Zhongtong Financial App observed that in the fourth week of September, the Hang Seng Healthcare Index rose by 12.7% during the period. Both its sub-sectors and individual stocks are also on the rise. Among the 210 stocks in the Hang Seng Healthcare Index, 152 have seen sustained growth. The Hong Kong stock pharmaceutical sector's increase indirectly reflects the investment value and cost-effectiveness of the sector in the global capital allocation perspective. In this context, the innovative drugs sector has also begun to show a highly certain reversal trend.

For Hong Kong stock investors, the long-term undervalued and imaginative innovative drugs sector is clearly an important investment direction worth paying attention to in this bull market cycle. Among them, Hec CJ Pharm (01558), as a rare option within the sector that simultaneously meets the requirements of "Hong Kong Stock Connect high-quality enterprises" and "undervalued stocks", is worth investors' attention.

The logic of valuation reversal in the innovative drugs sector

On September 27, both the A-share and H-share markets welcomed a bullish market with great momentum. The Hong Kong stock pharmaceutical sector quickly took off in this upward trend, with the innovative drugs sub-sector becoming one of the most aggressive assets affected by the overall uptrend in the market.

The rapid rebound of the innovative drugs sector this time is attributed to the positive development of the domestic macro economy, active support of domestic pharmaceutical policies, external factors such as the Fed rate cut, and the close relationship with the stable fundamentals of individual companies within the sector.

The overall macroeconomic situation has always been the cornerstone of stable development in all industries. On September 26, the Central Political Bureau held a meeting to discuss economic work, conveying the determination to stabilize the economy to the entire society and the market; coupled with the substantial favorable policies announced by the three financial departments on September 24 regarding reserve ratio cuts, interest rate reductions, and stimulating various aspects of the capital markets, this series of measures significantly boosted market confidence in domestic economic development.

In terms of pharmaceutical policies, since 2024, favorable domestic pharmaceutical policies have emerged frequently. For example, in 2024, the State Council's 'Government Work Report' proposed 'accelerating the development of innovative drugs and other industries'; in June 2024, the State Council issued the 'Key Tasks of Deepening the Reform of Medical and Health Systems in 2024', emphasizing the need to deepen reforms and innovations in the drug field; in July 2024, the State Council executive meeting approved the 'Full Chain Support Implementation Plan for the Development of Innovative Drugs', pointing out the need to strengthen policy support along the entire chain to promote the breakthrough development of innovative drugs.

At the same time, the Federal Reserve announced a 50 basis points rate cut in September this year, the first rate cut since 2020, which is expected to inject new vitality into the domestic primary market for innovative drugs.

In addition to the external factors mentioned above, the investment cost-effectiveness of the Hong Kong stock innovative drug sector in the global allocation of capital is highlighted due to its own valuation at the bottom but closely related to the stable fundamentals.

Currently, on the one hand, the overall Hong Kong medical sector has experienced continuous large declines for 4 years, especially in 2023 and 2024, where there were significant drops on top of already fully digested valuations, leading to the overall Hong Kong medical sector along with the innovative drug sector entering an extremely frozen state in terms of valuation, significantly below historical lows and also well below A-share and U.S. stock levels.

On the other hand, in the first half of 2024, the Hong Kong stock innovative drugs achieved stable net margin growth while maintaining stable overall revenue. With further expansion of the innovative drug market and improvement in company operational efficiency, the trend of endogenous growth within the sector is expected to continue in the future.

Among the suppressive factors triggering the widening deviation between the stock prices and fundamentals of Hong Kong medical stocks, the Federal Reserve's interest rate hike cycle has started to reverse as previously expected, continuously accumulating potential energy for the valuation return of the innovative drug sector.

In terms of funds, data shows that only on September 30th, the total trading volume of the Hong Kong Stock Exchange (stocks and ETFs) reached 505.919 billion Hong Kong dollars, ranking at 99.86% in the past 3 years; the average total trading volume in the recent 5 trading days was 350.391 billion Hong Kong dollars, with the latest value exceeding the average by 155.528 billion Hong Kong dollars. Among these, the trading volume on the Stock Connect accounted for 208.709 billion Hong Kong dollars, ranking at 99.85% in the past 3 years. The trading volume via the Stock Connect accounts for 41.25% of the total trading volume on the Hong Kong Stock Exchange, ranking at 98.68% in the past 3 years. The significant influx of market funds indirectly reflects a substantial rebound in market confidence, all indicating that the current valuation recovery of Hong Kong stock innovative drugs will be a highly certain long-term process.

Seize undervalued and scarce symbols.

According to the Wisdom Financial APP, from September 23 to date, the HEC CJ Pharm stock has the largest range increase of 23.1%. At the same time, the proportion of holdings through the Hong Kong Stock Connect reached 13.4% on September 30, with a trend of continuous buying.

From the current stock price situation of the company, since May this year, the stock price of HEC CJ Pharm has adjusted in line with the fluctuation of the Hong Kong stock innovative drugs sector, with the PE valuation clearly at a historical low.

However, in fact, there is a significant deviation between the current valuation of the company and the growth of its own business. Referring to the company's interim report for 2024 disclosed earlier, HEC CJ Pharm has a strong hematopoietic advantage at the commercial level. With the drive from the 'Flu Drug King' Ke Wei and a rich subsequent product line, the company's fundamentals are showing a clear trend of steady improvement.

In addition, the parent company of HEC CJ Pharm decided this year that its pharmaceutical industry will no longer continue the past independent business layout of innovation R&D and production and sales, but choose to promote the merger of Guangdong HEC Technology Holding and HEC CJ Pharm. From the recent development trends of the company, the merger of the two companies is proceeding smoothly and in an orderly manner.

After the integration, the new listed company will combine the advantages of drug research and development and foreign sales of Guangdong HEC Technology Holding with the domestic sales advantages of HEC CJ Pharm, becoming a comprehensive pharmaceutical company integrating research, production and sales, and further exerting its scale effect and synergy advantages.

In terms of research and development, the integrated Guangdong HEC Technology Holding has more than 100 drugs under development in its research and development pipeline, covering various disease areas such as infections, chronic diseases, and tumors. So far, the company has applied for more than 2,300 invention patents, including 880 overseas patents. According to Frost Sullivan's report, the company's number of patent applications and authorized declarations in China from 2014 to 2023 ranks first among domestic pharmaceutical companies. It is worth mentioning that Guangdong HEC Technology Holding is expected to complete the listing application of multiple new drugs around 2026, and the gradual realization of the rich research and development pipeline will bring new growth points for the company's performance.

In terms of production and sales, the newly integrated HEC Pharm will be one of the few companies domestically that have a complete production line from active pharmaceutical ingredients to formulations, and have a comprehensive pharmaceutical company with a sales and distribution network covering over 2400 tertiary hospitals, over 8900 secondary hospitals, and over 0.065 million primary hospitals across 32 provincial-level administrative regions and nearly 300 prefecture-level cities with more than 1700 professional salespersons.

In other words, by then Guangdong HEC Pharmaceutical is expected to achieve comprehensive harvest in terms of R&D, production, and sales integration. From the perspective of secondary market valuation, referring to the PE levels of comparable companies in the Hong Kong stock market such as Hansoh Pharma and Sino Biopharm, estimating based on a 20 times PE ratio, it is expected that Guangdong HEC Pharmaceutical's Hong Kong IPO market cap could exceed 40 billion Hong Kong dollars. In other words, the integrated Guangdong HEC Pharmaceutical will become a typical undervalued recovery target in the Hong Kong stock market's innovative drug sector, with significant potential for valuation upside.