China Healthcare

Bumpy ride ahead - be selective

WHAT’S NEW

The SFDA yesterday released a notice that they are moving against illegal advertisements for drugs, medical devices and health foods. The SFDA is investigating in13 Province and are looking into 14,574 drug illegal adds, 782 illegal medical equipment adds and 3893 illegal health food adds to clamp down on manufacturers that conduct illegal advertising and they issued a list containing companies that have been detected so far. None of the mentioned companies are listed.

ANALYSIS

In the long-term all of the recent actions, price examination, removal of mark-ups, stricter GMP standards etc. will ultimately help make the drug sector more efficient and support larger and established firms such as Shandong Weigao (8199.HK), Sinopharm (1099.HK), Shineway (2877.HK) and United Laboratories (3933.HK), as they can capitalize on their strength and benefit from the market consolidation.

In the short-term we see some weakness in the Healthcare sector due to the uncertainty concerning the government policies and the effectiveness of their implementation.

ACTION

Careful, there is a bumpy ride ahead. We see some interesting entry opportunities namely China Shineway (2877.HK; BUY; TP HK$26.00) and Sinopharm (1099.HK; NOT RATED) and Ruinian (2010.HK; BUY; TP HK$7.00), while stocks of other reputable companies, such as Shandong Weigao (8199.HK; HOLD; TP HK$30.00) and United Laboratoried (3933.HK; HOLD; TP HK$9.00) are stubbornly holding on to their respective valuations. Smaller stocks, such as Mingyuan Medicare (0233.HK; BUY; TP1.45) and Golden Meditech (0801.HK; BUY; TP HK$2.00) have come down quite a bit and seem undervalued, but tend to be neglected until the storm has passed by.