Analysts Out of Whack With Stocks After China Drugmaker Rout

Jan 10 2019, 2:10 AMJan 10 2019, 5:14 AMJanuary 10 2019, 2:10 AMJanuary 10 2019, 5:14 AM

(Bloomberg) -- Analysts’ price targets on Chinese health-care stocks are looking optimistic after a sell-off in the sector accelerated toward the end of last year.

The average 12-month target on drugmakers is 36 percent higher than their share price, according to data compiled by Bloomberg as of Wednesday. That’s close to the biggest gap since 2011 and the widest among all sectors on the MSCI China Index.

The disparity grew in December, when $46 billion was wiped from health-care stocks as China changed its drug procurement policy in a bid to drive down prices. A sector subgauge on the CSI 300 Index slid 15 percent, its biggest monthly loss in nearly three years. Drugmakers were already under pressure at that stage, rocked by a vaccine scandal that derailed a rally midway through 2018.

Analysts have tweaked their targets, but they’re still lofty. The sector was, after all, delivering stellar returns less than a year ago as the U.S.-China trade dispute erupted and the wider market fell. Health-care stocks -- defensive in nature -- climbed to record highs, with the CSI 300 health-care index jumping 26 percent from January through May. Most other subgauges declined.

After $46 Billion Drop, China Drugmakers Still Face Pressure

CSPC Pharmaceutical Group Ltd. was a top performer in Hong Kong, surging 56 percent in the first five months of the year. At least eight brokers raised their price targets on the company in late May after its quarterly profit beat expectations, citing everything from a strong product pipeline to inclusion on the Hang Seng Index. The stock went on to lose 54 percent over the rest of the year. It has bounced back in recent days, rising 4.6 percent as of 10 a.m. Thursday.

Among analysts tracked by Bloomberg, 33 still have buy or equivalent ratings on CSPC, while only two rate it hold and two recommend sell. Even after being lowered by 10 percent over December, the average 12-month price target is HK$19.95.

The CSI 300 health-care index, which slid 38 percent in the second half of last year, was the worst performing subgauge Thursday, falling 0.6 percent while the CSI 300 Index was little changed.

While the sell-off has paused amid broader market gains, the gap between prices and targets could narrow as analysts turn more bearish and Beijing’s procurement policy shift gathers pace. They’ve cut price targets by an average 1.9% for the sector over the past month.

“We are not optimistic in the long term,” said UOB Kay Hian analyst Carol Dou, who downgraded Sino Biopharmaceutical Ltd. last month. “We think drug prices will continue to be lowered. Policy risks are still big in this sector.”