Yunnan Baiyao's 2025 results were slightly below expectations, but dividends and manufacturing growth support the positive rating

Overview

This report is Morgan Stanley's summary of the key points from Yunnan Baiyao Group's 2025 earnings call. The company achieved year-on-year growth in both revenue and profit in 2025, but results were slightly below Morgan Stanley's forecasts. The report focuses on the quality of manufacturing growth, core drug performance, consumer health categories, cash flow and high dividend payouts, as well as the growth path for 2026 centered on clinical value, pain management, in-hospital scenarios, and online O2O channels.

Core views

The report is broadly positive: although 2025 financial results were slightly below expectations and consensus EPS for the next 12 months points to a modest downgrade, Yunnan Baiyao still has support from stable cash flow, high dividends, core product growth, and online channel expansion. Manufacturing is the clearest highlight, pharmaceutical business and core products are growing quickly, and Baiyao toothpaste continues to hold the No. 1 market share in China. Growth drivers in 2026 will come from extensions of traditional medicine series, pain management, expansion into in-hospital use cases, and growth in e-commerce/O2O channels.

Analysis framework

The report analyzes earnings comparisons, segment operating performance, management guidance, cash flow and dividend policy, valuation models, and risk scenarios; the financial basis mainly follows the Morgan Stanley ModelWare framework, while some consensus estimate data come from Refinitiv Estimates.

Methodology notes

• Valuation methoddiscounted cash flow

  DCF base case valuation

  The base case uses a discounted cash flow approach, assuming 8.5% cost of equity, 12.5% long-term ROE, a 3% steady-state revenue growth rate, reaching steady state in about 20 years, and a 25% net debt-to-equity ratio.

• Financial modelMorgan Stanley ModelWare

  Morgan Stanley's internal financial modeling framework

  Unless otherwise stated, most financial metrics in the report are based on the Morgan Stanley ModelWare framework.

• Consensus estimatesRefinitiv Estimates

  Market consensus estimates

  Data marked as consensus estimates are provided by Refinitiv Estimates and are used for comparison with Morgan Stanley forecasts and the company's actual results.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Yunnan Baiyao Group 000538.SZ

  Research subject / A-share equity asset

  Strengths

  Overweight rating, Attractive sector view, and a Rmb66 target price; high dividends, growing operating cash flow, strong core drug and manufacturing performance, and rapid O2O e-commerce growth.

  Weaknesses

  2025 revenue and profit were slightly below Morgan Stanley's forecasts, 4Q25 profit declined YoY, and manufacturing gross margin contracted slightly.

  Comparison

  The current price of Rmb56.78 implies about 16% upside to the Rmb66.00 target price; historically, the target price has gradually been reduced from about Rmb74.5 in 2023 to Rmb66 in 2026.

  Risks

  A lack of a concrete business plan after the Shanghai Pharmaceuticals investment, continued investment in non-healthcare listed equities, and a slowdown in China's economy and consumer demand.

Key data

• 2025 revenueRmb41.2bnUp 2.9% YoY, 3.7% below Morgan Stanley's forecast.
• 2025 profitRmb5,153mnUp 8.5% YoY, 1.2% below Morgan Stanley's forecast.
• 4Q25 revenueRmb10.5bnUp 4.1% YoY.
• 4Q25 profitRmb376mnDown 11.0% YoY.
• Dividend payout ratio90% of earnings35% from special dividends and 55% from annual dividends, implying a yield of about 4.6%.
• 2025 operating cash flowRmb4,600mnUp 7.0% YoY; about 90% of accounts receivable mature within one year.
• Manufacturing revenueRmb16.0bnUp 10.7% YoY, with gross margin contracting slightly by 0.7 percentage points.
• Pharmaceutical business growth12.5%Supported by 18% growth in core products.
• E-commerce GMVRmb500mnUp 139% YoY in 2025; O2O is seen by management as a key driver for 2026.
• Target price and upsideRmb66.00 / 16%Calculated based on the Rmb56.78 closing price on 2026-04-02.

Impact & implications

For investors, the near-term debate around Yunnan Baiyao is the slightly below-forecast 2025 results and consensus EPS downgrades, but its medium- to long-term appeal comes from high cash dividends, manufacturing growth, core drug volume growth, rapid online channel expansion, and its leading position in consumer health. If management can translate a clinical-value orientation, expansion into in-hospital scenarios, and the Shanghai Pharmaceuticals partnership into concrete business outcomes, there is still room for valuation and earnings expectations to move higher.

Risks

• If the Shanghai Pharmaceuticals investment lacks a concrete business plan, it may weaken synergy expectations.
• Continued investment in non-healthcare listed equities may affect capital allocation quality and investor confidence.
• A slowdown in China's economy and consumer demand may weigh on consumer health and related product growth.
• The 4Q25 profit decline and slightly below-forecast 2025 results may lead the market to lower short-term earnings expectations.

What to watch

• Whether the 2026 guidance for low-single-digit revenue growth and high-single-digit profit growth can be achieved.
• Progress on the pain management product line and new extension products for the 14 traditional medicine series.
• Whether expansion into in-hospital use cases can drive volume growth in high-value, high-quality products.
• Whether the O2O and e-commerce channels can sustain the 139% GMV growth momentum achieved in 2025.
• Whether the Shanghai Pharmaceuticals partnership leads to new product lines, marketing initiatives, or quantifiable business plans.
• Whether the dividend policy and operating cash flow remain stable.