China Healthcare:Takeaways from DB conference/tour;executive survey on 2018outlook

Anticipate stable delivery in 2018; Hengrui/SBP guided growth acceleration.

    We hosted executives from 18 listed companies during the DB conferenceand tour this week. Most executives remain constructive for 2018 and, despitethe stock rally, have not become more bullish or bearish vs. 1H17. Additionaltakeaways: 1) most expect an acceleration of drug approvals and benefits fromNRDL inclusion, although their views on the exact timeline of the latter weremixed; 2) their expectations of the pricing/volume trends after BE were mixed.

    We highlight that only two companies guided a growth acceleration for 2018 vs.

    2017 – Hengrui and Sino Biopharm.

    DB proprietary executive survey on the 2018 outlook.

    We conducted our annual survey of executives from 16 listed companies to gaugeviews of key policies and sector catalysts. We highlight the following results: 1)on whether the executives have changed their views on the sector growth outlookin 2018 vs. 1H17, 37% indicated no change. We concur and remind investors thatthe fundamentals have not changed despite the significant stock rally; 2) on thegrowth outlook for the distribution sector, 2 distributor bellwethers voted 7-8%,one expected a high single digit and another said 6-7%, vs. 7.8% growth in 1H17;3) on the timeline of the NRDL benefit on drug growth, the feedback was mixed,with 25% being uncertain; 4) on an acceleration of regulatory approvals in 2018,56% of the executives expected one; 5) on the pricing trend after the BE study,the responses were mixed as well, with 25% anticipating a price erosion and 44%expecting stable prices.

    DB view: more challenging to identify delta vs. consensus estimates.

    From a valuation perspective, we believe most of the near-term catalysts havebeen reflected for large-cap stocks while new mid/long-term risks are likely toemerge. On fundamentals, while we could still identify meaningful differencesin selective mid/long term growth drivers on a qualitative basis, we see feweropportunities for consensus revisions of 2018 numbers. While it would bechallenging to predict the sustainability of a large-cap stock rally, we now believelaggards may have more chances to outperform. We highlight Jointown andUniversal Medical as our top picks. We also like IHH at this point.

    We will host a teleconference on DB conference takeaways at 9:30am HKT,January 15. Dial-in: +852 3051 2792, conference ID: 4595967, passcode: DBJC18.