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HK healthcare stocks tipped for more gains on mainland China fund inflows

PUBLISHED : Friday, 22 May, 2015, 11:55am
UPDATED : Friday, 22 May, 2015, 3:19pm

More gains are likely in store for Hong Kong healthcare shares that have been flying high since a move to allow mainland mutual funds to buy in the city’s stocks under the through train scheme ignited a market boom.

That’s the view of Macquarie Research, which expects to mainland institutions to boost their participation in the Hong Kong market under the tie-up with the Shanghai bourse.

“Chinese mutual fund buying through the Shanghai-Hong Kong Stock Connect will focus on undervalued (compared to A shares) quality stocks that are not available in the A-share market and buy deeply discounted dual-listed H-shares with well-understood stories, Macquarie says in a report.

“Healthcare stocks listed in Hong Kong are trading significantly lower than their A-share counterparts.”

Shares of Hong Kong pharmaceutical and traditional Chinese medicine firms are trading at discounts of 30 to 35 per cent to their A-share counterparts, says Macquarie, noting that such stocks have been among the beneficiaries of the bull run since April.

“In the year to date, we have seen Hong Kong healthcare stocks increase in valuation from 19 times to 22 times forward rolling 12-month price-earnings ratios,” the report says. “ Even though Hong Kong healthcare stocks have surged 24 per cent year to date, the average valuation of 22 times 12-month forward rolling price-earnings ratio is still significantly below the 35 times of A-share healthcare stocks.”

Healthcare stocks listed in Hong Kong are trading significantly lower than their A-share counterparts
Macquarie Research

The China Securities Regulatory Commission on March 27 allowed mainland mutual funds to participate in the Shanghai-Hong Kong market link even if they lack qualified domestic institutional investor status.

The move potentially frees up a chunk of the 1.5 trillion yuan (HK$1.9 trillion) held in mainland mutual funds for a switch into Hong Kong investments, Macquarie notes.

On April 13, as the Hong Kong market took off, Invesco Great Wall – the first Sino-US fund management company – raised 11 billion yuan for its Shanghai-Hong Kong Stock Connect mutual fund. It was the first mainland-based fund to gain a mandate to invest in Hong Kong under the scheme.

“The market is anticipating more (mainland) mutual funds will raise new funds and enter the Hong Kong market in the second half,” Macquarie says.

It has upgraded its recommendations on two leading mainland pharmaceutical firms listed in Hong Kong, raising the share price targets on Sino Biopharmaceutical and CSPC Pharmaceutical to HK$11.20 (from HK$9.30) and HK$9.50 (from HK$8.20), respectively.

The research house also upgraded two Hong Kong-listed traditional Chinese medicine stocks, China Traditional Chinese Medicine and Guangzhou Baiyunshan Pharmaceutical Holdings.

China’s pharmaceuticals market is ranked in the world’s top three.

US management consultancy McKinsey estimates the country’s healthcare spending will grow from US$357 billion in 2011 to US$1 trillion by 2020.