However, high valuations have raised concerns.
The potential for a trade war between the US and China has many investors in Chinese companies focused on firms that largely pursue domestic sales. In particular, China’s healthcare industry is attracting attention given anticipated profit growth of 20% due to the increasing wealth and age of the Chinese population.
Traditional Chinese medicine maker Zhangzhou Pientzehuang Pharmaceutical Co. is one example of a company focused on the domestic market. Jiangsu Hengrui Medicine Co. is also attracting attention because it is focused on generics for the Chinese market, and currently the Chinese government looks to use more generics. Pharma companies with their own distribution networks are also fairing well due to government reforms intended to reduce the cost of drugs administered at hospitals by eliminating intermediaries.
One consequence of this activity is an increase in valuations for domestic healthcare companies to levels not seen in ten years or more. Pharmaceutical stocks on the Chinese market were up nearly 30% in 2018 before falling slightly last week.
The high valuations are of concern to some. “The sector may touch a valuation ceiling soon if it rallies further," says Sun Jianbo, president of Beijing-based China Vision Capital Management. "However fast the future growth might be, it takes time for companies to realize that." Adds Gu Yongtao, an analyst with Cinda Securities Co.: “The medical sector is in need of a temperature check, given how high valuations have soared. Health-care shares are looking a bit risky right now."