2026 TCM Sector Contrarian Strength: An Industry Revaluation Driven by Policy, Demand, and Supply Reshaping

Keywords: TCM Sector, Industry Revaluation, Policy Dividends, Volume-Based Procurement Reform, Innovative TCM, SOE Reform, Brand OTC, Guochao Health, Going Global

Introduction

In 2026, the overall pharmaceutical sector remains weak, but amidst the downturn, the TCM (Traditional Chinese Medicine) sector has bucked the trend, becoming a core direction for sustained capital influx. Unlike past reliance on concept rotation and short-term sentiment speculation, the underlying logic of this TCM rally is closer to an industry-level value revaluation. Whether in terms of industry scale expansion, increased policy support, upgraded consumer demand, or rising concentration of leading companies, the TCM industry has entered a critical phase of shifting from "quantitative growth" to "qualitative improvement."

More importantly, this change is not isolated but results from the simultaneous force of policy, supply, and demand. For the capital market, this means the TCM sector is no longer just a defensive variety but a long-term track with growth attributes, reform attributes, and internationalization imagination space.

1. Industry Fundamentals Improve, TCM Transforms from 'Lukewarm' to Growth Pole

From the data, the prosperity of the TCM industry is steadily recovering. In 2024, the TCM industry scale exceeded 1 trillion RMB for the first time, and is expected to reach 1.2 trillion RMB in 2025, with a compound annual growth rate of about 8.5%, leading among global traditional medicine markets. Meanwhile, the TCM material price index has fallen from its peak in July 2024, with prices of major varieties like astragalus, angelica, and largehead atractylodes gradually returning to rational levels, significantly easing corporate procurement cost pressures.

Cost reduction is only the surface. The deeper change lies in the shift of industry logic. In the past few years, the TCM industry relied to some extent on raw material price hikes and channel expansion to drive performance. Now, the industry is transitioning to quality management, R&D innovation, and brand premium. In 2025, 26 new TCM drugs were approved in China, setting a historical record. In Q1 2026, TCM export value grew nearly 40% year-over-year. These signals indicate that TCM is no longer just a domestic consumer category but has opened new growth space in new drug R&D, international certification, and overseas market expansion.

In other words, the industry has shifted from a "price hike logic" to a "quality logic." During this transition, the most advantageous are not small and medium enterprises chasing short-term elasticity but leading companies with brand, channel, R&D, and compliance capabilities.

2. Triple Engines Resonate, Sector Enters Medium-to-Long-Term Allocation Window

1. Policy Dividends Begin to Materialize

The long-term prosperity of the TCM sector cannot be separated from continuous policy support. In February 2026, eight departments including the Ministry of Industry and Information Technology jointly issued the "Implementation Plan for High-Quality Development of the TCM Industry (2026-2030)," proposing to cultivate a batch of leading TCM industrial enterprises by 2030 and build 60 high-standard raw material production bases. In March, the "Special Regulations on TCM Production Supervision" officially came into effect, marking a more systematic and standardized phase for the TCM production supervision system.

Such policies are not simply "bottom-supporting" but are reshaping industry order. High-standard raw material base construction, production standard improvement, and quality traceability system perfection will raise industry barriers, driving resources toward leading enterprises. At the same time, 114 new drugs were added to the medical insurance catalog in 2025, including 7 proprietary Chinese medicines, all exclusive innovative varieties involving companies such as Yiling Pharmaceutical, Sanjiu Medical, and Kanion Pharmaceutical. The inclusion of innovative TCM in the medical insurance catalog means increased recognition from the payer side, significantly enhancing certainty of terminal volume release.

2. Volume-Based Procurement Is No Longer Just Pressure but Industry Shakeout

In the past, market concerns about volume-based procurement (VBP) mainly came from price compression. But entering 2026, the rules for TCM VBP have noticeably shifted toward a "high quality, reasonable price" orientation. Quality factors such as authentic origin, GAP base certification, and traditional processing techniques have gained more weight in evaluations, meaning VBP competition is no longer just about low prices but about supply chain, craftsmanship, and quality systems.

This is actually beneficial for leading companies. The reason is simple: leading companies have more stable raw material sources, stronger compliance capabilities, and more comprehensive quality management systems, allowing them to obtain larger market shares with better cost performance in VBP. Data shows that the market share of the top 50 proprietary Chinese medicine companies has reached 63%, with concentration continuing to rise. In contrast, small and medium enterprises face increasing operating pressure due to rising compliance costs and enhanced traceability requirements, and the industry shakeout is accelerating.

Therefore, VBP is not simply negative for the TCM sector but a high-quality shakeout. In the short term, it compresses the profit space of some companies; in the medium to long term, it strengthens the competitive advantages of leading companies.

3. Demand-Side Upgrade, Guochao Health Becomes New Growth Curve

Changes on the demand side are also noteworthy. Today, consumer perception of TCM is no longer limited to "treating illness" but extends to "health preservation," "conditioning," "prevention," and "daily consumption." Surveys show that over 60% of consumers are willing to pay a premium for "traceable, pollution-free" TCM materials, indicating that quality and safety have become core purchasing factors.

More notably, the "Guochao (National Trend) Health" movement driven by Gen Z is becoming a new consumption hotspot. New scenarios such as TCM tea drinks, health-preserving hotpot, formula granules, and medicinal-food homologous products are emerging. For example, Jiangzhong's "Jianxiao Zongzi" (health-promoting rice dumpling) sold over 500,000 boxes in a single month, a typical case of TCM products becoming younger and scenario-based. Meanwhile, online channels now account for nearly half of sales, with live-streaming e-commerce, community group buying, and other models further accelerating the downward penetration and touch efficiency of TCM products.

This means the demand side of the TCM industry is not shrinking but upgrading. Changes in consumption habits extend TCM from traditional hospital and pharmacy scenes to home consumption, daily health care, and gift markets, raising the industry ceiling once again.

3. True Winners Are Often Three Types of Companies

Under the industry revaluation backdrop, the market is not universally rising but structurally diverging. The companies that truly benefit are mainly concentrated in three categories.

Category 1: Old-Established Brand Leaders

Examples include Yunnan Baiyao, Tongrentang, Pien Tze Huang, and Dong'e Ejiao. Their core advantages lie in secret formulas, brand reputation, and long-term pricing power. Gross margins are generally high, with strong consumer attributes and the ability to cross cycles. Especially against a backdrop where consumers increasingly value brand and trustworthiness, the moat of old brands is being repriced.

Category 2: SOE Reform Targets

Companies such as Sanjiu Medical and Tasly are benefiting from resource integration and management optimization. State capital entry not only brings capital support but also promotes product line consolidation, channel synergy, and operational efficiency. For such companies, reform dividends often manifest in margin repair and medium-to-long-term market share increase.

Category 3: Innovative TCM Enterprises

Innovative TCM drugs are moving from concept to reality. Tasly's Compound Danshen Dripping Pills passed FDA Phase III clinical trials, and Yiling Pharmaceutical's Lianhua Qingwen overseas revenue share has significantly increased, indicating that TCM going global is no longer pure imagination but gradually has verifiable commercial paths. With international registration, clinical evidence, and overseas channels gradually improving, the long-term space for innovative TCM deserves sustained attention.

4. How Ordinary Investors Should View This Opportunity

For ordinary investors, the TCM sector is more suitable for a medium-to-long-term perspective rather than chasing short-term fluctuations. Although the sector has recovered from the bottom, fundamental delivery is still ongoing, and performance improvement, policy implementation, and VBP shakeout all take time.

In terms of allocation thinking, three main lines can be emphasized: first, brand OTC companies, benefiting from independent pricing power and out-of-hospital channel expansion; second, innovative TCM companies, benefiting from medical insurance volume release and overseas expansion; third, SOE reform targets, benefiting from resource integration and efficiency improvement. At the same time, risks such as new regulations on TCM decoction piece traceability codes, VBP price pressure, and insufficient compliance capabilities of small and medium enterprises should also be watched out for.

Conclusion

Overall, the TCM sector in 2026 is no longer a traditional defensive track but a growth-oriented sector driven by policy support, demand upgrade, and supply reshaping. The industry is moving from experience-driven to data-driven, from extensive expansion to high-quality development, and from domestic consumption to global competition.

This means opportunities in the TCM sector are not a short-term fad but an industry revaluation lasting several years. The true winners in the future may not be the best storytellers but companies that can simultaneously grasp authentic resources, quality management, brand channels, and innovation capabilities. For the market, this may just be the beginning of a new era for TCM.