China Biotech Keeps Fans Despite Wild Swings, High Valuation
(Bloomberg) -- Chinese biotechnology stocks have been hit by a wave of bad news since the summer.
Shares plunged about 30 percent from a peak through the end of last week as a vaccine scandal shook the entire health-care 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 with 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 health-care stocks staged its biggest rally in three years on Monday 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 percent of the analysts who cover them, even as they’ve lost more than 20 percent since the end of May. All four stocks soared on Monday, with GenScript surging 13 percent.
Biotechs started out on a strong note in 2018. Health-care was the best sector in the CSI 300 index of shares traded in Shanghai and Shenzhen, climbing 26 percent through the end of May while the entire market fell 5.7 percent. Investors poured into the $122 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 health-care industry lower. The Chinese government cracked down, and last week slapped a 9.1 billion yuan ($1.3 billion) penalty on Changsheng Bio-technology 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 percent on Monday, the most since September 2015 amid a rally in Chinese stocks. Even after biotech’s recent drop, valuations are still high. The CSI 300 health-care gauge traded higher than an index of global peers as of 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 health-care analyst with ICBC International Research Ltd. in Hong Kong, agrees. He said the current three-year average valuation level will be supported by the sector’s long term outlook.
“We think the defensive character of the health-care 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 health-care companies is far higher that 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 percent 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 health-care companies are just like riding roller coasters,” Chief Executive Officer Frank Zhang said in an interview 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.”
©2018 Bloomberg L.P.