Long term growth in China’s healthcare sector
In March, ongoing geopolitical tensions between the US and China and regulatory uncertainty continued to weigh on China’s healthcare industry.
During the period, our exposure to the biotechnology sector was hit. On top of the rising global interest rate environment negatively impacting valuations, the market remains worried about risks that the US FDA may tighten the approval of innovative drugs from China, hindering the export of Chinese innovative medicines. Although this may delay the internationalization of our holdings, we remain constructive toward them as their existing portfolio and pipelines in China remain decent. Meanwhile, our holdings of pharmaceutical companies also detracted as investors are concerned about the impacts of the GPO. That said, we view that GPO impacts are short-term, and our holdings, which are high-quality leaders in the industry, should eventually benefit longer-term as the industry consolidates.
On the other hand, investors paid more attention to COVID-related beneficiaries amid the resurging COVID infections in China. Our exposure to life sciences tools and services yielded positively, also benefitting from continued strong overseas demand. These include some of our holdings in the supply chain of a COVID oral pill production. Our holdings of healthcare distributors also yielded positively. Previously, the valuations of these companies were very low, and the market has noticed that some of these companies may benefit from the distribution of COVID-19 drugs and vaccines.
While there is a sharp fall for the renminbi due to the Fed’s tightening policy, the currency risk is not high for China healthcare companies. Some CXO companies can even benefit from the currency depreciation as a significant part of their revenue is in US dollars. The expectation of an accelerated rate hike in the US continues to hurt the valuations of biotech companies, which relies on the DCF of future earnings and are sensitive to rate hikes. A weak economy is typically not a key factor affecting healthcare demand. Despite the pandemic, we continue to see solid healthcare demand this year.
In a volatile macro environment, we expect the healthcare sector to stay more resilient, as demand for healthcare products and services is relatively inelastic. More recently, the resurgence of the pandemic has made China realize the need to have more hospitals and facilities, and we are seeing increasing investment in healthcare infrastructure in China, as well as opportunities in oral drug and vaccine-related development. That said, it is still crucial to manage risks and take into account how companies are positioned in the current market environment. Healthcare spending has a low correlation with economic growth and therefore offers a more stable long-term growth perspective.
We remain confident in the long-term outlook of China’s healthcare sector. We continue to favor leading companies with better core competitiveness in the long term, especially those that will benefit from sustainable healthcare demand growth trends and low labor costs. Currently, we see more investment opportunities as many high-quality companies in the sector are trading at attractive valuations.
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The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This commentary has not been reviewed by the Securities and Futures Commission. Issuer: Value Partners Hong Kong Limited.
Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.
This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited. Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.
This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.