Southbound funds continue to pour in, and the Hong Kong stock market's innovative pharmaceutical sector has become a "favorite."

Benefiting from the recent easing of the external environment, the Hong Kong stock market's innovative pharmaceutical sector has rebounded rapidly. It can be observed that the CSI Hong Kong Innovation Pharmaceutical Index (931787) experienced a sharp drop of 20.55% on April 7 this year, bottoming at 713.02 points on April 9, and then saw a rapid rebound with strong resilience, far outperforming the Hang Seng Tech Index. On April 25, the index reached a phase high of 979.92 points, approaching the previous high of 1000.95 points, with a maximum cumulative increase of 37.43%. In summary, based on the closing price of 953.29 points on April 6, the overall increase in the Hong Kong stock market's innovative pharmaceuticals has already filled the decrease from April 7 and is close to returning to the previous high. In comparison, after a period of volatility in the earlier market, the Hang Seng Tech Index has only risen by 12.48% since the beginning of the year, while the Hong Kong stock market's innovation pharmaceutical index has surpassed this, achieving a rise of 31.03% up to now, demonstrating the significant risk resistance and defensive attributes of the market for innovative pharmaceuticals in Hong Kong. Performance release and going overseas are key Recent data shows that the performance of Hong Kong's innovative pharmaceutical companies has seen a major breakthrough, far exceeding market expectations. It is worth mentioning that this is not the growth of individual companies' performance, but a collective performance recovery in the industry, becoming one of the main drivers of the industry index's continuous rise. According to GF SEC statistics, in 2024, among the 12 Hong Kong-listed innovative pharmaceutical companies with a market value of over 10 billion, 10 of them had positive revenue growth rates, of which 8 companies had positive revenue and profit growth rates. The company with the highest revenue growth rate is EVEREST MED-B (01952), with a current revenue growth rate of 341.8%; and the company with the highest non-GAAP net profit growth rate is INNOVENT BIO (01801), at 91.8%. Behind the growth in performance of innovative pharmaceuticals, "going overseas" has become a hot topic that cannot be avoided. In recent years, Chinese pharmaceutical companies have achieved a breakthrough in License-out transactions in overseas markets, demonstrating China's global competitiveness in pharmaceutical research and development. According to data from the Dynamika think tank, in 2020, the total amount of License-out transactions in the innovative pharmaceutical field was only about $11 billion, but in 2024, Chinese pharmaceutical companies' foreign authorizations set a historical record, with a total transaction amount of $51.9 billion. In the first two months of 2025, the total amount of these deals had already exceeded $8 billion, entering a period of obvious gains. The reason for the significant increase in the number and scale of License-out transactions for going overseas mainly reflects in three aspects: first, the upgrading of transaction structures, shifting from early small molecule drug authorizations to cutting-edge technology platforms such as ADC, bispecific antibodies, siRNA, etc.; second, the increase in international recognition, with companies such as Hengrui and CanSino repeatedly reaching major cooperation agreements with MNCs like Merck and Novartis; third, the innovation of business models, with the rise of the NewCo model in 2024, achieving risk sharing and deep bonds through the establishment of joint ventures. Taking the NewCo model as an example, compared to the traditional License-out model, the NewCo model seems to be more friendly to domestic biotech companies. In terms of the model, on one hand, the NewCo model can provide cash flow support to innovative pharmaceutical companies while bypassing the strict control of MNCs on the introduction of assets, promoting the research and clinical trials of the company's own pipeline; on the other hand, this model can somewhat diversify the risks of local pharmaceutical companies. As a new paradigm of going overseas that has become popular in recent years, it is estimated that at least six domestic companies have chosen the "NewCo model" as their strategy for taking their products overseas. In addition to CanSino, Hengrui, Jiahao Bioscience, and Shanghai Allist Pharmaceuticals Co., Ltd. have all had successful cases of going overseas through the NewCo model. For example, the targets of the two NewCo deals between Jiahao Bioscience and Anchor and Jiangsu Hengrui Pharmaceuticals were the hot TCE bispecific antibodies, and the target of Jiangsu Hengrui Pharmaceuticals' deal was three drugs developed based on the metabolic disease star target GLP-1. From a fundamental perspective, the pharmaceutical industry has shown many new industry trends, such as weight loss drugs, bispecific drugs, ADC drugs, cell therapy, Innovative Medical Management devices, etc. These new industry directions will inevitably bring new investment opportunities, and China has a competitive advantage in the field of biomedicine, which is also the reason why overseas companies are looking to cooperate with Chinese companies. On the policy side, the country is further increasing its support for innovative pharmaceuticals going overseas. It is observed that the recent issuance of the "Opinions on Implementing the Strategy to Enhance the Free Trade Zone" proposes to explore the establishment of a "white list" system for the import of R&D items for bio-pharmaceutical companies, allowing the clearance of imported drugs without customs clearance, giving a green light to the clearance of imported drugs. Overall, the support for innovation from the Medical Insurance Bureau and the improvement in the final profit margins in centralized purchasing are more apparent, which is the foundation for the development of the pharmaceutical industry. Although the market is currently experiencing some volatility due to the impact of the tariff war, the main focus of the pharmaceutical industry is on IP going overseas, and the impact is not significant. Therefore, it is currently a great opportunity for big capital to lay out in the pharmaceutical sector. In the long term, as the pace of going overseas accelerates, the growth certainty of the performance of Hong Kong's innovative pharmaceutical companies is expected to further improve. The valuation of Hong Kong's innovative pharmaceuticals may have entered a new bull market With the collective fundamental recovery of Hong Kong's innovative pharmaceuticals, and as market pricing is not yet sufficient, the entire sector is likely to usher in a new round of valuation return to a long bull market. It is observed that Southbound funds have been pouring into Hong Kong stocks since the beginning of this year, driven by DeepSeek's incentives, significantly improving the market trading conditions. As of April 24, mainland A-share investors had a net capital inflow of 611.01 billion yuan into Hong Kong stocks, of which 59.537 billion yuan flowed in through the Stock Connect related funds. In fact, since October last year, Southbound funds have undergone a significant style shift, mainly lowering the holdings of dividend stocks and increasing bets on growth (and counter-cyclical) themes. However, when looking at it by industry, within the booming growth sector, hardware and semiconductor stocks saw the largest increase in holdings. The pharmaceutical and software industries are relatively neutral. However, with the Hong Kong technology stocks cooling off at the end of March and early April this year, more and more funds have chosen the healthcare industry with higher certainty.Since April this year, in the top 10 industries where southbound funds have flowed into, finance, healthcare, industrial, information technology, and optional consumer sectors occupy the top five. Among them, the healthcare industry has replaced the previous position of the information technology industry and has become the second highest net inflow industry, with a net purchase amount of 14.80 billion shares. From a valuation perspective, after the strong rise of technology stocks since the beginning of this year, the healthcare sector of Hong Kong stocks is relatively safe compared to other growth industries. According to GF SEC statistics, based on the Wind secondary industry classification, the current TTM P/E ratio of the pharmaceutical biotechnology sector is 27.1 times, in the 16.1 percentile since 2021; the P/B ratio is 2.0 times, lower than other major growth sectors, in the 27.6 percentile since 2021. In terms of individual stocks, among innovative pharmaceutical companies with a market value of over 10 billion Hong Kong dollars, BEIGENE, INNOVENT BIO, ZAI LAB, REMEGEN, HUTCHMED, EVEREST MED-B, ASCENTAGE-B, and their P/S-TTM ratios are all below the 20th percentile since 2021, indicating they are clearly undervalued. Therefore, it can be seen that the current market pricing of the innovative pharmaceutical sector in the Hong Kong stock market is not sufficient, and overall valuation urgently needs to be repaired. With the current time window of Hong Kong technology stocks surging and funds continuing to flow into Hong Kong stocks, the innovative pharmaceutical sector is undoubtedly becoming an important direction for funds to actively deploy, which is also expected to become an important indicator for investors' investment allocation in the future.