Guoyuan International released a research report stating that SHINEWAY PHARM (02877) has made smooth progress in innovative traditional Chinese medicine (TCM) R&D. Its core product, Sailuotong Capsules (an innovative TCM for vascular dementia), has completed Phase III clinical trials and is expected to receive approval in 2026, with commercial launch in 2027. Currently, revenue and gross margins are under pressure due to centralized procurement policies. However, with new drug launches, the product mix is expected to improve, driving a recovery in earnings growth. The firm assigned a "Buy" rating with a target price of HK$10.04 per share.

**Key Highlights:** 1. **Strong Progress in Innovative Drug Development** SHINEWAY PHARM has achieved significant results in TCM innovation, with multiple research and clinical projects advancing steadily. In H1 2025, R&D expenses reached RMB 50.37 million, accounting for 3.0% of revenue. Key pipeline products, including Q-B-Q-F concentrated pills and Sailuotong Capsules, are progressing well. Sailuotong Capsules, a modern innovative TCM targeting vascular dementia (the second most common cause of dementia after Alzheimer’s), has completed Phase III trials. Regulatory data compilation is underway, with production approval expected in 2026 and market launch in 2027. Given China’s dementia patient population exceeding 10 million by 2025 and the lack of effective treatments, Sailuotong Capsules hold substantial market potential.

2. **Earnings Pressure from Industry Factors** Revenue for the first three quarters of 2025 declined 16.3% YoY to RMB 2.415 billion, primarily due to TCM inclusion in centralized procurement. Segment-wise: - Injectable products: Revenue fell 23.6% YoY to RMB 786 million. - Soft capsules: Revenue dropped 13.7% YoY to RMB 337 million. - Granules: Revenue declined 14.5% YoY to RMB 391 million. - TCM formula granules: Revenue decreased 11.8% YoY to RMB 726 million. Gross margin for mid-2025 contracted to 72.2% (vs. 75.3% YoY) due to rising raw material costs and pricing pressure from national TCM procurement. However, net margin improved to 37.2% (vs. 30.0% YoY), supported by a 20.7% reduction in sales/distribution costs and 12.9% lower administrative expenses. Operating cash flow rose 0.4% YoY to RMB 566 million, reflecting cost-control efforts. The company expects earnings recovery driven by new products like Sailuotong Capsules and an efficient commercialization team.

3. **Optimized Product Structure with New Drug Launches** Oral products (65.8% of revenue) and injectables (34.2%) form a balanced portfolio, enhancing risk resilience. Projected 2025–2027 revenue is RMB 3.84 billion, RMB 4.11 billion, and RMB 4.60 billion, with net profit at RMB 929 million, RMB 1.011 billion, and RMB 1.138 billion, respectively. The HK$10.04 target price implies an 8x 2026 P/E. With a current dividend yield of 6.1%, the stock offers 22% upside potential, warranting a "Buy" rating.

**Risks:** 1) Delays in drug development; 2) Slow expansion in new businesses; 3) Profit impact from healthcare policies like centralized procurement and reimbursement negotiations.