Expert Insights Health, Wealth and Investing in Modern China
On the macroeconomic front CIC attendees heard a mixed prognosis, not least due to escalating trade tensions with the United States that are compounding concerns about slowing economic growth. John Litwack, the World Bank’s lead economist for China, explained that China would be advised to see the trade issue as broader than a bilateral dispute, and that (although it has taken some steps in this direction already) “there will likely need to be movement in the direction of reciprocity to avoid and defuse conflicts”.
“We could also see greater protectionism emerging in other countries, as well as more and more restrictions on Chinese investors and more concerns about technology transfer,” Litwack said.
Semiconductors: Opportunity in Adversity?
The trade environment is not necessarily a universal negative. Take semiconductors, long an area in which China has lagged the US. Since 2014 China’s semiconductor industry has entered a new era, explained Min Ding, Investment Director at SL Capital, with new state-level development funding for the sector worth RMB100 billion. In separate remarks Joseph Xie, Founder and President of IC Engineering and Business School, warned that the gap with the US won’t easily be closed, given the shortage of some 320,000 engineering talent and R&D capital invested in the sector in China, not to mention the sheer complexity of manufacturing chips.
However, Ding and Xie both explained that the current Sino-US trade environment is an opportunity for the domestic semiconductor industry - not least, Xie said, because some players have started to use domestic chips on a trial basis, leading to a marked improvement. (Kyna Wong, head of China Technology Research at Credit Suisse, agrees that the sector has made good progress.)
EVs: Where Innovation Meets Demand
Nor did the trade outlook dampen enthusiasm at the CIC for other high-potential industries in investors’ spotlights, such as new-energy and smart vehicles – identified as “the megatrend of the automotive industry” by Bin Li, the Founder, Chairman & CEO of NIO, speaking on a panel with Daniel Kirchert, president and co-founder of electric car startup BYTON.
Not only will smart EVs become the mainstay of the auto industry within 10 years, Li forecast, but Chinese brands would gain an adequate share in this market. Demand is soaring. NIO, positioned as a high-end smart vehicle brand, launched its first product, a 7-seater electric SUV, in June this year and by end-October had delivered over 5,000 units. Kichert, meanwhile, identified China as the world’s best country for the development of self-driving vehicles, given factors such as the innovation environment, AI development, government support and financing.
While bullish about the prospect for China brands in the EV market, Li also pinpointed some “dark horses” innovating in related fields, such as battery materials and technologies (a view shared by CIC speaker Ke Mo, Founder, CEO and Chief Analyst of RealLi Research). Indeed, identifying prospects to join the club of China’s most successful innovators – those which have become “unicorns”, with valuations in excess of US$1bn - was a favorite topic for CIC attendees.
In this they were guided by a special report from Credit Suisse, launched at the conference: “China Unicorns: Where are their breeding grounds?” The report compares China’s unicorn scene to that of the US, identifying five major sectors from which future unicorns will likely emerge: automotive, fintech, internet, technology hardware – and, of course, healthcare.
Wealth from Digital Health?
It is no surprise that China’s healthcare sector stands to be a fertile breeding ground for unicorns, since it is a nexus of growing demand and cutting-edge innovation heavily affected by government initiatives.
Hengpeng Zhu, Director of the Public Policy Research Center at the Chinese Academy of Social Sciences (CASS) and an advisor to multiple Chinese government ministries, noted the importance of three forces shifting the dynamics of healthcare in China: demographics, economic and social transformation, and technology. From a policy perspective, he pointed out that the government is focused on controlling medical costs (a theme explored in more detail in an exclusive pre-conference interview) but reform will take time, Zhu warned.
Developments in healthcare policy herald opportunities across the sector, said Serena Shao, Head of China Healthcare Research at Credit Suisse: “After introducing a universal healthcare plan to cover almost all of China with affordable care in 2009, the government is now focused on enhancing the quality of medicine.”
Digital health has accordingly become a hot topic, with the government recently licensing some internet hospitals, Shao noted. Innovative business models based on digital health platforms, such as Ping An Good Doctor, have already proven their success, CIC attendees heard. Good Doctor, one of China’s first unicorns, has leveraged Ping An’s client resources and its own team of over 1,000 doctors to improve its AI diagnosis system. The number of annual inquiries on the platform now exceeds 300 million, equivalent to the total that might be managed by 250 Grade-III hospitals, CIC attendees heard.
Pharma and Biotech Bonanzas
Investors should also be on the alert for opportunities across healthcare subsectors, notably pharmaceuticals, Shao explained. For one thing, spending on medicine in China in 2016 was only 1.7% of GDP versus 2.4% in the US. China’s pharma market could therefore achieve a 15% CAGR in sales revenues in 2019-21, Credit Suisse estimates, driven by higher penetration rates, the launch of biologics, a higher rate of chronic disease management and earlier dosages for serious diseases.
Consolidation in the fragmented pharma industry is also likely. “Currently, the top-10 players generate only 10% of total drug sales in China, compared to 48% in the US in 2016,” Shao said. “We expect further consolidation over the next five years, with big pharma companies taking at least 50% market share from smaller companies.”
Biotechnology is another area with great potential. Speaking at the CIC Jimmy Zhang, Venture Partner at Lilly Asian Ventures, and Taylor Guo, Chief Scientific Officer at I-Mab Biopharma, discussed the latest trends in biotech investment in China and the US. According to Zhang, biological medicine is a field with many investment opportunities, given the emergence of new therapies and generally high pricing in primary markets. Regarding cancer therapy, tumor immunology, combined treatment and new small molecule drugs are potential new directions, Guo said, while Zhang highlighted the application of new methods like cell therapy.
The Tools to Invest Wisely
The CIC audience heard many exciting prospects, but also a caveat or two. Take digital health: according to Zhengrong Liu, Founder & CEO of internet medical hub Allinmd, “China’s digital health is still in a very early stage, and no significant development has yet been observed.”
Evaluating prospects judiciously is therefore crucial. As Serena Shao, Head of China Healthcare Research at Credit Suisse advised, with reference to the healthcare sector, it’s best to ask three questions: “First, is the company actually solving any practical issues? Second, what benefits have been brought to the medical system or patients? Third, does the team have a good track record? At the end of the day, in-depth understanding of the medical and the digital industries is very important.”
The same could be said of investments in any sector in China – part of the reason why Credit Suisse developed HOLT, its proprietary analytical platform, launched at the CIC. HOLT has the most advanced coverage of the China A-share market, with over 1,800 companies in its database, providing near 100% coverage of the CSI 300, SSE 180, SSE 380, and SICOM stock indices. It helps sophisticated asset managers and financial professionals make better and smarter investment decisions.
Another way to evaluate opportunities, please continue to pay close attention at the 10th Credit Suisse CIC.