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Dear reader,
Chinese interest in weight-loss drugs is just as high as it is elsewhere in the world. Amid a slide in local equities, weight loss-related pharma stocks have been rare standouts this year.
This week, however, one of the local leaders apologised for misleading investors about obesity treatments. That pushed stocks to the opposite extreme. A bet on dining out may be a quicker source of returns.
Several Chinese companies were once expected to benefit from the global frenzy over the weight-loss drug semaglutide, the main ingredient behind Novo Nordisk’s diabetes drug Ozempic.
The medication, also sold under the names Wegovy and Rybelsus, is used to treat type 2 diabetes. The injected drug suppresses the appetite and slows digestion. It has been seen as a solution to induce weight loss.
Investors believed Chinese companies would make a local version of the drug. Shares in Xinjiang Bai Hua Cun Pharma Tech, Cheng Du Sheng Nuo Biotec and Hebei Changshan Biochemical have soared. The latter’s stock has almost quadrupled in recent months.
The sector has been one of the few bright spots amid a broader decline. The Shanghai Composite index has fallen by a tenth in the past six months.
Yet it took just one company to end the rally, not only for related stocks but for the rest of the local pharma sector.
Xinjiang Bai Hua Cun Pharma Tech backtracked on its earlier claims that a fully owned subsidiary was providing research and development services on drugs including semaglutide. It has, in fact, conducted only preliminary research.
Shares in the broader pharma sector continued to fall on Wednesday after related names reached the daily limit on Tuesday.
The dramatic reaction is understandable. Soaring obesity levels in China, especially among the younger generation, mean the market will be lucrative. More than half of Chinese adults were considered overweight or obese last year. This rate has more than tripled in the past two decades.
The trend is not expected to stop. More than 8 per cent of children under five are overweight, one of the highest proportions in the world. Almost a third of all school-age children in China are projected to be overweight or obese in the next seven years.
This has coincided with a surge in dining out. Restaurant spending has grown rapidly over the past decade to more than $450bn last year. That is expected to continue to grow at an annual rate of more than 11 per cent to 2030.
The fast-food industry alone is worth about $180bn, on par with its market size in the US. This year, strong demand in China has boosted McDonald’s group earnings and same-store sales growth. Yum China, which operates brands such as KFC and Pizza Hut, added 655 new stores in the country in the first half of the year.
Yum China’s earnings have been remarkable, even when accounting for a low base from last year. Operating profit tripled in the second quarter. On Children’s Day (a Chinese holiday) it posted a record 8.5mn daily transactions. Restaurant margins were at 16 per cent, up from 12 per cent the previous year.
Shares of Yum China are up more than 40 per cent from the 2022 low. They trade at a premium to US-listed McDonald’s, reflecting the rapid rate of growth in the country.
Compare that easy growth trajectory with the stops and starts in pharma. It will take time and cash for Chinese pharma groups to develop their own successful local versions of weight-loss drugs. Stock moves will be as volatile as the results of clinical trials.
Meanwhile, restaurant spending will continue to rise at a stable pace. So will share prices in the sector’s companies. It is an easy choice to make.
Elsewhere in Asia
US food brands may be abundant in China but US chips are in increasingly short supply. The US has tightened its rules on the sale of artificial intelligence chips as President Joe Biden’s administration attempts to limit access to advanced processors. The impact on Nvidia is already being priced in.
Meanwhile, I enjoyed this read on Lego, the Danish brick behemoth that has ambitions to be as big as Disney. Sales are booming from its portfolio of toys, movies and theme parks.
Enjoy the rest of your week,
June Yoon
Lex Asia editor
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