Asset management

Funds look to Beijing, not viruses, to dictate investments

While the market grapples with the full impact of the Wuhan coronavirus, long-term investors typically follow Beijing’s policy playbook when deploying their capital. And if they don't, they probably should.

Amid the spread of the deadly coronavirus that has emerged from Wuhan, China’s largest and well-known companies have generously donated medical aid and resources.

New economy leaders, that included Alibaba, Tencent, and Meituan, have together donated more than Rmb3 billion towards the relief efforts. Top private equity and venture capital houses, like Hillhouse and Qiming Venture have also donated millions to help doctors in the front line

Tencent set up a special fund of Rmb300 million ($43 million) for medical supply purchase and future R&D. Alibaba allocated Rmb1 billion to invest and purchase medical supplies for hospitals in Wuhan, where the virus first broke out.  

Pinduoduo, an e-commerce company, set up a Rmb100 million fund for the specific investment of the coronavirus. The fund will be run by doctors and academics who will invest in research and development (R&D). 

And more is needed, especially into R&D of the coronavirus itself, as China’s Premier Li Keqiang said on January 31. But given widespread concerns about the capacity of Chinese charities – notably China Red Cross and China Charity Federation – to effectively distribute the funds to where they are needed, there are calls for more professional fund managers to deal with such a national crisis.

“I think the government can open up and allow some private charity group and funds to work together and increase efficiency,” one China-based manager of an American multinational PE fund told FinanceAsia. She said the competition in China will be much healthier if the government opens up and fully allows foreign fund managers to enter the domestic market.

SUBSTANTIAL INFLOWS

But despite the overall surge in largess, it’s yet unclear if the coronavirus outbreak will trigger a significant new catalyst for additional healthcare investments into China. The sector has already seen a substantial inflow of capital recently. Private equity investments in the Chinese healthcare industry reached $34 billion by the middle of 2018, a five-fold increase from just three years earlier, according to research published by Preqin, a financial data service provider. 

The trend was also evident in the value of healthcare venture exits which reached $3.7 billion in China in 2018, almost four times larger than in 2007. Over this time 60%, IPO’s accounted for the majority of these exits according to Preqin.

While investors are attracted to China’s aging demographic profile, rising disposable income levels, and increasing demand for quality healthcare services, the largest factor remains Beijing and policy narrative the central government decides to push.  

In the 13th, and current, five-year plan (2016 – 2020), Beijing outlined its Healthy China agenda, looking to close the healthcare quality gap between the middle kingdom and developed nations.

On the servicing and professional staffing side, China will have its work cut out. China averages less than two physicians for every 1,000 people, compared to almost three in developed countries, according to research from S&P Intelligence.  For nursing and midwives China, has about three for every 1,000 people, compared to 10 in developed countries. 

REGULTORY REFORM

But regulation changes in China is drawing investor attention especially as Beijing aligns drugs production standards closer to international practices, as well as contribute towards establishing ethics guideline for advanced newer technologies. 

"Capital follows Beijing because Beijing is the ultimate decider,” said a buy-side analyst for a mid-size Asia pacific equities fund that asked to remain anonymous. “China’s five-year plans basically become a ‘to do’ list for investors. It’s a well-known secret.”

Among recent notable deals includes the $440 million acquisition of diagnostic group Adicon by US investment firm Carlyle Group and Meinian, the largest professional health examination and medical treatment services group in China. Lilly Asia Ventures, Temasek, Hillhouse Capital, Teng Yue Partners, Sequoia Capital China, and ARCH Venture Partners are also invested into the space.

Among these regulatory changes are China’s efforts to modify testing rules in bioequivalence drugs, where commercially available branded products and potential generic products, are, for all intents and purposes, the same. Alongside shortening clinical trial and authorization process, means better generic drugs and medicines for patients.

Bioequivalence reforms hold two critical implications, according to Pui Man Hoi, an associate professor at University of Macau and lecturer at the university’s Institute of Chinese Medical Sciences. First, its widely supported government policy, since the “confirming the quality of cheaper generics which is widely availability for poorer communities.”

Second, it lowers the perceived risk for patients “removing bad companies that are producing under-quality medicines” continued Hoi. “It’s probably not a coincidence” that lower patients risk coincides with a rise in investments in this area.

Coupled with changes to the Hong Kong Stock Exchange and launch of the Shanghai Stock Exchange Science and Technology Innovation Board (STAR Market) that allow unprofitable biotech companies, together acts as factors that draw more capital.

Regulation framework will likely remain inviting for investments, evident in previous five-year plan agendas. Consider the previous favored policies when the government advocated infrastructure spending or aiming to rebalance economic towards household consumption.

“If Beijing publicly says that more support will focus in XYZ, don't bet against XYZ,” says Eric Ritter, a former Asia hedge fund manager and current adjunct professor of economics for Lakeland University in Tokyo. “Remember when Beijing said young people were at risk of developing a video game addiction? Tencent remembers."

But investors and patients are not only asking China to close the quality gap in drug production, but also contribute to future standards and guidelines for more advanced scientific technologies that have broader implications.

Among the most contentious is genome editing, which has taken more attention following the jailing of Chinese scientist He Jiankui, who created the world’s first gene-edited babies without the knowledge of the international scientific community. He was sentenced to three years in prison in December last year for violating medical regulations and sends a message to promote responsible research and ethical use of the technology, which is likely to be mentioned in the next five-year plan.

CORONAVIRUS’ IMPACT ON CAPITAL

While the full impact of the WCV will remain unknown for some time, market anxiety is already evident in recent share price movement, where defensive stocks have outperformed faster growth companies.

“The share price movements are unlikely reflecting any sustained sector rotations, and instead appear to respond to the daily news flow and sentiments,” says Sabrina Ren, a portfolio manager at JK Capital Management in Hong Kong. Bluntly, “I have doubts that this is the biggest market risk of the year.”

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