Chinese Medicine

USA

Chinese biotech and pharmaceuticals ETF listed on Nasdaq

Loncar Investments, a Kansas-based investment firm, is teaming up with white-labeller Exchange Traded Concepts to list a new fund that gives a more granular play on China’s booming healthcare industry. The Loncar China BioPharma ETF (CHNA) will track an index built by Loncar that measures the performance of Chinese pharmaceutical and biotech companies.

The index gets going by sifting out every biotech and pharma company listed on Nasdaq or the Hong Kong Stock Exchange. Companies that fall within those sectors in Loncar’s judgment are then “screened to eliminate those that focus strictly on manufacturing active pharmaceutical ingredients,” the prospectus says. (The screen is used to isolate innovation, the prospectus says).

Companies remaining are then screened again to include only:

(i)             Those based exclusively in China;

(ii)            For those based both in China and overseas, companies:

  1. whose key operations or research and development is based in China;
  2. for which at least 25% of the value of their product pipeline is directly tied to the Chinese market.

Companies that survive these two screens are then screened yet again for size and liquidity, leaving only those with a market capitalization of at least $200 million and traded enough to satisfy Loncar (no specific liquidity threshold is given in the prospectus).

Companies chosen are then equally weighted. The index is rebalanced semi-annually.

Analysis – Great fund, but is Chinese healthcare in a bubble?

Chinese healthcare is booming like nothing you’ve ever seen. Going through the portfolio of today’s new listing, one can see why Loncar thought it genius to list an ETF.

To take a few examples, Sino Biopharmaceutical (1177) a Hong Kong company that specialises in treatments for hepatitis and ophthalmia, has returned 130% the past year. YiChang HEC, a company on which I could find very little English language material, has delivered 104% the past year. Shanghai Fosun Pharmaceutical Group (2196), a Shanghai-based producer of “genetic medicines” and “Chinese traditional medicines” – a corporate slug by comparison – produced a 24% return the last year. All these – we should note – despite the trade war.

Such returns are dizzying. But with such rocket launch-style performance investors will inevitably ask (and have asked) if the sector is bubbling. Going through the fund, the average PE ratio for underlying companies was, by my calculation, just under 30. True, pharmaceuticals tend to trade at higher PEs. And True, demographic trends – i.e. ageing populations – may justify the global healthcare sector trading at a premium. But investors considering this ETF should go in with eyes wide open.