There will be a growing opportunity to invest in the future giants of the Chinese healthcare sector, according to Citywire A rated Bin Shi, lead portfolio manager, China equities at UBS Asset Management.
Speaking at a press briefing in Singapore earlier this week, Shi said in the healthcare sector, there are no leading firms, unlike the technology industry, which has giants such as Tencent, Alibaba or Baidu.
‘The Chinese healthcare sector is very fragmented and has long term potential,’ said Shi, who manages the UBS (Lux) Equity fund - China Opportunity fund.
‘If you look at the S&P500 weighting in the healthcare industry, it is 22%, but if you look at the weighting in MSCI China, it is only 2.3%. There is a 10x difference.
‘I think in the long run the healthcare market of China will probably be very big. A lot of Chinese healthcare companies will become global companies, while at this point, the industry still mostly focuses on the Chinese market.’
Shi said the key is to identify the companies what could be the next Tencent or Alibaba in the healthcare industry in China.
Furthermore, he believes innovation will be the core quality for Chinese healthcare firms to be successful.
‘If you want to go global, you need to compete on R&D. I think a lot of pharmaceutical companies initially began by manufacturing similar drugs but offering at a much lower price to multinationals. That’s how they got started.‘But it doesn’t mean you can always continue that model. When you go global, you need to be able to compete with global giants, which means you can’t compete on low price anymore and you need to compete on R&D. We think a few Chinese companies have very strong R&D capabilities.’
Key trendsShi also outlined two key market trends during the briefing.
The first trend is that he has already seen more inflows into emerging markets this year than compared to two or three years ago, when he only saw outflows from EM equities.
‘We don’t think this is a one-time event or seasonal event and we think this is just the beginning of many years of inflows or allocations to EMs.’
While this trend is related to overseas investors, for domestic Chinese investors, there will be more of an allocation to the Hong Kong market than to Chinese equities, Shi said.
‘This is because the valuation in Hong Kong is much lower than that of A-shares. So with an increased access of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, this means the door is opening wider for domestic investors to invest in Hong Kong-listed stocks.
Furthermore, he said: ‘Potentially, mainland investors' trading volume could become 25% to 30% of the total trading volume in the Hong Kong market.
‘That’s just daily participation. If you look at the cumulative effect, I think it is even bigger than that, because they buy and they do not sell, so they actually put more money into the Hong Kong market. And this will change the dynamics of the Hong Kong market significantly.
‘We are quite positive on Chinese equities over the next six to 12 months,’ he said.