Zhejiang Medicine's 2025 earnings came under pressure as vitamin price increases failed to offset 1Q26 margin risks

Overview

This report is Morgan Stanley's review of Zhejiang Medicine Co. Ltd. (600216.SS) 2025 results. The company's 2025 revenue and earnings both declined year over year, and earnings came in significantly below consensus. The main pressures came from normalization of supply and demand after the BASF incident in the nutritional products segment, industry destocking, and price declines triggered by new capacity releases, as well as pressure on the formulations segment, especially anti-infective drug sales. The report also focuses on the impact of the Middle East crisis on vitamin pricing and margins in 1Q26.

Core views

The report's core view is cautious: although geopolitical tensions in the Middle East caused a sharp short-term rise in vitamin A and E prices, the increase was driven mainly by higher European energy costs and downstream advance stocking rather than a substantive improvement in demand. As a result, the report remains cautious about the sustainability of price and margin strength in 1Q26. In 2025, gross margins in both the nutritional products and formulations segments contracted materially, indicating that the company's earnings quality is still affected by the industry price cycle and domestic pharmaceutical price competition. NovoCodex's planned Hong Kong listing and relatively high financing valuation provide a potential asset revaluation angle, but this is not yet enough to offset pressure from the core business cycle.

Analysis framework

The report evaluates Zhejiang Medicine's earnings resilience and short-term margin risk by combining the company's reported results, Morgan Stanley estimate variance, revenue and gross margin changes by segment, customs data, industry commentary from BASF and DSM, and changes in spot vitamin prices. The valuation section uses a DCF methodology and also references the Morgan Stanley ModelWare framework.

Methodology notes

• Valuation methodsdiscounted cash flow

  DCF valuation

  The base-case assumptions include an 8.8% cost of equity, 4% perpetual growth, 12% long-term ROE on new investment, and a 30% net debt-to-equity ratio.

• research frameworkMorgan Stanley ModelWare

  institutional model framework

  Unless otherwise noted, the report's metrics are based on the Morgan Stanley ModelWare framework; some consensus data are provided by Refinitiv Estimates.

Asset mapping & comparison

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

• Zhejiang Medicine Co. Ltd. (600216.SS)

  Company covered in the report

  Strengths

  Short-term prices of vitamins A/E have surged; NovoCodex offers a potential biopharmaceutical asset revaluation and HKEx listing catalyst; the ESOP requires earnings CAGR of at least 10% in 2026 and 2027, providing some performance targets.

  Weaknesses

  2025 earnings declined year over year, and gross margins in both nutritional products and formulations contracted significantly; anti-infective drug sales were dragged down by price declines; vitamin price increases were driven mainly by costs and stocking, with insufficient demand support.

  Comparison

  The report cites recent commentary from BASF and DSM, noting that the pace of vitamin price declines had previously been faster than expected, reflecting industry supply-demand normalization, destocking, and pressure from new capacity releases.

  Risks

  A full recovery in European vitamin supply, price competition among domestic producers, and sharp price cuts in antibiotics by the Chinese government could all weigh on the company's performance.

Key data

• 2025 revenueRmb8,881mnDown 5.3% year over year, 1.5% above Morgan Stanley estimates.
• 2025 earningsRmb873mnDown 24.7% year over year, 27.4% below Morgan Stanley estimates.
• 4Q25 revenueRmb2,185mnDown 3.4% year over year.
• 4Q25 net lossabout Rmb60mnThe original report shows a net loss in 4Q25.
• Nutritional products segment salesdown 7.8% year over yearGross margin contracted by 10.2 percentage points to 44.4%.
• Formulations segment salesdown 2.7% year over yearGross margin contracted by 4.9 percentage points to 25.6%.
• Anti-infective drug salesdown 17.9% year over yearMainly affected by a decline in average selling prices, with volumes down 3.4%.
• Vitamin A price increase89.1%Up since early March 2026.
• Vitamin E price increase84.3%Up since early March 2026.
• NovoCodex valuationRmb3.7bnPost-money valuation after the Series C round, with a Hong Kong listing in progress.
• Target price historyRmb16.7The chart shows a target price of 16.7 on 2026-04-11.

Impact & implications

For investors, the near-term focus for Zhejiang Medicine is whether the rise in vitamin prices can translate into sustainable profit improvement and whether progress toward NovoCodex's listing can provide a valuation catalyst. However, the report emphasizes that the current price increases are mainly cost-driven; if European supply recovers, domestic competition intensifies, or the government pushes for lower antibiotic prices, the company's earnings recovery may be weaker than market expectations.

Risks

• A full recovery in European vitamin supply could cause vitamin prices to fall back.
• Price competition among domestic producers could squeeze profitability in the nutritional products segment.
• Sharp Chinese government cuts to antibiotic prices could further weigh on the formulations segment.
• If the Middle East crisis-driven price increases are mainly cost-push in nature, they may not be sustained as margin expansion.
• Industry destocking and new capacity releases may prolong the price-down cycle.

What to watch

• Whether vitamin A and E prices can hold in 1Q26 and whether they can pass through to the company's gross margin.
• The impact of European energy costs and supply recovery on supply-demand conditions in the vitamin industry.
• Progress on NovoCodex's Hong Kong listing and subsequent valuation changes.
• Price and volume trends in the formulations segment, especially anti-infective drugs.
• Completion of the 2026 and 2027 earnings CAGR targets under the ESOP.