China Healthcare
Year of the Snake – Shaping
Up to Be a Volatile 2013
Both positive and negative forces will weigh on the
industry in 2013. Policy uncertainties may put
pressure on performance in early 2013, but stable
fundamentals could cause a rally in subsequent
quarters. Our top picks are China Pharm,
Tongrentang Tech, and Sino Biopharm.
2013 may start with profit taking as: 1) Perceived
negative policies that have been held off due to the
change of government will come to the forefront,
affecting investor sentiment. 2) Investor expectations
have adjusted upwards, and it is harder to see upside
earnings surprise. 3) Bellwether names, such as
Sinopharm and Weigao, are sounding more cautious on
the 2013 outlook. 4) After the rally in 2012, the offshore
China healthcare P/E is 1 standard deviation (or 22%)
above the historical average. We expect some stock
selling as the economic backdrop is improving in China
and investors may decide to switch to cyclical sectors.
But strong industry fundamentals should prevail
eventually: Hospital volume growth, a leading indicator,
is still at a historical high, underpinned by expanded
medical insurance coverage. Company earnings will also
be boosted by increasing provincial tender activities in
2013 after a stall in 2012. As the year moves on, we
expect the market to gradually realize that policy impact
will be minimal. Therefore, we predict healthy 20%
growth for the industry in 2013 (albeit slightly lower than
around 22% in 2012 due to a high base). We believe that
such a high and sustainable rate should attract investors
back to the industry later in the year.
Our top picks are: 1) China Pharm (1093.HK) for its
underappreciated structural change and reasonable
valuation; 2) Tongrentang Tech (1666.HK) for its stable
growth; and 3) Sinobiopharm (1177.HK) for its continued
earnings upside. We also like OW-rated stocks, Mindray
(MR.N), Tasly (600535.SS), WuXi PharmaTech (WX.N)
and Sihuan (0460.HK). In the smaller cap names, we
prefer Lee’s Pharma (0950.HK) and Trauson (0325.HK).