinese patent medicine companies have generally improved, and the bank expects companies with lighter channel inventory and larger operational reform efforts to have impressive performance. Risk warning: Policy implementation is not as expected; drug centralized procurement price reductions exceed expectations; risks of failure in new drug research and development; fluctuations in Chinese herbal medicine/raw material prices.