China’s healthcare sector – the opportunity for equity investors

Robust income growth and an ageing population are driving the fastest-growing major healthcare market in the world, according to the Economist Intelligence Unit (EIU).¹ From vaccine development to innovative drugs and biotechnology, China’s healthcare companies have been expanding rapidly, outpacing some of the world’s leading industry players, and creating opportunities for investors.

The statistics

Chinese per-capita health spending rose from just US$42 in 2000 to US$441 in 2017, still far below the US$6,500 average in the world’s top eight healthcare markets, indicating potential scope for significant growth ahead. Indeed, China aims to double the size of the nation’s health-service industry to about US$2.4 trillion by 2030.¹

The drivers

Various factors are fuelling demand for healthcare services in China:

• An ageing population: Life expectancy is steadily increasing, rising from 69 years in 1990 to 77 today (and projected to reach 79 in 2030). Longer life expectancy correlates with increased healthcare spending, as older people are more likely to need healthcare than their younger cohorts. Moreover, the scale of demand in China is unique. By 2027, the number of people aged 60+ in China is set to double to 324 million — almost the size of the entire US population.¹

• Rising living standards: Meanwhile, China’s non-retired citizens have growing wages, GDP per capita on a purchasing power parity (PPP) basis rising from US$9,190 in 2010 to an estimated US$17,220 in 2020 and a forecast of more than US$30,000 in 2030. Excluding 2020, disposable income in China has grown at a consistent annual rate of more than 5% since 1990. As a result, the Chinese middle class is now the largest in the world, underpinning surging demand for high-quality healthcare products and services.²

• Healthier lifestyles: There is a growing awareness of the importance of healthcare, both physical and mental. This is particularly true of those living in major urban areas (although the trend is spreading across China) and among the young. The latter, seeing the growth in diseases such as diabetes linked to obesity, are eager to take preventive measures.

• Growing healthcare costs: Costs are rising faster than GDP and are outpacing the capacity of public services, so the government is looking for ways to stimulate other means of payment. This could drive growth in private health insurance and, therefore, private healthcare provision.

• Technological advances: New drugs and treatments are fuelling spending. For example, China is in the early stages of shifting from older-generation treatment regimens for cancer.

• COVID-19: The emergence of the virus has likely served to accelerate industry growth, particularly in subsectors such as telemedicine and biotech.

• Healthcare reforms: The re-organization of the National Medical Products Administration (the Chinese equivalent of the US Food and Drug Administration or the Medicines and Healthcare products Regulatory Agency in the UK) has further accelerated the development of innovative drugs domestically. Policy actions have also cut the price of generic drugs, so encouraging companies to focus on developing innovative, higher-margin pharmaceuticals.

The investment opportunity – a huge and diverse market

Over the last decade, China’s healthcare industry has grown into a RMB 6.8 trillion (US$1 trillion) industry by market capitalization and is one of the largest sectors in the A-share² market. The sector has been growing at a compound annual growth rate of 15–20% (2015–2018) and consists of more than400 listed healthcare companies in China and Hong Kong.³

Moreover, compared with global peers, Chinese healthcare firms have ample growth potential (China’s top 20 domestic healthcare companies have market capitalizations of less than US$50 billion) and spend less on research and development (R&D) as a percentage of sales, as can be seen below.

The potential to outpace growth in other global healthcare markets

There is a wide pool of subsectors for investors to choose from within China’s A-share healthcare sector— each with its own unique supply-and-demand dynamics and business model. The growth profiles of a China healthcare stock and a multinational healthcare company are very different. China healthcare stocks can broadly deliver double-digit revenue growth at 50 times forward PE (Price-to-Earnings), whereas US healthcare companies offer low single-digit earnings growth at 30 times forward PE.³

For growth-oriented investors, some Chinese healthcare companies have a strong pipeline of innovative drugs. China is the second-largest prescription-drug market in the world (US$140 billion market capitalization) after the US (US$393 billion) and is expected to continue to expand rapidly.