Industry context
Pharmaceutical players face a harsh regulatory and competitive
environment that is likely to become even more challenging. We expect
persisting pressure on industry pricing and demand trends. Moreover, the
outlook seems uncertain due to the absence of identifiable future leaders
and policy uncertainties. By contrast, leading medical devices makers that
focus on innovation and R&D have established a competitive edge in their
respective fields. Government policies and industry trends are favorable.
We have added five pharmaceutical stocks to our offshore-listed China
Healthcare universe, for which we hold a Neutral coverage view.
Source of opportunity
We believe opportunities in the China Healthcare sector over the next 6-12
months clearly lie in the Medical Devices segment, based on its favorable
macro, solid corporate fundamentals, and undemanding/reasonable
valuations. Pharmaceuticals could come under further pressure, despite
inexpensive valuations, as earnings pressure, regulatory risk, and policy
uncertainty will continue to take center stage.
Catalyst
Near-term earnings/growth delivery is a general concern and key to the
stock call, in our view. The three companies in our Medical Devices group
are on a strong growth trajectory, with 2006E-2008E earnings CAGR at
33%-39%. Solid delivery underpinned by favorable macro and companyspecific
fundamentals will continue to drive share appreciation.