Core Viewpoint - The Chinese herbal medicine sector is expected to see a gradual recovery in gross margins in H2 2025 as the pressure from high-priced raw materials diminishes, despite ongoing operational challenges for companies and weak OTC demand [1][2]. Group 1: Industry Performance - In H1 2025, the total revenue of 64 Chinese herbal medicine companies was 172.9 billion yuan, a year-on-year decrease of 4.95%, while the net profit excluding extraordinary items was 19.1 billion yuan, down 9.31% year-on-year [2]. - The gross margin for the sector in H1 2025 was 42.05%, a decline of 1.01 percentage points year-on-year, and the net profit margin excluding extraordinary items was 11.04%, down 0.56 percentage points year-on-year [2]. - The prices of Chinese medicinal materials have stabilized since mid-2024, with a notable decline starting in May 2025, which is expected to alleviate cost pressures in H2 2025 [2]. Group 2: Financial Metrics - The median expense ratio for the herbal medicine sector in H1 2025 was 44.5%, an increase of 1.5 percentage points compared to the same period in 2024, while the median sales expense ratio was 31.6%, a slight decrease of 0.1 percentage points [3]. - The ratio of accounts receivable plus notes receivable to total revenue was 48.8%, and the inventory to total assets ratio was 12.3%, indicating an increase in accounts receivable as a proportion of total revenue compared to 2024 [3]. - Operating cash flow showed a slight improvement year-on-year in H1 2025, indicating enhanced collection efforts by herbal medicine companies [3]. Group 3: OTC Market Dynamics - The OTC demand remains weak, with a median revenue growth rate of -7.6% and a net profit growth rate of -19.7% for 22 OTC-focused herbal medicine companies in Q2 2025, indicating greater operational pressure compared to the overall sector [4]. - The retail scale of physical pharmacies in China for H1 2025 was 296.1 billion yuan, reflecting a year-on-year decline of 2.2%, which corroborates the weak OTC demand [4]. - Despite short-term demand pressures, the consolidation of retail pharmacies is expected to accelerate the concentration of the OTC market, with leading products gaining market share [4].