1H21 results preview. We are generally positive about the upcoming 1H21 results season, given the low base in 1H20 and the fact that the impact of the group purchasing organization (GPO) drug procurement plan on companies is already reflected in their numbers. However, considering the demanding valuations after the strong performance in 1H, and regulatory initiatives become more active, bringing more uncertainty, we think share prices in 2H could be volatile. Overall, despite our expectation of a bumpy 2H, we still like high-quality biotech/biopharma companies given their high potential and strong efficiency. We also like companies with attractive valuations and growth visibility, such as the big pharmaceutical and pharmacy names.

2H21 outlook. Regulatory initiatives tend to happen in 2H, creating uncertainty about share price performance, but we don’t expect surprises as most policies have been well flagged. We don’t expect a sharp turnover of healthcare service providers as the private sector still complements the public system. Regarding innovation, we think the industry will follow the trend of improving standards of practice, but with no major changes. As domestic innovation is moving into an earlier stage of development, risks related to new drug development may emerge. This means investors may have to be patient about the pace of clinical improvements.

Our preferred stocks. We like high-quality biotech/biopharmas with strong execution and pipelines, such as Innovent and BeiGene. We also like companies with visible growth and low valuation, including small caps like CMS; large pharmas trading at historically low valuations, like Sino Biopharm, Hansoh, CSPC, and Hengrui, as well as pharmacy operators trading at multiples close to commercial franchises. In this report, we provide revised estimates, a 1H21 results preview and full year outlooks for pharma stocks under our coverage. We adjust our target prices for nine names by -14%-23%.