20180524-中国银河国际证券-Healthcare_sector__What_is_the_most_attractive_valuation_niche__6页_652kb

Healthcare Sector: Most Attractive Valuation Niche Summary

Core Content

This report, authored by Harry He and Wong Chi Man, CFA, provides an analysis of the healthcare sector's valuation dynamics in 2017 and 2018, with a focus on identifying sub-sectors with attractive valuations and growth potential. The analysis highlights the divergence in performance among leading pharmaceutical companies and smaller players, and evaluates the valuation levels of different sub-sectors to find opportunities for investors.

Main Points

1. Overall Healthcare Valuation Pressure

   • Both A-share and H-share healthcare sectors have seen a recovery since 2017, following underperformance in 2016 due to government policies like tender price cuts and drug sales percentage caps.
   • The H-share healthcare sector currently has a valuation premium of ~90% compared to the overall H-share market, which is significantly higher than the three-year average of ~56% and lies more than 2 standard deviations above.
   • The A-share healthcare sector's valuation premium (~75%) is relatively moderate and not excessively high compared to its historical average.
   • Therefore, the H-share healthcare sector may face pressure to narrow its valuation premium, while A-shares remain relatively safer.

2. Leading Innovative Drug Names at Risk of Overshooting

   • Leading pharmaceutical companies, such as Hengrui (A-share) and CSPC (H-share), have seen their valuations reach historical highs.
   • Their absolute TTM valuations and relative premiums to the market have both reached near 100%, indicating potential short-term valuation pressure.
   • Investors are advised to be cautious of these names and consider alternative sub-sectors with better margin of safety.

3. CTM Sub-sector Still Has Upside Room

   • The Chinese Traditional Medicine (CTM) sub-sector, represented by CTCM (570.hk) and Shineway (2877.hk), has shown strong performance.
   • CTM is supported by solid fundamentals and positive market sentiment.
   • The sub-sector may still have ~10–13% upside potential, assuming it reaches its historical high of ~20% premium to the healthcare sector.

4. Distributors Offer Attractive Valuation with Turnaround Story

   • Distributors are identified as the most attractive sub-sector due to their relatively low valuations and strong industry turnaround potential.
   • Key reasons for this include the consolidation effects of the "two invoice system," the completion of quality assessments for chemical generics, the reflection of tender price cuts in 2018, and the emergence of new growth engines such as retail expansion and medical device distribution.
   • Leading distributors like Shanghai Pharm (2607.hk) and CTCM (570.hk) are highlighted as potential investment opportunities.

Key Information

• Stock Picks: CTCM (570.hk) and distributor names, including Shanghai Pharm (2607.hk), are recommended.
• Valuation Metrics: The report uses PER (TTM), PBR, and EV/EBITDA to evaluate stock valuations.
• Market Sentiment: The healthcare sector has seen defensive capital flows due to the China-U.S. trade war, which has positively impacted the sector.
• Stock Valuation Table:

Equity Ratings Explanation

• BUY: Share price is expected to increase by >20% within 12 months.
• SELL: Share price is expected to decrease by >20% within 12 months.
• HOLD: No clear catalyst; downgraded from BUY pending clearer signals.

Disclaimer

• This report is not directed at any person or entity in jurisdictions where distribution would be illegal.
• No warranty or guarantee is made regarding the accuracy or completeness of the information.
• The report is for institutional clients only and should be read in conjunction with the disclaimer.

Disclosure of Interests

• China Galaxy International may have financial interests in the companies mentioned.
• The company may have served as a manager or co-manager in public offerings or provided significant investment advice.
• Compensation may have been received from the companies mentioned in the past 12 months.

Analyst Certification

• The views expressed accurately reflect the analyst's personal opinions.
• No compensation was directly or indirectly related to the views in the report.
• The analyst has not traded in the securities covered in the last 30 days and will not do so within three business days of the report's release.