Traditional Chinese medicine companies are encountering industry headwinds, and Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (600332) continues to experience performance difficulties. Due to persistent factors including insufficient demand, intensified industry competition, and regulatory policies, Baiyunshan's net profit continued to decline in the first half of this year, marking the second consecutive year of interim net profit decline.

Analyzing Baiyunshan's business structure reveals vastly different development trajectories across its three major segments. The traditional medicine sector, as the company's core business, suffered a significant setback, with traditional Chinese medicine revenue declining by 20.12%. Baiyunshan, currently in an "adjustment period," welcomed new Chairman Li Xiaojun at the beginning of the year. Li faces the challenging task of leading Baiyunshan through multiple headwinds after delivering his first interim report since taking office.

**Interim Net Profit Decline**

In the first half of this year, Baiyunshan's net profit declined year-over-year once again.

Financial data shows that in the first half of this year, Baiyunshan achieved operating revenue of approximately 41.835 billion yuan, up 1.93% year-over-year; corresponding attributable net profit of approximately 2.516 billion yuan, down 1.31% year-over-year; and corresponding non-recurring net profit of approximately 2.206 billion yuan, down 5.78% year-over-year.

In the first half of 2024, the company achieved attributable net profit of approximately 2.55 billion yuan, down 9.31% year-over-year; corresponding non-recurring net profit of approximately 2.341 billion yuan, down 9.92% year-over-year.

Regarding the reasons for declining performance, Baiyunshan stated that due to persistent factors including insufficient demand, intensified industry competition, and regulatory policies, some of the company's business operations experienced decreased performance.

However, looking at quarterly performance, while Baiyunshan's performance declined significantly in the first quarter, second-quarter net profit showed signs of recovery.

According to financial data, in the first quarter of this year, Baiyunshan achieved operating revenue of approximately 22.47 billion yuan, down 2.06% year-over-year; corresponding attributable net profit of approximately 1.821 billion yuan, down 6.99% year-over-year. In the second quarter, the company achieved operating revenue of approximately 19.36 billion yuan, up 6.99% year-over-year; corresponding attributable net profit of approximately 695 million yuan, up 17.48% year-over-year.

Additionally, Baiyunshan plans to distribute interim dividends, with the company distributing profits based on total issued shares registered on the equity distribution record date, paying cash dividends of 0.4 yuan per share (including tax) to all shareholders, with total proposed cash dividends of approximately 650 million yuan (including tax).

**Business Segment Performance Divergence**

By business segment, Baiyunshan's major business divisions showed significant performance divergence in the first half of the year.

According to company information, Baiyunshan operates four major business segments: traditional medicine, health products, commercial distribution, and healthcare services.

Specifically, the traditional medicine segment primarily engages in research, development, manufacturing, and sales of Chinese and Western patent medicines, chemical raw materials, chemical intermediates, biopharmaceuticals, and natural medicines. Main traditional Chinese medicine products include Xiao Chai Hu granules, Zishen Yutai pills, and Qingkaiming series, while chemical products include sildenafil citrate (brand name "Jinge") and cefuroxime sodium injection. The health products segment primarily produces, develops, and sells beverages, foods, and health supplements, with main products including Wang Laoji herbal tea. The commercial segment primarily handles pharmaceutical distribution, including wholesale, retail, and import/export of pharmaceutical products, medical devices, and health supplements. The healthcare services segment remains in the layout and investment expansion phase.

Baiyunshan's interim report shows that in the first half of the year, the traditional medicine segment achieved main business revenue of 5.241 billion yuan, down 15.23% year-over-year; the health products and commercial segments achieved main business revenue of 7.023 billion yuan and 29 billion yuan respectively, up 7.42% and 4.25% respectively year-over-year.

Looking specifically at the traditional medicine segment, traditional Chinese medicine achieved main business revenue of approximately 3.246 billion yuan, down 20.12% year-over-year; chemical medicine main business revenue also declined to 1.994 billion yuan, down 5.85% year-over-year. In terms of gross margins, traditional Chinese medicine gross margin was 44.05%, up 0.75 percentage points year-over-year; chemical medicine gross margin was 58.93%, down 3.12 percentage points year-over-year.

The revenue decline in traditional Chinese medicine deserves particular attention. In recent years, domestic traditional Chinese medicine regulation has intensified, with stricter price governance bringing operational pressure to companies like Baiyunshan. Meanwhile, industry homogenization competition has intensified, with the number of approved traditional Chinese medicines increasing in recent years, further compressing market space.

An industry expert noted that regulatory policies significantly impact traditional Chinese medicine, such as pharmaceutical procurement policies potentially leading to price declines and affecting revenue. Additionally, traditional Chinese medicine prescription volumes are relatively small. Furthermore, the complex composition of traditional Chinese medicines makes it difficult to identify exact components, making clinical evidence challenging to obtain, resulting in most products being unable to become first-line treatments. These factors may explain the significant decline in the company's traditional Chinese medicine revenue.

**R&D Expenses Down Nearly 30% Year-over-Year**

Baiyunshan's emphasis on marketing over R&D has been widely criticized by the market. From the first half of this year, the gap between the company's R&D expenses and sales expenses has widened further.

The interim report shows that in the first half of this year, Baiyunshan's R&D expenses were 285 million yuan, down 27.06% year-over-year. Taking a longer view, Baiyunshan's R&D expenses show a clear declining trend. In the first half of 2022-2024, Baiyunshan's R&D expenses were 441 million yuan, 401 million yuan, and 391 million yuan respectively, showing a year-over-year declining trend.

Additionally, in the first half of this year, Baiyunshan's sales expenses were 3.028 billion yuan, down 2.92% year-over-year. While also in decline, this remains far higher than R&D expenses, with the decline significantly smaller than the R&D expense decline.

An industry analyst stated that for established traditional Chinese medicine companies, R&D expenses are important but long-neglected metrics. Traditional Chinese medicine modernization requires sustained R&D investment, including dosage form improvements and evidence-based medical research. Declining R&D will affect product iteration capabilities, making it difficult to respond to market changes. Additionally, the long-term model of emphasizing marketing over R&D is unsustainable and may face innovation challenges. The analyst recommends Baiyunshan adjust its R&D strategy, focusing on advantageous areas; balance marketing and R&D investment, accelerate product structure transformation, and layout emerging growth points.

Notably, Baiyunshan has experienced management turbulence since 2024. In July 2024, former Chairman Li Chuyuan suddenly resigned, followed by reports that he was under investigation for suspected serious disciplinary violations. In January this year, Li Xiaojun assumed the position of Chairman of Baiyunshan. Li Xiaojun reportedly has extensive experience in corporate management, disciplinary inspection, financial and tax management, resource integration, and reform innovation. Under performance pressure, how this new leader balances Baiyunshan's short-term performance with long-term innovation investment remains to be seen by investors.