1) The Chinese Government will be making huge investments in health care and give huge support to companies in this field in the coming decade.
2) A number of US-listed Chinese pharma stocks trade OTC but are in the process of getting listed on major US exchanges.
3) Chinese hospitals are solid customers but they are very late payers. Therefore, many Chinese pharma companies trade at very low PE ratios due to their very high working capital requirements. At some point they may find a way to lower their working capital through factoring or negotiated faster payments from the hospital. If this happens, PE multiples could expand significantly.
4) Institutional investors like “Aging” as an investment theme, but they are concerned about future profitability of Western pharma companies, as Western governments face pressure to reign in health care costs. Emerging market pharma such as Chinese pharma allows them to continue to have pharma/aging exposure without the gross margin risk of Western pharma companies.
5) For historical reasons, the biggest pharma companies in the world are in the US, France, Switzerland, Denmark, Germany and other European countries with good health care systems and good education. Considering the huge population in China, the government’s new focus on health care and a very large number of world class scientists and low cost production, it is not hard to imagine that China in ten or twenty years will have a number of pharma companies joining the ranks of the largest pharma companies in the world.
6) At some point Western pharma companies will want to buy Chinese pharma companies as a way to more effectively penetrate the Chinese market.
7) China is rapidly becoming a medical tourism destination especially for cancer treatments.
8) Potential for existing players to buy state owned enterprises at compelling valuation (without truly competitive bidding processes) and run them much better than today.
9) Generally speaking, there are a lot of compelling valuations combined with the potential for Chinese pharma to develop into a bull story in the coming years.
10) Most Chinese pharma stocks have little or no debt
Of course one has to be very careful with Chinese stocks – lots of poor management, fraud, dilution, poor disclosure and pursuit of growth for its own sake.
I currently have no positions in Chinese pharma stocks but I’m doing research on Jiangbo Pharmaceuticals (JGBO.OB) and China Pharma Holdings (CPHI.OB).
Mike Speculates 