Zhejiang Medicine's 1Q26 earnings under pressure, vitamin price shock seen as temporary

Overview

This report is Morgan Stanley's review of Zhejiang Medicine's 1Q26 results. The core view is that the company's revenue was broadly in line with expectations, but earnings, gross margin, and operating cash flow were under pressure; the short-term rise in vitamin prices caused by the Middle East conflict was driven more by customer stockpiling in response to higher energy and transportation costs than by persistent supply-demand tightness, so the price shock may only be temporary.

Core views

The report believes that after rising briefly in March, vitamin prices have stabilized and edged down slightly, with the dominant factor still being supply recovery following BASF's July 2024 fire, and prices continuing to normalize through 2025 and early 2026. Customer stockpiling in March may have pulled forward some 2Q sales, putting pressure on subsequent year-on-year trends. On valuation, the report considers 13x 2026e P/E reasonable and believes it already reflects price volatility.

Analysis framework

The report compares the company's actual 1Q26 revenue, earnings, gross margin, and operating cash flow with Morgan Stanley's expectations and year-on-year performance, and combines this with vitamin A/E price trends, European supply recovery, customer stockpiling behavior, ESOP earnings targets, DCF valuation, and P/E valuation to assess earnings quality, price sustainability, and the stock's relative rating.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The base case uses a discounted cash flow method, assuming an 8.8% cost of equity, a 4% terminal growth rate, a long-term ROE on new investments of 12%, and a net debt-to-equity ratio of 30%.

• Valuation methodsP/E

  Price-to-earnings valuation

  The report considers 13x 2026e P/E reasonable because vitamin price volatility needs to be incorporated.

• ModelMorgan Stanley ModelWare

  Morgan Stanley internal model framework

  Unless otherwise stated, financial metrics are based on Morgan Stanley ModelWare; consensus data is provided by Refinitiv Estimates.

Asset mapping & comparison

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

• Zhejiang Medicine (600216.SS)

  Core covered stock

  Strengths

  The vitamin business has price elasticity, the ESOP requires more than 10% CAGR in 2026 and 2027 earnings relative to the 2023-25 average, and the NovoCodex ADC pipeline provides potential growth optionality.

  Weaknesses

  1Q26 earnings declined year-on-year, gross margin and operating cash flow weakened, and vitamin prices have continued to normalize after supply recovery.

  Comparison

  The stock is rated Equal-weight, implying that expected risk-adjusted total return over the next 12-18 months is broadly in line with the industry coverage average.

  Risks

  Further declines in vitamin prices, customer stockpiling pulling forward 2Q demand, price competition from domestic producers, and significant government price cuts for antibiotics.

• Vitamin A/E business

  Main source of earnings and price volatility

  Strengths

  The Middle East conflict once drove a short-term price rebound, and continued global supply shortages could pose upside risk.

  Weaknesses

  Average 1Q prices were still sharply down year-on-year, and by the time of the report had fallen 15.3% and 14.0%, respectively, from the mid-April highs.

  Comparison

  The report believes supply recovery is more important than the Middle East shock, and the price trend remains tilted toward normalization.

  Risks

  Full recovery of European supply, intensified domestic competition, and demand being pulled forward by earlier stockpiling.

• NovoCodex / ARX305

  Subsidiary and ADC pipeline catalyst

  Strengths

  ARX305 initiated Phase II clinical trials in China, targets CD70, uses the MMF-derived amberstatin269 as payload, and has potential clinical data catalysts.

  Weaknesses

  It remains at the clinical stage, and there is uncertainty around commercialization and clinical success rates.

  Comparison

  Compared with the traditional vitamin and antibiotic businesses, the ADC pipeline offers higher growth elasticity but also higher risk.

  Risks

  Clinical data falling short of expectations, uncertainty in the listing process, and execution risk in the Hong Kong listing plan.

Key data

• 1Q26 revenueRmb2,191mnDown 2.9% year-on-year and 1.1% above Morgan Stanley's expectations.
• 1Q26 earningsRmb287mnDown 29.8% year-on-year and 23.1% below Morgan Stanley's expectations.
• Gross margin35.1%Down 8.3 percentage points year-on-year, mainly affected by the high base from earlier supply shortages and price normalization.
• Operating cash flow同比下降67.2%Indicates cash flow performance was weaker than the revenue side.
• Average vitamin A/E price in 1Q分别同比下降51.9%和38.0%Although prices rose in March due to the Middle East crisis, the average 1Q prices were still significantly below the same period last year.
• Target priceRmb16.70Based on the April 23 closing price of Rmb14.65, implying 14% upside.
• 2026e EPSRmb1.12Morgan Stanley forecast disclosed in the table.
• 2026e P/E13.1xValuation multiple disclosed in the table, close to the 13x 2026e P/E that the report considers reasonable.

Impact & implications

From an investment perspective, the report does not view the vitamin price increase triggered by the Middle East conflict as a sustainable upward driver, but instead emphasizes uncertainty arising from price volatility and supply recovery. In the short term, stockpiling in March may pressure 2Q sales year-on-year; in the medium term, renewed global supply shortages or strong ADC/oncology biologics clinical data could create upside risk.

Risks

• Upside risks include continued global supply shortages, strong clinical data for oncology biologics, and new product launches such as next-generation antibiotics.
• Downside risks include full recovery of European vitamin supply, price competition from domestic producers, and significant Chinese government price cuts for antibiotics.
• Customer stockpiling in March may have pulled forward some 2Q sales, weighing on subsequent year-on-year trends.
• Vitamin price volatility may continue to affect earnings and valuation.

What to watch

• Whether vitamin A and E prices continue to fall from their mid-April highs.
• The progress of BASF and European vitamin supply recovery.
• Whether 2Q26 sales are affected by customer stockpiling being pulled forward in March.
• Readout of NovoCodex ARX305 Phase II clinical data.
• Whether the company can achieve the ESOP requirement of more than 10% earnings CAGR in 2026 and 2027.