Equities take a beating after drug scandal probe begins, but analysts optimistic

Experts said they maintain their positive outlook on the long-term performance of the A-share medical sector, despite the sector slumping immediately on the first trading day following a vaccine scandal in China that went viral online over the weekend of July 21 and 22.

A widely viewed and circulated online post accused Changchun Changsheng Bio-tech Co of fabricating production and inspection data on a freeze-dried rabies vaccine designed for human use. The company was also alleged to have manufactured and sold inferior-quality vaccines for infants a few months ago.

Anti-corruption watchdogs in Jilin and Shandong provinces announced on Tuesday they have launched investigations. President Xi Jinping and Premier Li Keqiang issued harsh, personal condemnations and ordered thorough investigations into Changchun Changsheng.

The vaccine maker's parent company, Changsheng Bio-Technology Co Ltd, is listed in Shenzhen. It received an investigation notice from the China Securities Regulatory Commission on July 23 and suspended trading on the same day. Its price dropped by the daily limit of 10 percent when it resumed trading later that day. It had already slumped by 10 percent daily on the previous six consecutive trading days.

Based on the CSRC notice, if the company is found to have violated the law, it may be delisted, or trading in its shares halted.

Market sentiment remains impaired due to concerns over vaccine safety. According to Reuters, the medical sector dropped by 3.91 percent on July 23. Ten vaccine companies' shares plunged by the daily limit of 10 percent.

But the stumble did not last long. The medical sector quickly picked up on Tuesday by 1.36 percent and the momentum continued until Friday, with the sector rising by 0.83 percent.

According to market information provider Wind Information Co Ltd, biological products only take up about 16 percent of the total market value of the medical sector. The sector registered 3.1 percent share price growth in the first half of this year. In terms of the return on common shareholders' equity during the first quarter, the medical sector increased by 33.8 percent year-on-year.

Jiang Qijia, senior analyst of the research department at financial services provider Noah Holdings Ltd, said recent market fluctuations are logically aligned with the big picture.

"The medical industry has performed well in the past few months. As the biological sector only takes up a relatively small part in the industry, it can be inferred that the vaccine scandal will have a limited impact on the long-term performance of the medical sector in general," Jiang said. He added the sector will benefit from the central government's emphasis on the healthcare industry and upgraded consumption.

Analysts from Ping An Securities said the market will have little motivation to invest in the medical sector in the short term due to the vaccine scandal, but the negative impact will not last long. Even if there is continued irrational short selling in the sector, it will be a good opportunity for investors who eye long-term profits.

Experts from Everbright Securities Co Ltd wrote in a note that investors can look to logistics companies in the medical sector that are currently undervalued.

Analysts from China Galaxy Securities Co Ltd suggested investors check out the over-the-counter pharmaceutical manufacturers, as their brand and distribution channels have become well-established over the past few years.