Max Pacella
Investment Analyst
Equities
17 Aug, 2021

We have written about global healthcare trends in the past – healthcare is a logical theme to consider in a portfolio if you think it’s reasonable that people want to live longer lives with better treatment, particularly as they grow wealthier across the world.

We have also written about China, and the ambitions of its recent Five Year Plan to continue pushing the Chinese economy towards more ‘developed markets’ attributes.

You can find some of those notes here:

So, in an effort to demonstrate ecofriendliness, why not recycle two old ideas into one fresh new one: a closer look into investing in Chinese healthcare.

The Red Pill

First, let’s begin with a brief overview of the investment universe available for the Chinese healthcare theme.

As many market participants may have observed, Chinese equities have encountered heightened volatility the past few months, prompted by a slew of regulatory inquiries and noise around different sectors.

Healthcare befell some of that volatility in late July over concerns that a regulatory enquiry was heading their way, only to rebound after government officials publicly showed support for traditional medicine and improving care across the country. For now, the situation remains “unchanged” relative to some other areas like technology and e-commerce.

CSI 300 Healthcare Index – Source: Bloomberg

Based on the MSCI China All Shares Index, there are 25 listed healthcare stocks in Hong Kong and 67 in Shanghai – presenting a reasonable investment universe for overseas investors to gain exposure to the sector through ETFs, Managed Funds, or in accessible listed equities..

The next important piece of the puzzle when considering the universe is the dynamic of government/policy support for the sector – Chinese equities, arguably more so than almost any other major economy, are particularly vulnerable to the direction the government has in mind for their particular industry.

There are multiple structural trends which support the growth of healthcare companies within China;

1) Over a decade of reforms have sought to expand social health insurance, public availability of modern medicine and developing hospital infrastructure in metropolitan centres
2) The continuing drive towards urbanising ~65% of the population will naturally support spending
3) GDP growth per capita continues to be a focus, with the growing Chinese middle class and improvement of household wealth crucial to China’s long-term vision – this will of course support the ability to spend on healthcare
4) The aim to increase the life expectancy of all Chinese citizens by one year (currently 77) by 2025 will only be achievable through the immediate availability of quality healthcare

With this structural support by key government programs, does this mean healthcare is invulnerable to further regulatory volatility?

Absolutely not.

Lowering medical expenses as a portion of overall living costs has already been outlined as a key focus in several outlines from Beijing, including the latest Five Year Plan, so this stands to attract the attention of a regulatory crackdown on the sector if prices are seen to become unreasonable.

This does, however, present a filter to what equities may come out winners: those who have scale and have the capacity to offset reduced fees with increased volume as they develop their products/infrastructure in urban centres.

With this in mind, let’s consider some investible options within the space.

Buying a Clean Bill of Health

If we begin with structured products, there are several ETFs and funds which provide exposure through to Chinese healthcare names. These vary from actively managed global portfolios through to index-wide ETFs.

KraneShares MSCI All China Health Care Index ETF (KURE: NYSE)

With ~$230 million USD under management, KURE is one of the largest China healthcare-specific ETFs available on the market. The index tracked by KURE encompasses pharmaceuticals, medical equipment, hospital administration, biotech, healthcare IT and traditional Chinese medicine.

With a weighted average market cap of $31 billion USD, these are certainly not small players within the space.

Source: Bloomberg

Platinum International Healthcare Fund

Platinum Healthcare Fund is one of a handful of managed funds which tap the global healthcare market, employing an actively managed strategy to take positions in what they consider to be the leaders in their respective medical fields.

This is not a pure play, with 8.7% allocation to China and 2.0% allocation to Hong Kong, but managed funds such as this do represent a way to achieve an actively managed exposure.

Direct Holdings

The Chinese healthcare sector boasts a wide range of disciplines, market capitalisations and geographic focuses. In keeping with the previous comment regarding those who have scale, some direct holdings which could be further examined may be:

  • JD Health International (6618:HK)
    • JD Health is a subsidiary of JD.com and has pioneered an online pharmacy/health clinic model throughout mainland China and Hong Kong. They hold around a ~30% market share according to Factset, which represents around 73 million active users.
  • Alibaba Health Information Technology (241:HK)
    • In a similar vein, 241:HK is a subsidiary of the industry titan Alibaba, and also focusses on online health service, digital pharmacies and telehealth solutions, both Alibaba and JD competing for market dominance of this emerging sector.
  • Shenzen Mindray Bio-Medical Electronics (300760:CH)
    • Mindray manufactures key medical equipment used in life support machines, in-vitro delivery of medicines and diagnostics and medical imaging equipment across mainland China. They design these products as proprietary medical equipment and also produce medical accessories (such as heart rate monitors) for both human and animal usage. Although this cannot be purchased directly by overseas investors, there are ETFs and funds which hold this security as one of their highest weightings due to its critical equipment suite.

A Final Diagnosis

The Chinese healthcare sector is not without risk of regulatory interference, in fact it may be prudent for international investors to factor in a circumstance in which that volatility does occur no matter which sector they view.

However, given the structural support and clearly flagged policy milestones which both support and require healthcare’s success, still maintains a compelling profile for growth in the medium-to-long term.

Keeping your own health in mind, ensure you can stomach the volatility, and perhaps this is one exposure that will fit into your own portfolio.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.