Why is medicine working again? ICBC Credit Suisse Tan Donghan saw these changes
Woman in the Yellow Shirt|Text
Produced by Fortune and Merchant Heroes
Image source: Internet
Winter doesn't last forever.
Once the cold begins to subside, everything breaks through the ground.
——Lu Yao, "Ordinary World"
In the rebound since October 24, the biomedical index has risen by more than 9%, ranking third among the 31 Shenwan first-class industry indexes (data source: Wind, as of 20231107), and innovative drugs are even more strong and very capable of playing.
The market is about to move, and the pharmaceutical industry, which has been adjusted for more than two years, will usher in a new round of spring?
"It's kind of like that time in 2018. ”
Fund manager Tan Donghan said in a recent exchange with us that in 2018, A-shares fell for a year, and the introduction of the pharmaceutical centralized procurement policy at the end of the year led to a further decline in the pharmaceutical industry, which fell deeper than other industries, but in retrospect, it was a strategic buying point for the pharmaceutical industry at that time.
"The pharmaceutical industry is like a 'magnifying glass' for A-shares. Tan Donghan said that under the extremely pessimistic market sentiment, the valuation of the pharmaceutical industry has been at the bottom of history, and the proportion of public fund holdings in the second quarter of this year is also the lowest in history (not one), and the governance of the medical industry in August has accelerated the decline of the entire sector, which is very similar to the situation in 2018.
But in fact, he pointed out that the general logic of the entire pharmaceutical industry has changed. The industrial policy has changed significantly, and it has even improved a lot compared with 2018 and 2019, and there have been many positive changes at the micro level of enterprises.
Based on this judgment, Tan Donghan maintained the fund's high position operation in the third quarter, and focused on allocating CXO companies with global business as the main source, traditional Chinese medicine targets and some Hong Kong-listed pharmaceutical companies.
"At this point, we are not pessimistic about the outlook for the pharmaceutical industry. Tan Donghan wrote in the third quarterly report.
Tan Donghan
12 years of experience in equity investment research, 7 years of investment management experience;
He is currently the research director and fund manager of the fund research department of ICBC Credit Suisse, managing funds such as ICBC Pharmaceutical Health, ICBC Healthy Life, and ICBC Pilot for 3 Years.
Tan Donghan is a clinical doctor of medicine from Peking Union Medical College, joined ICBC Credit Suisse Fund in 2013, began to participate in fund investment in 2016, and has managed ICBC Pharmaceutical and Health A for the longest time, since July 30, 2018, as of September 30, 2023, the return on tenure has reached 139.25%, the performance benchmark return for the same period is -7.34%, and the excess return has reached 146.59%.
In the bull market of the pharmaceutical industry, Tan Donghan is good at grasping the mainstream trend, and his products reflect a strong aggressiveness.
For example, in 2019 and 2020, the annual returns of ICBC Pharmaceutical and Health A managed by him reached 71.64% and 93.45% respectively, and in the context of the overall adjustment of the pharmaceutical industry in the past two years, the funds he managed have also achieved excess returns relative to the industry index.
As a medical fund manager with a clinical medicine background, how did Tan Donghan find his own profit rule in A-shares?
After experiencing changes in the industry cycle, how did he find the next growth code for the pharmaceutical industry?
Let's take a look.
01
Invest like a doctor
There is a very popular post on the Internet, called "Four Reasons to Apply for Medical School", the first of which is: medicine is hard work, and you can change careers to do other things after studying medicine, but if you want to reverse it, it will be difficult.
Tan Donghan does not like to take risks, he describes himself as a stable person, he always believes that if he works diligently and works seriously, there will be good returns.
Perhaps it was this simple idea that supported him to study all the way to the "ceiling" of the domestic medical community - Clinical Doctor of Medicine at Peking Union Medical College.
At that time, it coincided with 2010, A-shares deduced a wave of "drinking alcohol and taking medicine" market, the annual increase in the pharmaceutical and biological industry reached 30%, ranking second among all industries, the pharmaceutical industry has become the "darling" of institutional investors, in order to increase the depth of pharmaceutical investment and research, many investment institutions have also begun to look for more professional medical investment and research talents, reserve investment research strength.
The original professional medical background, can still exert energy in investment?
It was in this context that Tan Donghan began to get in touch with investment, and joined CITIC Securities as a researcher in the pharmaceutical industry after graduation. In 2013, with the idea of doing investment research more purely, he joined ICBC Credit Suisse Fund, and has been a fund manager, from industry researcher, research director, to fund manager, and currently has a fund scale of 7.099 billion yuan.
From medicine to investment, how did Tan Donghan exert his professional strength and find his own profit path in A-shares?
In fact, looking back, Tan Donghan found that making investment also has the same similarities as studying medicine, which is the realization of cognitive ability, the continuous optimization of the system framework, and the test and summary of clinical practice.
(1) Cognitive ability
Medicine is a fairly professional track, and the first thing that needs to be broken through is the cognitive barrier in the professional field.
"The first hurdle to be overcome in the investment research of the pharmaceutical industry is to recognize the product and the market. Tan Donghan said that because pharmaceutical products are directly facing experts, there are high cognitive barriers, and if there is no medical background, it is difficult to recognize products and compare products.
The professional background of clinical medicine doctor allowed Tan Donghan to quickly build his own investment and research advantages in the field of medicine.
He is very clear about the classification of various diseases, and can also understand the diagnosis and treatment methods of various diseases through research, what kind of products are used at each stage, how to diagnose, how to do treatment, and how to compare various treatment products, and he has become an "expert" representative in the pharmaceutical investment and research circle.
"The research work must be first-hand, the most insightful in the market, and the incremental help for investment. Tan Donghan said.
This kind of "more real" ability has continued in Tan Donghan's pharmaceutical investment and research work, and has also allowed him to lead the market many times and dig out a number of high-quality growth stocks in advance.
(2) System framework
How to make investment more effective and replicable fission? Tan Donghan established a systematic investment framework very early on, and has been constantly polishing it in practice.
In view of the characteristics of the pharmaceutical industry, Tan Donghan advocates a combination of top-down and bottom-up investment methods.
From top to bottom, it is to find the subdivision track with the most growth potential and investment opportunities through the changes in the external environment and internal competitiveness and driving force of the industry.
"Pharmaceutical is an industry with a very strong top-level design, and the policy control is very strong, so we need to understand, recognize and judge the evolution process of the policy, and recognize the industrial development path, so as to find sub-industries with greater advantages and more outstanding competitiveness. Tan Donghan said.
After finding a track with potential and industry driving force, it is necessary to find the most competitive companies from a bottom-up perspective and buy them at a reasonable valuation.
How to choose the most cost-effective company on the pharmaceutical track? Tan Donghan listed four indicators.
A. Growth rate;
B. Room for growth;
C. Quality of growth;
D. Certainty of growth.
"These four indicators are not in order, but the weights we assign to different indicators will vary in different market environments. Tan Donghan said.
For example, in the growth stock bull market before 2021, funds were very fond of companies with fast growth and large space, and were willing to give this type of company a high valuation premium, but did not care much about risk indicators such as growth certainty.
When the market is in a period of expansion, everyone will feel that dreams can be realized, and risk is not a problem, so the weight given to the growth rate and growth space will be greater.
However, when the market is in a period of contraction, deterministic assets will be more popular, and at this time, it is necessary to appropriately increase the weight of growth certainty indicators and reduce the weight of growth speed indicators.
In fact, this is the same as studying medicine, according to different physical conditions, the proportion of light and heavy drugs needs to be different from person to person, and for different market environments, the investment factors to be considered also need to be adapted to the time and conditions.
(3) Clinical experience
Tan Donghan said that medicine is an empirical discipline, and there are many times that need to rely on inference, hypothesis, and trial methods, which is very similar to investment, and investment also has a lot of artistic components.
"At that time, the teacher taught us how to look at patients, how to observe, evaluate, characterize, and follow, which has a lot in common with my methodology when I looked at a company in investment, how to recognize it at the beginning, then how to characterize it, how to track it, and how to see its various changes, and there are similarities in methodology. Tan Donghan said that after the doctor prescribes, he needs to take the risk with the patient, and the investment is also to control the risk.
From entering the industry in 2011 and formally managing the fund in 2016 to experiencing the growth and cyclical changes of the entire pharmaceutical industry, Tan Donghan, like his teachers and classmates who are fighting in the front line of medical treatment, has also continued to accumulate experience and improve his strength in the clinical practice of the market.
02
Take the pulse of opportunities in change
As an "expert" fund manager, Tan Donghan has always paid attention to the dynamics of the medical frontier, and he also has a more sensitive understanding of the changes in the general trend of the industry.
In 2018, Tan Donghan forward-looking grasped the new investment logic of the pharmaceutical industry and became a pioneer in innovative drug investment in the A-share market.
Previously, the most powerful investment line in the A-share pharmaceutical industry was to find large pharmaceutical companies with strong imitation capabilities. But after 2018, the policy environment for the entire pharmaceutical industry has changed dramatically.
On the one hand, the implementation of the generic drug procurement policy, the actual price reduction greatly exceeded market expectations, and some varieties even had an extreme situation of more than 90%, and within a year, the valuation of generic drugs was killed from 25 times to 15 times.
On the other hand, the country has begun to vigorously encourage the innovative drug industry, the launch of the Science and Technology Innovation Board in 2019, and the centralized listing of several leading biotechnology companies on the Hong Kong stock market, all of which have driven the market's great enthusiasm for innovative drugs and the innovative R&D industry chain.
In this context, Tan Donghan believes that the driving force of the pharmaceutical industry has changed, R&D innovation and quality upgrading are the future industrial development path, and volume procurement will accelerate enterprises with large-scale manufacturing advantages and R&D innovative pharmaceutical companies to stand out, and the long-term logic of innovative drugs is more solid.
As a result, since 2018, Tan Donghan has gradually adjusted his position structure and concentrated more positions on the innovative drug and CXO tracks.
In 2019, ICBC Pharmaceutical and Health A managed by Tan Donghan recorded an annual return of 71.64%, and in 2020, the net value of the fund rose by 93.45% again, becoming the leader in this wave of innovative drug market.
The secret of Tan Donghan's breakthrough is, on the one hand, a forward-looking investment vision that accurately grasps the opportunity of the transformation of the pharmaceutical industry; on the other hand, the depth of individual stocks and the acquisition of knowledge beyond the market are an important source of excess returns.
In 2019, Tan Donghan excavated a medical protection company in his research, at that time, the entire industry was at the bottom of the cycle of experiencing overcapacity and falling prices, and many companies were losing money and closing production capacity, but this company showed a strong ability to "reverse growth", not only making profits on the books, but also continuing to expand production capacity, which is very in line with the characteristics of a good company.
Based on in-depth research, Tan Donghan began to buy the company in the fourth quarter, and was optimistic about the company's growth quality. Unexpectedly, at the beginning of 2020, the new crown epidemic broke out, and the entire medical protection industry ushered in a large explosion of orders.
And Tan Donghan was "prepared", and after the outbreak of the epidemic, he decisively increased his position in the company, and fully enjoyed the company's benefits due to the "Davis double click".
In 2020, the stock rose more than 14 times throughout the year, ranking 6th on the list of A-share gainers.
It is worth mentioning that after the company's stock price rose sharply, Tan Donghan believed that the company had converged with the investment logic of cyclical stocks, and the subsequent growth of market value was closely related to product prices, and after the price surge in 2020, the supply of products began to be excessive.
"Birds soar high in the sky, looking forward to mathematical visions that stretch into the distant horizon, and they rejoice in the concepts that unify our minds and bring together problems in many different fields;
Frogs live in the dirt beneath the sky and can only see flowers growing around, and they are excited about the details of a particular problem, solving only one problem at a time. ”
This is a passage written by American physicist Freeman Dyson in 2009, he said,
"We need both frogs that delve into details and birds that have a vision. ”
This is precisely Tan Donghan's interpretation of pharmaceutical investment, which not only needs to find excellent companies from the bottom up and dig out the alpha of individual stocks, but also needs to often open up their horizons and calibrate the correct path forward from top to bottom.
03
In the face of a bear market, only research can withstand adversity
Tan Donghan experienced the bear market in 2018, when the entire pharmaceutical industry experienced a roller coaster ride, and the CSI Pharmaceutical Index fell by more than 20% in a quarter.
However, this wave of adjustment in the pharmaceutical industry since 2021, both in terms of time and magnitude of adjustment, still exceeded his expectations.
"In fact, at the high point, there are many signs that the market is overheated, valuations are high, and risks are increasing. Tan Donghan said, but standing in the position at that time, from the perspective of investment, it is difficult to replace high-growth and high-prosperity assets with high-dividend, debt-like assets at once.
How to deal with it?
Tan Donghan still chooses to do what he is good at, constantly looking for more cost-effective companies from a fundamental point of view, selling more expensive and buying cheaper.
For example, in 2022, Tan Donghan liquidated CXO companies with mainly domestic business, while retaining leading CXO companies with global business, and he believes that the resilience of R&D investment will give these companies an opportunity to repair their valuations.
At the same time, he also found that after the epidemic, the environment of the traditional Chinese medicine industry is also changing, on the one hand, the people's attention to health is increasing, on the other hand, the country is also vigorously developing the traditional Chinese medicine industry, and the policy environment is also changing.
More importantly, from the perspective of medical expertise, Tan Donghan found that in recent years, traditional Chinese medicine has also paid more and more attention to clinical evidence, and the clinical value of traditional Chinese medicine is also increasing, which will also breed some investment opportunities.
As a result, he also balanced the portfolio allocation and increased the allocation ratio to sub-industries such as traditional Chinese medicine.
In the process of continuous adjustment of the entire pharmaceutical industry, the fund managed by Tan Donghan has inevitably experienced a drawdown of net value. In the face of the pressure of the industry's decline and net worth adjustment, Tan Donghan said that his own response is to "continue to do research, only the more in-depth the research, the greater the certainty of the fundamentals, the pressure can be alleviated."
04
Attack from the bottom: How to see the investment value of the pharmaceutical industry at present?
In 2022, based on the caution of the market, Tan Donghan rarely maintained a low position operation of about 85%, however, after the fourth quarter of last year, with the expectation of the epidemic and the adjustment of real estate policies, Tan Donghan believes that the market has bottomed out, and gradually increased the position to 90-95%, and laid out the pharmaceutical industry in advance in the left area.
In August this year, a wave of sharp decline in the pharmaceutical industry made Tan Donghan more sure of the judgment of the bottom, he believes that the current pharmaceutical industry highlights the value of investment, and should be more optimistic in investment.
In the exchange with us, Tan Donghan also shared his in-depth understanding of the current investment in the pharmaceutical industry, and we compiled some of his views to share with you.
(1) The investment value of the pharmaceutical sector is gradually emerging
"Financial Heroes": Recently, the pharmaceutical sector has become active, and it has performed strongly every time it rebounds, what is the reason behind it?
Tan Donghan: I tend to think that A-shares are in a very low position, the opportunities for returns outweigh the risks, and medicine is a re-amplification of the A-share situation.
The valuation of pharmaceuticals is currently at a relative bottom in history, and in the second quarter, the proportion of public funds holding pharmaceuticals is the lowest in history, not one of them.
But the big logic of the pharmaceutical industry is already changing. For example, the price reduction that everyone was very worried about before, the industry policy has taken a significant turn, the industrial policy is much better than in 2018 and 2019, and the lowest price is not pursued, and even some industries have begun to raise prices, and the competition is more rational, these changes are happening.
But people don't recognize these changes in this position, and they don't price it, and I think this time is more likely to bring strategic opportunities, and the opportunities outweigh the risks.
Especially in August and September, the pharmaceutical industry fell for two years, the valuation and public offering positions were at a historical low, and there was another industry governance event that everyone did not expect, and the stock price was killed again. I think it's a bit like the market fell for a year in 2018, and at the end of the year, the negative of pharmaceutical centralized procurement was superimposed, and the medicine fell more than other industries, and now it is very similar to that time. However, this does not mean that the future trend will replicate the trend of the next two or three years in 2018, just that the current market makes people more confident.
"Financial Heroes": In your grassroots research, what do you know about the situation at the micro level of enterprises?
Tan Donghan: The situation reflected in the micro survey is also more and more confident.
There are three clues.
The first clue is that CXO has fallen so much, and everyone is very worried that the prosperity of China's innovative drug industry will not recover, but in fact, from the micro level of enterprises, there have been many positive changes.
For example, the global R&D boom is picking up, and new developments in the fields of weight loss drugs and Alzheimer's disease have opened up the space for pharmaceutical innovation.
The second clue is whether the logic of steady growth in medicine can be maintained? This point is also slowly getting better from the tracking in September and October.
Another point is the logic of the policy, the logic of suppressing pharmaceutical stocks before is that everyone thinks that centralized procurement, generic drugs are not good, negotiation makes the pricing of new drugs not good, and it seems that it is difficult for Chinese drugs to produce large varieties and become a good business model. But since last year, the policy has been moderate, leaving more and more room for the industry.
Judging from these three clues, the fundamentals of the pharmaceutical industry have been slowly moving up.
(2) Focus on three major directions: CXO based on global business, traditional Chinese medicine, and Hong Kong pharmaceutical stocks
Fortune Heroes: CXO is one of your heavy positions, what are the current opportunities and risks?
Tan Donghan: Let's first divide CXO into two categories, one is CXO for domestic business, and the other is CXO for global business, because their customer groups are different, and the corresponding downstream customer prosperity is also differentiated.
The prosperity of global new drug research and development has bottomed out, and the performance of overseas CXO companies has also shown a recovery trend. Domestic CXO companies with overseas business as the main source, the number of inquiries in the third quarter is increasing, and the order volume has an inflection point.
At the same time, the valuations of these targets are already at historically low levels, which are not expensive even compared to the general manufacturing industry, and are expected to provide greater performance elasticity in the industry's upcycle.
As a result, we currently have strong confidence in CXOs with global business as their primary source.
As for CXO companies doing domestic business, the problem they face is that the domestic new drug R&D boom has not yet rebounded, and they are still going through the process of supply-side clearing.
"Financial Merchant Heroes": You also mentioned the layout of traditional Chinese medicine in the third quarterly report, why are you optimistic about the investment opportunities in the traditional Chinese medicine industry?
Tan Donghan: The whole environment of traditional Chinese medicine is getting better.
On the one hand, after the epidemic, people's attention to health is increasing.
In addition, during the epidemic, the country's promotion of traditional Chinese medicine and the role of traditional Chinese medicine varieties in the process of fighting the epidemic have deepened the people's recognition of traditional Chinese medicine, and the country is also very willing to develop the traditional Chinese medicine industry, and the policy environment for traditional Chinese medicine is also improving.
At the same time, in recent years, some new Chinese medicine drugs have been approved one after another, although the number is not large, but it reflects that Chinese medicine has been evolving, and a batch of Chinese medicine has grown because the clinical evidence is becoming more and more sufficient, and the clinical value is increasing.
The overall environment of traditional Chinese medicine is getting better, and what some traditional Chinese medicine companies are doing is also creating value, making the value of traditional Chinese medicine bigger and bigger, and I think there will be some opportunities in it.
Fortune Merchants: In addition to CXO and traditional Chinese medicine, what other sub-sectors are you optimistic about?
Tan Donghan: I'm quite optimistic about medical services. A-share stomatology, ophthalmology and other companies, with public hospitals have differentiated competition, is the field of medical supplementation, the development logic of these fields has not changed, the needs of the people do exist, I think the medical service industry will continue to develop.
There is also an opportunity for medical equipment. It is similar to many Chinese manufacturing industries, even more advanced than home appliances, and has a global brand, which can give full play to the advantages of China's engineers and manufacturing industries, serve customers well, and continue to iterate and evolve solutions. At present, the share of Chinese enterprises in this field is still very low, as long as Chinese enterprises overcome the corresponding technology, this industry continues to upgrade, and give full play to R&D efficiency, production efficiency, and service efficiency, there are also opportunities.
"Financial Heroes": You also increased the proportion of Hong Kong stocks in the third quarter, what is the reason?
Tan Donghan: There are two characteristics in the pharmaceutical field of Hong Kong stocks.
First, Hong Kong stocks have some specific assets that A-shares do not have, such as innovative drugs. I am indeed optimistic about the long-term development of these innovative drug companies in the process of supply-side reform and integration in the future, and I am willing to buy these companies in Hong Kong stocks.
Second, the Hong Kong stock market is likely to show strong flexibility, but it is more demanding, requiring both good fundamentals in China and good global liquidity, and if both requirements are met, Hong Kong stocks will be more resilient than A-shares and U.S. stocks.
Of course, most of the time, if one of these two points is not satisfied, it is still not good.
However, at the current valuation, there are options to take more Hong Kong stocks. Now everyone's expectations for next year's economy are not high, but the policy is very precise in some directions, and has achieved very good results, once consumption begins to recover, the economy is better than everyone expected, showing that China's fundamentals are good, the Federal Reserve will no longer raise interest rates, if inflation goes down next year, and interest rates begin to cut, then Hong Kong stocks will show a good elasticity.
(3) The logic of long-term investment in pharmaceuticals is still there, and we should not continue to panic at present
"Financial Heroes": A few years ago, everyone thought that the pharmaceutical industry was a track with long slopes and thick snow, but after a wave of decline, everyone's confidence was insufficient, in your opinion, has this logic changed?
Tan Donghan: The long-term logic of the pharmaceutical industry has not changed.
The demand for medicine is domestic demand, of course, there are some external demand, such as CXO has external demand, but most of the prescription drugs and pharmaceutical terminal product preparations and devices are still domestic demand, which is not so related to anti-globalization, compared with many manufacturing industries, it is not an export-oriented industry, but an industry dominated by domestic demand.
In terms of domestic demand, its correlation with the macroeconomy is relatively counter-cyclical, which can resist the stable demand in the downward stage of the economic cycle and the rigid demand.
Historically, in the process of other countries' economic growth rate has also fallen, although medicine has also followed the step, but on the whole, it can still maintain a nominal GDP growth rate of twice as much, and the reason behind it is that the demand for medicine continues to increase, and it will not fall if it rises. If you don't have any money, you can skip buying optional consumer goods, but you can't go without seeing a doctor.
In addition, aging is also irreversible, the population forecast is very clear, slowly deduced, the next ten years will experience a rapid aging stage, it brings a relatively clear demand for medicine.
Financial Merchants: Recently, the market is expecting a reversal of difficulties in the pharmaceutical industry, what advice do you have for investors in the pharmaceutical industry?
Tan Donghan: I myself have been increasing investment in medicine in this position, and the unity of knowledge and action is doing this.
At the bottom of the industry, when the expectations were very poor, and the valuation was very cheap, there was a negative impact on the industry, giving us a lower position. Now, even if the pharmaceutical sector has rebounded somewhat, in fact, it has just repaired the negative expectations of the industry, and the entire sector is still in a relatively low valuation.
I don't think this position can at least continue to panic.
Risk Warning
ICBC Pharmaceutical and Health Stock was established on July 30, 2018, Tan Donghan has been managed since its inception, and the annual performance of Class A shares from 2019 to 2022 is 71.64%, 93.45%, 4.51%, and -20.88% respectively, and the performance benchmarks for the same period are 25.88%, 39.19%, -10.43%, and -15.83% respectively, and the data comes from the fund's regular report or custodian review data. The investment views are for reference only and are time-sensitive, and do not constitute investment advice or income commitments, nor do they represent the specific future allocation direction of the product. The fund manager manages and uses the fund property in accordance with the principles of due diligence, good faith, prudence and diligence, but does not guarantee that the fund will be profitable, nor does it guarantee a minimum return. Past performance of a fund is not indicative of its future performance, and the performance of other funds managed by the fund manager does not constitute a guarantee of the performance of the fund. The ICBC Pharmaceutical and Health Fund mentioned is an equity fund, with a higher expected return and risk level than hybrid funds, bond funds and money market funds, and will invest in the underlying stocks of the Hong Kong Stock Connect, which will bear the unique risks brought about by the differences in investment environment, investment targets, market systems and trading rules under the Hong Kong Stock Connect mechanism. Investing in equity funds carries a greater risk of income fluctuations. Before investing in a fund, investors should carefully read the "Fund Contract", "Prospectus", "Fund Product Key Facts Statement" and other fund legal documents, and choose investment varieties suitable for their own risk tolerance on the basis of a comprehensive understanding of the product situation, fee structure, charging standards of each sales channel and listening to the suitability opinions of the sales agency, and fund investment should be cautious.
Investment is risky, and you need to be cautious when entering the market