China Healthcare:Monthly data tracker,June 2017

Monthly data tracker: June 2017.

    Recent data suggest that: 1) drug consumption registered 11.7% YoY growth in YTD5m17 vs. 12% in 2016; 2) inpatient and outpatient traffic grew 4.0% and 1.0%, respectively in YTD Apr 17; 3) government spending growth in health care accelerated to 19% YoY in YTD5m17, vs. 10% in 2016; 4) the prices of 6- APA and 7-ACA rebounded in June; 5) TCM raw material price movement remained fixed; 6) corn price increased to RMB1,700/ton in June; and 7) domestic Vitamin C prices remained high with ASP of RMB70/kg, and the export Vitamin C price jumped 9%.

    Government spending, drug consumption, patient traffic, and insurance.

    Government spending growth in health care increased to 12% YoY in May 2017 (at RMB131bn); YTD5m17 growth was 19%, vs. 10% YoY in 2016. Meanwhile, drug consumption growth fluctuated and recorded 14% YoY in May 2017; YTD5m17 growth was 11.7%, vs. 12.0% in 2016 and 14.2% YoY in 2015. Inpatient traffic continued to outpace outpatient flow, with the former registering YoY growth of 4.0% and the latter 1.0% in YTD Apr 17. For urban basic medical insurance, inflow grew by 42% in April, while outflow increased by 28%. For commercial insurance, the inflow of healthcare insurance experienced its first decline since 2012, recording -12% YoY in May 2017, while outflow of healthcare insurance continued to grow at 26% YoY in May. However, on an YTD basis, inflow still grew by 17% vs. 23% for outflow.

    6-APA and 7-ACA prices rebounded in June.

    The price of 6-APA increased 17% to RMB190/kg in June 2017. ASP of 7-ACA picked up by 43% from the previous month at RMB480/kg. Despite the ASP increase for 7-ACA, it is still significantly lower than the peak of RMB630/kg in June 2015.

    TCM raw material prices were mixed.

    The TCM raw material price index continued a recent upward trend and climbed 0.6% MoM to 1,277. The ASP of honeysuckle increased by 13% while the price for indigowoad root was flat in May 2017. Honeysuckle and indigowoad are the main ingredients in Shineway’s flagship product, Qing Kai Ling. Additionally, the prices of ophiopogon root increased by 10% in June, while radix ginseng prices dropped by 11%. These are the main ingredients in Shen Mai.

    Valuations and risks.

    We caution investors that the monthly data is volatile and YTD data is a more meaningful indicator. In this report, we adjusted price targets for three companies due to recent sector re-rating, as summarized on page 15. We use a multiples-based valuation approach in light of sustainable growth we expect from the sector. Key risks include: price erosion, government policy, capitated reimbursement control, and increasing competition.