10 August China

China A-Shares: Health Care Fall

115 Active China A-Share Funds, AUM $63bn.

China Health Care

Health Care weights among China A-Share managers have fallen to some of the lowest levels on record, with managers moving from overweight to underweight over the last 12-months. The recent moves have been caused by a number of domestic A-Share funds closing out, or significantly cutting exposure to key stocks in the Health Care sector.

Time-Series & Sector Positioning

Health Care weights in active China A-Share portfolios have taken a dive. Average holding weights sit near historical lows of 6.51%, falling from over 14% back in June 2020 and in the process pushing active managers from overweight to underweight the benchmark.
The allocation shift was active in nature. Between 11/30/2021 and 07/31/2022, all 4 of our ownership metrics declined. Of particular note, Average weights fell by -3.8% and the percentage of funds overweight by -17.39%, the most of any sector.

Fund Holdings & Style

The fund holdings distribution is skewed to the left-hand side and with the bulk of allocations below 5%. A long tail to the upside, led by Growth and Aggressive Growth strategies skews the average weight higher to 6.51%, with the median allocation some way behind at 5.9%.
Fund allocations are correlated to Style, with Growth and Aggressive Growth strategies holding more than their Value and Yield counterparts. China AMC Growth (26.14%) and Baillie Gifford China A Shares (24.96%) top the allocation list, 2 of only 5 strategies to allocate more than a fifth of their fund to the Health Care sector.

Stock Holdings & Activity

On a stock level, WuXi AppTec Co and Shenzhen Mindray Bio-Medical Electronics are the most widely held stocks in the sector by some margin, held by 47.8% and 42.6% of managers respectively. Ignore Medprin Regenerative Medical Technology for the moment, which, though held by 40.1% of managers is held in almost zero size as a ‘ghost’ mandated holding by local China A-Share funds. UBS China A Opportunities’ 9%+ holding in Yunnan Baiyao Group tops the individual fund holdings, with a number of high conviction holdings above 5% in selected stocks.
Stock activity between 11/30/2021 and 07/31/2022 was heavily skewed to the sell side. Key holdings WuXi AppTec Co and Shenzhen Mindray Bio-Medical Electronics suffered a mini exodus, losing investment from 11.3% and 16.5% of the funds in our analysis, respectively. In addition, China A-Share funds scaled back holdings in Changchun High & New Technology Industry, Hangzhou Tigermed Consulting and Jiangsu Hengrui Medicine, with the percentage of funds invested and average holding weights falling in all 3 stocks. Only Shandong Pharmaceutical Glass, Iray Technology Co and Zhejiang Jiuzhou Pharmaceutical saw ownership levels rise by any meaningful amount.

Key Stock Trends

To get a handle on how this trend has played out for the major holdings, the chart below plots the time-series of the percentage of funds invested for 5 of the most widely held China A-Share companies that have suffered recent declines. It shows an aggressive rise in ownership between late 2019 and November 2021, at which point large scale position closures reverse the trend abruptly.
The chart below shows the largest closures on a fund level in those 5 names, and highlights an almost exclusive list of domestic China A-Share funds, from China AMC, China Universal, China Southern and more. The November filings update captured significant closures among these funds, in a seemingly coordinated fashion.

Conclusions

China A-Share Health Care allocations have fallen aggressively over the last 2 years. The extent of the fall has relegated the Health Care sector to the 7th largest sector holding among active China A-Share managers, the lowest of the ‘gang of 7’ though still well above the fringe holdings of Real Estate, Utilities et al (see attachment for more details).

The decline has been driven in part by mass-closures from local China managers across some of the key names in the sector, led by WuXi AppTec Co and Shenzhen Mindray Bio-Medical Electronics. Both remain widely held and well owned by domestic and international funds alike, yet the severity of the declines raises questions as to why such a coordinated action occurred at all. The chart to the right shows the opening positions among those same domestic managers over the same period. It shows a preference for Industrials, Consumer and Technology stocks, but far more diversified than the closures on the Health Care side.

 

See below for more ownership information on WuXi AppTec Co and Shenzhen Mindray Bio-Medical Electronics. Please click on the link below for the extended report on Health Care exposure among active China A-Share funds.

Click on the link below for the latest data report on Health Care positioning among active China A-Share funds.

Stock Profile: WuXi AppTec Co

Stock Profile: Shenzhen Mindray Bio-Medical Electronics

For more analysis, data or information on active investor positioning in your market, please get in touch with me on steven.holden@copleyfundresearch.com