Brief China: Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field and more

In this briefing:

1. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field
2. Global Ex-U.S. Equity Strategy: Positive Outlook Intact; Remain Overweight China
3. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
4. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way
5. China Meidong (1268 HK): +59% YTD After Strong FY18 Results and Positive Outlook; Now Fairly Valued

1. Keytruda Approved for Lung Cancer Treatment in China – A Review of PD-1 Battle Field

Anti-PD-1 monoclonal antibody (mAb) is a hotly contested immunotherapy area in China, with seven companies working on clinical trials covering various lines of treatment for more than a dozen indications. Out of these indications, we have highlighted in our previous coverage on Chinese biotech companies that the most critical indication is the first line treatment of lung cancer, particularly non-small cell lung cancer (NSCLC). Valuation of PD-1 related drugs anchors many of the Hong Kong-listed biotech companies, such as Innovent Biologics Inc (1801 HK), Shanghai Junshi Bioscience Co. Ltd. (1877 HK), BeiGene Ltd (6160 HK), CStone Pharma (2616 HK)  and China A-share listed Jiangsu Hengrui Medicine Co., (600276 CH). 

In March, Merck’s Keytruda (generic name pembrolizumab) was approved by NMPA for the first line treatment of EGFR and ALK-negative non-squamous NSCLC. This marks Keytruda the first approved PD-1 drugs for the first line treatment of NSCLC in China.

In this insight, we will review the status and targeted indications of clinical trials of PD-1 candidates by domestic players. 

2. Global Ex-U.S. Equity Strategy: Positive Outlook Intact; Remain Overweight China

Incremental technical developments continue to be of the bullish variety as more and more countries/regions begin to participate in the rally. These ongoing improvements further cement our positive overall outlook, and we continue to believe that global equities (MSCI ACWI) are poised for additional strength moving forward. In our April International Strategy, we highlight various themes which lead to our overall positive outlook, along with areas within the world’s markets where we see immediate opportunity.

3. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

4. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way

In our latest Asian Tower Trends report, Chris Hoare looks at the listed telecom tower industry across the region. During 4Q18, we became more optimistic on the Asian tower space. 

• China: Last December, we upgraded what is by far the largest towerco globally, China Tower (788 HK), after it became clear the story was much better than disclosed at the time of the IPO (still a mystery as to why this happened),
• The Indian tower business has been buffeted by rapid industry consolidation but we think it is now near a bottom, and recently raised Bharti Infratel (BHIN IN) to Neutral, and
• Growth is improving in Indonesia with increased investment ex Java from the smaller operators. Protelindo (TOWR IJ) our preferred name, but Tower Bersama (TBIG IJ) has lagged badly recently and may be due some catch up. 

With the 5G investment cycle a key theme for coming years, we are now more constructive on the telecom tower space in general. 

5. China Meidong (1268 HK): +59% YTD After Strong FY18 Results and Positive Outlook; Now Fairly Valued

China Meidong Auto (1268 HK) has been a great success story for its investors in the last two years. I first wrote about the company in May 2017 when shares were trading at 1.53 HKD. This week shares traded over 4.7 HKD. While the share price has gyrated wildly the past 24 months the underlying earnings of the company have been increasing steadily and shareholders have been rewarded with solid dividends.

FY18 results were released last month which showed strong growth in revenues (+44%) and net profits (+31%). With the importance of Lexus and Porsche increasing, FY19 should be another year of growth. The performance of BMW remains a wild card.

With the stock up 59% YTD shares are now fairly valued and trading at a 30% premium to its peers. Meidong remains a long-term favorite but has now exceeded my fair value estimate of 4.4 HKD (10x 2019 EPS). I suggest waiting for a better entry point.