China biotech keeps fans despite wild swings, high valuation

Hong Kong • Chinese biotechnology stocks have been hit by a wave of bad news since the summer.

Shares plunged about 30% from a peak through the end of last week as a vaccine scandal shook the entire healthcare industry.

Companies have been subject to short-seller attacks and the government’s efforts to lower drug prices. Despite the sector’s woes, valuations are still at elevated levels compared to global peers.

Yet analysts aren’t giving up on one of the most volatile groups in the Chinese market, citing the long-term growth potential of a rapidly developing industry.

Investors may agree with that view as a gauge of healthcare stocks staged its biggest rally in three years yesterday amid a rebound in the overall Chinese market.

“The business performance of biotech firms is far less volatile than the share prices,” said Haitong International Securities analyst Nicolas Wang.

“While the market will be more regulated, China has gradually launched supportive policies for the sector, including speeding up new drug approvals. Leading biotech companies are on the right track.”

Among the top biotech companies trading in Hong Kong and the mainland, Wuxi Biologics Cayman Inc, 3SBio Inc, Shenzhen Kangtai Biological Products Co and GenScript
Biotech Corp receive ‘Buy’ ratings from at least 80% of the analysts who cover them, even as they’ve lost more than 20% since the end of May. All four stocks soared yesterday, with GenScript surging 13%.

Biotechs started out on a strong note in 2018. Healthcare was the best sector in the CSI 300 Index of shares traded in Shanghai and Shenzhen, climbing 26% through the end of May, while the entire market fell 5.7%.

Investors poured into the US$122 billion (RM507.52 billion) drug industry as the government sought to overhaul regulations that had for decades slowed drug approvals and stifled innovation, with the aim of building homegrown champions.

Investors headed for the exits in mid-July after a vaccine scandal sparked a wave of consumer outrage, with biotechs leading the entire healthcare industry lower.

The Chinese government cracked down, and last week slapped a 9.1 billion yuan (RM5.46 billion) penalty on Changsheng Biotechnology Co that produced low-quality vaccines for infants and fabricated rabies vaccine data.

The CSI 300 Health Care Index last week touched the lowest level in more than a year. It jumped 5.1% yesterday, the most since September 2015 amid a rally in Chinese stocks.

Even after biotech’s recent drop, valuations are still high.

The CSI 300 healthcare gauge traded higher than an index of global peers as of last Friday.

Analysts aren’t worried about such comparisons.

“It’s not fair to say a fast-growing sector is expensive based on the valuation methods, because in the early development stage of an emerging industry, investors are willing to give high premium to companies that have potential,” said Haitong’s Wang.

Zhang Jialin, a senior healthcare analyst with ICBC International Research Ltd in Hong Kong, agrees. He said the current three-year ave- rage valuation level will be supported by the sector’s long-term outlook.

“We think the defensive character of the healthcare sector might be attractive in the turmoil environment,” he said. “Pharmas with good drugs will thrive in the long run.”

Lately, the group has proved more unpredictable than the rest of the market. The historical 120-day volatility of Chinese healthcare companies is far higher than for the overall market.

GenScript has seen the volatility up close. Among the first Chinese developers of so-called CAR-T cancer therapies, GenScript surged 440% last year. Then last month, it lost almost half its value after Flaming Research published a bearish report. GenScript denied the allegations in the report.

“Prices of the listed healthcare companies are just like riding roller coasters,” CEO Frank Zhang said in an interview last Wednesday.

“Lacking of sufficient knowledge on the highly technical sector due to its sophistication, investors, especially the retail investors, tend to overreact.” He’s optimistic the current volatility won’t last.

“I hope investors can be more patient,” said GenScript’s Zhang. “The industry in China is still young, but it’s catching up fast on new drug innovation. Once a new and effective drug is successfully launched, the profit is huge.” — Bloomberg