China Healthcare Sector:Time to buy in

We are positive on the sustainable long-term growth of China’shealthcare sector, given (i) an ageing population and increasingurbanisation, (ii) rising incomes and broader insurance coverage,and (iii) increasing morbidity due to lifestyle changes under rapideconomic development and greater health consciousness. While thissector should remain strictly regulated by the government, weexpect policies to moderate somewhat this year as the governmentthoroughly reviews the past stringent policies that did not achievethe desired results, especially the several one-off curbs in 2013.

    Meanwhile, we are keen on long-term investment opportunities frommedical service sub-sector due to medical service undersupply aswell as the increase in policy support.

    Key Factors for Rating.

    Rapid and sustained growth is expected for China’s healthcare sector, driven bythe ageing population and urbanisation, rising incomes and broader insurancecoverage, and increasing morbidity due to lifestyle changes under rapideconomic development and rising health consciousness.

    A softer policy stance is expected in 2014 on the back of the government’sthorough reviews of the previous stringent policies.

    We are keen on (i) leading pharmaceutical companies in sub-sectors whichhave exclusive and popular products for the treatment of chronic illnesses, and(ii) powerful medical groups focusing on medical devices and services.

    We are also positive on (i) large-scale distributors with management incentivesto ramp up profitability, and (ii) drug promoters with astute business modelsand high entry barriers under a moderate policy environment.

    We are optimistic about investment opportunities in medical services over thelong term due to the undersupply of medical services and mounting policysupport.

    Key Risks to Rating.

    Greater-than-expected policy pressure.

    Top Picks.

    Consun Pharmaceutical: Offering superior products for the treatment ofchronic kidney disease (CKD) and as medical contrast medium, Consun is anintegrated pharmaceutical company with strong R&D capabilities and anextensive distribution network. We are optimistic about the market potential ofits major product, uremic clearance granule, an exclusive drug and the onlymedicine for treating chronic kidney failure on the National Essential Drug List.

    This implies penetration into Class-I hospitals and smaller medical facilities(China’s fastest-growing healthcare segment) with a certain degree ofexclusivity and market expansion potential given the government’s blessing.

    We are also positive on the company’s business expansion from MRI medicalcontrast medium to CT medical contrast medium, whose market size was morethan 8x larger than the former’s in 2012. We forecast a net profit CAGR of28.96% for Consun during 2013-16 if eliminating one-off listing expenses.

    (Please refer to our company initiation report dated 25 March 2014 for details) Fosun Pharmaceutical: As a well-diversified healthcare company in China,Fosun Pharm. primarily engages in drug manufacturing, distribution, andmedical service businesses. We view the company as a star proxy of theChinese healthcare industry and believe it is a solid pharmaceutical companywith a diversified product portfolio and visible growth driven by strong R&Dcapability (as opposed to a pure investment entity). Fosun is activelyexpanding its medical services through a series of hospital M&As, which shouldbenefit from policy support. We believe effective expansion in the field ofmedical service will strengthen considerably its leadership in the Chinesehealthcare value chain.