HK/China Healthcare Analyst (ex-Fosun Pharma)

Xinyao (Criss) Wang

Equity Bottom-Up

<ul>
<li>2023 is a crucial year for Zai Lab.It’s the first time for Zai Lab to demonstrate the profitability of license-in model.If it fails, investors would lose confidence in the company.</li>
<li>There is little correlation between the four commercialized products, which makes commercialization difficult and leads to low efficiency/high costs for sales team. So, breakeven could be more distant than expected.</li>
<li>Zai Lab's current pipelines are hard to make money. There are concerns whether its business model is sustainable in the long term. As its valuation lacks an “anchor”, risk is high.</li>
</ul>


2023 is a crucial year for Zai Lab.It’s the first time for Zai Lab to demonstrate the profitability of license-in model.If it fails, investors would lose confidence in the company.
There is little correlation between the four commercialized products, which makes commercialization difficult and leads to low efficiency/high costs for sales team. So, breakeven could be more distant than expected.
Zai Lab's current pipelines are hard to make money. There are concerns whether its business model is sustainable in the long term. As its valuation lacks an “anchor”, risk is high.


Zai Lab (9688.HK/ZLAB.US) 2022/2023Q1 - The True Colors and the Risks Behind

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Quantitative Analysis

<ul>
<li>We analyze the monthly Shanghai/Shenzhen northbound Connect flows with our data engine.</li>
<li>We estimate the outflows to be $12.8bn in August and consumer staples, and financials sectors led the outflows.</li>
<li>We highlight flows for CATL, Wuxi Wapptec, Fuyao Glass, Foxconn Industrial, CMB, Wuliangye, Mindray, Moutai, Longi Green.</li>
</ul>


We analyze the monthly Shanghai/Shenzhen northbound Connect flows with our data engine.
We estimate the outflows to be $12.8bn in August and consumer staples, and financials sectors led the outflows.
We highlight flows for CATL, Wuxi Wapptec, Fuyao Glass, Foxconn Industrial, CMB, Wuliangye, Mindray, Moutai, Longi Green.


Northbound Flows Monthly (August): $12.8bn Outflows

Equity Capital Markets

<ul>
<li>There is a certain connection between Sunho and Genscript. So, Sunho has a typical style of "CXO switching to biotech" – That is to do whatever is popular.</li>
<li>For core products, IAP0971 and IAE0972 just completed phase I trials, still with high R&amp;D failure risks. IAH0968 is difficult to become a blockbuster variety due to strong competing products.</li>
<li>As investors’re already rational about investing in unprofitable Biotech. The companies without commercialized products and with uncertain outlook may not be favored by the market. Therefore, high valuation is unreasonable.</li>
</ul>


There is a certain connection between Sunho and Genscript. So, Sunho has a typical style of "CXO switching to biotech" – That is to do whatever is popular.
For core products, IAP0971 and IAE0972 just completed phase I trials, still with high R&amp;D failure risks. IAH0968 is difficult to become a blockbuster variety due to strong competing products.
As investors’re already rational about investing in unprofitable Biotech. The companies without commercialized products and with uncertain outlook may not be favored by the market. Therefore, high valuation is unreasonable.


Pre-IPO Sunho Biologics (SHB HK) - High Valuations Can Be Hard to Come By

Jiangsu Hengrui Medicine / Equity Bottom-Up

<ul>
<li>Hengrui’s performance recovery in 23H1 (especially 23Q2) was due to the low base last year caused by pandemic/lockdown. Increasing innovative drugs revenue proportion also reduced the negative impact of VBP.</li>
<li>People think the turning point of Hengrui's performance has arrived, but we hold different opinions.Some big varieties haven’t entered VBP. It would take some time to achieve breakthrough in internationalization.</li>
<li>The negative impact of 23H2 anti-corruption hasn’t been reflected in interim report.Even if Hengrui’s performance growth could be back to 20-25% YoY in 2025/2026, over 60 PE/TTM is already expensive. </li>
</ul>


Hengrui’s performance recovery in 23H1 (especially 23Q2) was due to the low base last year caused by pandemic/lockdown. Increasing innovative drugs revenue proportion also reduced the negative impact of VBP.
People think the turning point of Hengrui's performance has arrived, but we hold different opinions.Some big varieties haven’t entered VBP. It would take some time to achieve breakthrough in internationalization.
The negative impact of 23H2 anti-corruption hasn’t been reflected in interim report.Even if Hengrui’s performance growth could be back to 20-25% YoY in 2025/2026, over 60 PE/TTM is already expensive. 


Jiangsu Hengrui Medicine (600276.CH) 23H1 - Has the Turning Point of Performance Really Arrived?

Thematic (Sector/Industry)

<ul>
<li>The anti-corruption campaign has significantly accelerated since the beginning of this year. After Central Commission for Discipline Inspection has been involved, the anti-corruption efforts in pharmaceutical/device sectors would be unprecedented.</li>
<li>The main targets are leaders of hospitals/governments. The impact of anti-corruption on companies is indirect. As long as senior management are not investigated/arrested, the impact on stock price isn’t significant.</li>
<li>However, investors not only need to consider the problem of sales growth slowing down in the context of anti-corruption, but also consider whether companies is engaging in financial fraud. </li>
</ul>


The anti-corruption campaign has significantly accelerated since the beginning of this year. After Central Commission for Discipline Inspection has been involved, the anti-corruption efforts in pharmaceutical/device sectors would be unprecedented.
The main targets are leaders of hospitals/governments. The impact of anti-corruption on companies is indirect. As long as senior management are not investigated/arrested, the impact on stock price isn’t significant.
However, investors not only need to consider the problem of sales growth slowing down in the context of anti-corruption, but also consider whether companies is engaging in financial fraud. 


Anti-Corruption in China Healthcare – the Impact and the Outlook

China

Jiangsu Hengrui Medicine Co., Ltd. develops, manufactures, and markets a variety of medicines and medicine packing materials. The Company's products include anti-tumor medicines, pain-killers, anti-infection medicines, aluminum foil, and other related products.

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Jiangsu Hengrui Medicine (600276 CH)

Zai Lab (9688.HK/ZLAB.US) 2022/2023Q1 - The True Colors and the Risks Behind

In the insight, we analyzed major investment logic flaws of Zai Lab. As we expected, the company's performance is not ideal. The license-in model...

Xinyao (Criss) Wang

Northbound Flows Monthly (August): $12.8bn Outflows

We analyzed the Shanghai/Shenzhen Connect Scheme for August and highlight flows for CATL, Wuxi Wapptec, Fuyao Glass, Foxconn Industrial, CMB,...

Ke Yan, CFA, FRM

Pre-IPO Sunho Biologics (SHB HK) - High Valuations Can Be Hard to Come By

Sunho does not have any drugs at NDA/BLA stage or commercialized products. Its outlook is highly uncertain due to challenging clinical trials...

Xinyao (Criss) Wang