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For those of you who have been following my articles, you may know that I have big reservations on the state of the macro economy in China. I worry about multiple things; mounting debt, real estate bubbles, and the return ofcommunist-era practices such as the state-private partnership, among others.
That’s why I repeatedly urge Hong Kong investors to diversify their portfolio into international stocks. The stagnant performance of the Hang Seng Index over the last decade has meant that Hong Kong investors have stampeded into high-yield income stocks. Yet, are there any actually Hong Kong stocks out there that have promising long-term future in the next 10 years and beyond?
China healthcare is thriving
China possesses a booming healthcare market, which has seen phenomenal growth in recent years, to become the second-largest in the world. The fact that per-capita spending on healthcare is still relatively low shows you that the market is still in its infancy and offers massive potential for the future.
Factors driving this spike in healthcare spending are manifold: increasing urbanisation, rising incomes and, to a greater extent, an ageing population.China’s healthcare sector is at a critical juncture as 200 million Chinese people will reach the age of 60 by 2020, turning it into the world’s most aged society in 2030.
China’s increased spending on social security and pension on its elderly population in recent years has raised demand for skilled nursing facilities and treatment for age-related diseases like diabetes, respiratory diseases and cancer.
Healthcare industry outperforms
Below, I compared the three-year performance of two new additions to the Hang Seng Index: Sino Biopharm(SEHK:1177) and CSPC Pharma(SEHK:1093).
Source: S&P Global Market Intelligence
As you can clearly see, both Sino Biopharm and CSPC Pharma shares have left the Hang Seng Index in its wake over three years, notching up gains of at least four times that of Hong Kong’s benchmark.
The emerging nature of the the healthcare sector is China is evident by the relatively young and smaller companies in the sector – many of which listed just last year. Below, I’ve added Ping An Healthcare and Technology(SEHK:1833) and WuXi Biologics (SEHK:2269) to compare their one-year performances against the other two healthcare stocks.
Source: S&P Global Market Intelligence as of 16 September
All except CSPC Pharma outperforms Hang Seng Index in past 12 months.
Flourishing biologics market
One in four new global cancer cases are now in China, and over 100 million Chinese people have diabetes – the largest diabetic community in the world. Given the advances in treatment and a deeper understanding of the immune system, biological drugs are now more suitable than chemical drugs to treat cancer and diabetes.
Meanwhile, the patent protection of most top-selling biological drugs have been expiring in recent years. China’s biosimilar drug development is riding on the wave of this golden opportunity. Moreover, China’s Food and Drug Administration (CFDA) has published a slew of encouraging policies to promote the research and development of biosimilar drugs in China, particularly first-to-market drugs.
Biosimilar drugs are more complex and require a higher level of R&D to develop than generic chemical drugs, thus creating a higher entry barrier that also protects pricing power. CSPC Pharma has a higher proportion of chemical drugs in its portfolio and, hence, a lower profit margin and lower R&D expenses than those drugs seen in the portfolios of Sino Biopharm and WuXi Biologics.
A famous Chinese movie called “Dying to Survive” (我不是藥神) shed light on the serious social problems associated with unaffordable overseas patent-protected drugs in China.
In order to maximise the effectiveness of its social medical insurance programmes, the Chinese government has expanded both the coverage and benefits under these programmes. This should further improve affordability and drive the growth in demand for healthcare products and services.
Digitalising healthcare services
The China market has severely skewed market for medical resources and diagnosis demand because most hospitals – particularly the premium-class hospitals (the main healthcare providers) – are located in big cities. People living in semi-urban or rural areas find it extremely difficult to reach such services.
Trying to solve this has been Ping An Healthcare & Technology. The company has built an online healthcare platform called “Ping An Good Doctor” that attempts to bridge the wide gap between the scarcity and uneven distribution of quality medical resources in China.
Patients can consult the family doctor via a mobile phone and receive the medicine within the same day, all thanks to the well-developed logistics infrastructure in mainland. Their one-stop O2O resources can improve utilisation efficiency, while also improving users’ experience and engagement. With the wide acceptance of e-commerce and mobile payments in China, healthcare services administered via the Internet is also expected to grow robustly in the coming decade.
Foolish bottom line
The healthcare industry can undoubtedly benefit from this massive trend of ongoing demographic change in China. Five years from now, many investors may regret not investing in these less well-known and underappreciated long-term gems in the Hong Kong stock market.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Hayes Chan and Motley Fool Hong Kong own shares of Ping An Healthcare & Technology.