Since the beginning of this week, A-shares have fluctuated as a whole, testing the gap in the early stage many times. Institutions believe that after reviewing the past sharp rise, the sectors that can continue to lead the rise after the general rise are supported by fundamentals. At present, when investing in A-shares, it is still necessary to pay attention to fundamentals and choose industries with comparative advantages. As one of the popular sectors with the highest market attention, the pharmaceutical sector has obvious relative advantages.
Zhongtai Securities said in a recent research report that the direction of the policy of the pharmaceutical sector is clear, and the future trend is good. With the all-round implementation of a package of fiscal and monetary policies and the continuous restoration of market confidence, the advantages of the pharmaceutical sector at the bottom, clean chips and good fundamentals are still prominent. Looking ahead, the pharmaceutical sector may be one of the main forces of the rebound, and a new round of upsurge in the allocation of medicine is expected to start gradually.
He Yuxuan, fund manager of Tianhong Guozheng Biomedical ETF, believes that after nearly four years of adjustment, the fundamentals of the pharmaceutical sector are gradually improving, the valuation level is highly attractive, and the long-term growth potential is significant, and the pharmaceutical industry is expected to become the new main line of the next round of the market.
Low valuations combined with improving fundamentals
The pharmaceutical industry may welcome an inflection point in investment
Looking back on the market performance in the past 3 to 4 years, the pharmaceutical sector has undergone multiple rounds of adjustments, and the Shenwan Pharmaceutical and Biological Index (801150. SI) has declined from around 13,000 in early June 2021 to around 6,200 on September 23, 2024, and the price-to-earnings ratio has also adjusted from 41x valuation to around 25x.
Although the index point and valuation level have rebounded with the sharp rise in late September, as of the close of trading on October 17, the valuation level of 29.69 times in the pharmaceutical industry is still at a historically low level of 28.38% in the past decade. From the perspective of price-to-book ratio, the current valuation level of the pharmaceutical industry is at the historical quantile of about 10%, which can be seen from the low valuation level.
Even from a horizontal comparison, the historical quantile of the current valuation of the pharmaceutical industry in the past ten years ranks 13th among the 31 Shenwan first-class industries, showing a high investment cost performance. Since November 2023, the pharmaceutical industry index in developed countries has risen by more than 20%, while the mainland pharmaceutical industry index has fallen by about 25% as of August this year. The divergence of 40% to 50% highlights the cost-effectiveness of the A-share pharmaceutical industry index.
In terms of fundamentals, the pharmaceutical industry has experienced policy adjustment and market baptism, there has been a certain degree of clearance within the industry, superimposed in the middle of last year, a large number of innovative drug companies began to enter the harvest period, and the fundamentals of the entire pharmaceutical industry are gradually improving, which is actually more favorable for large and medium-sized enterprises, and the industry as a whole shows a bottom-up trend. From a more macro policy perspective, since 2015, the state has successively introduced policies such as volume procurement, medical insurance negotiation, and outpatient co-ordination to guide the development of the pharmaceutical industry in the direction of higher quality, and urged pharmaceutical companies to focus more on research and development by compressing the moisture of the channel, which has greatly enhanced the competitiveness of the pharmaceutical industry. In recent years, large and medium-sized pharmaceutical companies have made great progress in participating in global market competition and competing for market pricing power. Some large and medium-sized enterprises have a considerable part of their revenue from overseas, which brings higher profit margins and greater market space to domestic pharmaceutical companies.
As a market-recognized "long slope and thick snow" track, the pharmaceutical industry has benefited from factors such as industrial rigid demand + accelerated population aging + demand quality upgrading, and its investment advantages have become increasingly obvious. From the perspective of foreign historical experience, the growth rate of the pharmaceutical industry is usually higher than the GDP growth rate, therefore, from the perspective of long-term investment, the pharmaceutical industry has significant growth potential.
Innovative drugs and medical devices have higher growth potential
When it comes to the growth of subdivided industries, institutions believe that innovative drugs and medical devices that can go overseas are areas with high growth potential in the pharmaceutical industry. Companies in these areas typically have a high proportion of R&D spending, which is indicative of potential future revenue and profit growth. In addition, the growth potential of the consumer medical field cannot be ignored, especially with the increase in the penetration rate of medical services, the growth potential of related companies is huge.
As for how much room for growth? This mainly depends on the fundamentals of the pharmaceutical industry, the level of valuation, and market sentiment. Professionals emphasize that market sentiment and short-term options for funds are difficult to predict, but fundamentals and valuations are key factors that investors can grasp. In the current market environment, the fundamentals of the pharmaceutical industry are improving, and valuations are at historically low levels, which provides investors with a good opportunity to enter the market.
In the view of institutions, investment in the pharmaceutical industry is not only the pursuit of short-term stock price rise, but also the long-term growth potential of the industry. The pharmaceutical industry has multiple attributes of consumption and technology, the cognitive threshold is high, the industry is volatile, and it is difficult for ordinary investors to choose individual stocks for investment, while the index fund is to buy a basket of stock portfolios, which has the advantages of transparent positions, risk diversification, convenient transactions, and low fees, and is a good investment tool for investors to capture the growth opportunities of the pharmaceutical industry.
There are many types of pharmaceutical index funds
Meet the multiple choices
Wind data shows that as of September 13, there were 138 pharmaceutical index funds in the whole market, with a total scale of 118.407 billion yuan, and a total of 40 indexes were tracked. These pharmaceutical and biological indices can be divided into broad-based indexes, thematic indices and Hong Kong stock and QDII indices according to the concentration of their subdivided industries and regional differences, of which the thematic indices are divided into four categories: vaccines, innovative drugs, medical devices, and traditional Chinese medicines.
How to choose the right pharmaceutical index fund? He Yuxuan took Tianhong Fund's pharmaceutical index fund products as an example to systematically explain the characteristics of some pharmaceutical industry indexes. He introduced that the CNI Biomedical Index (399441) is an index that focuses on the biomedical segment among many pharmaceutical industry indexes, with about 26% of the industry weight for pharmaceutical R&D services (CXO), about 37% for biological products, including blood products and vaccines, about 20% for biological drugs, biological innovative drugs, etc., and about 10% for biomedical materials. The index has only 30 constituent stocks, which is the index with fewer constituents in the pharmaceutical industry index, so the weight is relatively more concentrated, providing investors with a clear investment direction.
"The Hang Seng Shanghai-Shenzhen-Hong Kong Innovative Drugs Select 50 Index is an index that prefers to completely cover listed companies in the field of innovative drugs, including not only biological innovative drugs, but also chemical innovative drugs and medical R&D services related to innovative drugs, covering the markets of Shanghai, Shenzhen and Hong Kong geographically. In terms of compilation method, in addition to the requirements for the scope of the industry and liquidity, it also increases the requirements for the scale of the company's R&D investment and performance indicators. The idea of stock selection is not simply based on market capitalization, but more similar to strategic stock selection, which can eliminate some mixed pharmaceutical companies. He Yuxuan introduced that Tianhong Hang Seng Shanghai-Shenzhen-Hong Kong Innovative Drug Select 50 ETF (517380) is currently the only ETF in China that tracks the Hang Seng Shanghai-Hong Kong-Shenzhen Innovative Drug Select 50 Index.
In addition, Tianhong Fund also provides CSI Pharma 100 Index Fund covering medical equipment, medical devices and medical services, as well as an enhanced fund that benchmarks against CSI Pharma Theme Index. Among them, the CSI Pharmaceutical 100 Index selects the 100 pharmaceutical companies with the largest market capitalization in the A-share market, focusing more on large-capitalization pharmaceutical companies; Due to the equal weight strategy, the volatility is relatively large, which is suitable for investors with a high risk tolerance and looking for high volatility to bring high returns. The CSI Pharmaceutical Theme Index selects the securities of listed companies in the medical and health and pharmaceutical retail industries as the index sample, with 200 constituent stocks, including more small and medium-capitalization pharmaceutical companies, with wider coverage and higher risk diversification, suitable for investors with moderate risk tolerance and seeking steady growth.
He Yuxuan emphasized that the transparency of index funds is one of its important advantages. Investors can check the specific composition and weight of the index through the official website of the index company, so as to have a clear understanding of their portfolio. This transparency makes index funds a reliable choice for investors investing in the pharmaceutical industry. However, pharmaceutical indices are very different, and investors can choose suitable index funds according to their optimistic sub-sectors and risk appetite.
Risk Warning: Views are for reference only and do not represent investment advice. Index funds have tracking error, the market is risky, and investment needs to be cautious.