20180808-中国银河国际证券-Healthcare_sector–_Don_t_throw_the_baby_out_with_the_bathwater_10页_749kb

Healthcare Sector Summary: Don't Throw the Baby Out with the Bathwater

Core Content

The healthcare sector in Hong Kong has experienced a correction since early June 2018, influenced by a combination of factors including profit-taking after a re-rating since 2017, the vaccine incident and the movie Dying to Survive, which highlighted systemic issues in China's medical system, and the RMB depreciation of about 6%. Despite these challenges, the report argues that the sector's fundamentals remain strong, and that the correction presents opportunities for bottom-fishing.

Main Points

• Sector Correction Drivers:

  • Profit-taking following a re-rating since 2017.
  • Public backlash from the vaccine incident and the movie, which exposed long-standing issues such as quality regulations, high drug prices, and high marketing expenses.
  • RMB depreciation impacting investor sentiment.

• Why the Sector Remains Attractive:

  • Resilience to Trade Disputes: The healthcare sector is largely unaffected by trade tensions.
  • Strong Financials: Leading companies have robust cash flows and balance sheets.
  • Valuation Opportunities: After the correction, some stocks have become relatively undervalued.

• Preferred Stocks for Investment:

  • CTCM [570.hk]: Exports CCMG to Germany, with regular inspections.
  • Shanghai Pharm [2607.hk]: Strong pharmaceutical logistics business, not affected by the vaccine incident.
  • Genscript [1548.hk]: Strong potential from CAR-T therapy, with clinical results reported at major U.S. oncology conferences.
  • CSPC [1093.hk]: Strong U.S. ANDA pipeline and solid financials.

Key Information

Valuation Analysis

• CSPC:

  • PEG ratio is 0.96x, indicating fair value.
  • Estimated fair value at HK$30.5/share, implying a 60% upside.
  • Share buy-back plan of up to HK$700m.

• Genscript:

  • CAR-T therapy has potential to treat ~19,000 patients/year, generating RMB9.5bn revenue.
  • With a 30% profit margin, profit is estimated at RMB2.9bn in 2023.
  • Current valuation at ~HK$28/share based on 25x PER for 2018.
  • Fair value at ~HK$30.5/share, considering existing CRO business.

• Wuxi Bio [2269.hk]:

  • Valuation at ~1.2x PEG, which may not be excessive due to efficient operations, FDA-compliant cGMP, and potential for stable CMO revenue.
  • EPS CAGR in 2017-2019E ranges from 68% to 100%, narrowing in the medium to long term to 68%-74%.

• Traditional Medicine (CTM):

  • CTCM [570.hk] has a PEG ratio of 0.7x, which is reasonable.
  • The CTM sub-sector is considered one of the top picks due to its long-term growth potential.

• Distributors:

  • The distribution sub-sector has attractive valuations.
  • Industry consolidation is expected to benefit leading distributors, especially with the implementation of the "two invoice system."
  • Tender price cuts are anticipated to be reflected in 2018, improving margins.

Investment Thesis

• Investor Prudence: Investors are more cautious and prefer companies with strong fundamentals and international exposure.

• International Certifications and Collaboration:

  • CTCM has collaborations with Tsumura (JP) and exports to Germany.
  • Shanghai Pharm has U.S. ANDA applications and European CEP certifications.
  • Genscript has collaborations with Janssen Biotech and accepted foreign clinical trial data by CFDA.
  • CSPC has a strong U.S. ANDA pipeline and is focused on innovative drug development.

• Market Reforms:

  • China's healthcare system is undergoing reforms, including stricter regulations, GMP compliance, and zero price mark-up.
  • These reforms aim to reduce corruption and improve quality, aligning with investor expectations.

Conclusion

The report emphasizes that the sector's structural de-rating is overly bearish, as key fundamentals remain intact. The preferred stocks are those with international exposure, strong R&D pipelines, and solid financials. The current correction offers opportunities for investors, especially in companies with attractive valuations and growth potential.