China: Improving and on track for summer 2023 reopening


We see asymmetric risk-reward in favour of being invested, on the back of a return to normalcy as summer approaches, given the compelling valuations today, and the eventual emergence of a China...
Chief Investment Office19 Apr 2022
Photo credit: AFP Photo


One of the reasons we upgraded China to Overweight was the expectation of a gradual adjustment of China’s “Covid Zero” policy to minimise the impact on the economy, which would mean fewer lockdowns and interruption of activities, improvement in consumption, and alleviation of output bottlenecks.

While China is trying to adjust, it is not doing so at the speed which the markets are hoping for. Current omicron outbreaks in various parts of China such as Shenzhen and Shanghai have led to lockdowns. While China is trying to be less stringent, ultimately, controlling the spread of Covid remains paramount.

It seems China will not relax its “Covid Zero” policy to the markets’ desired level until two things happen:

(1)      There are effective approved therapeutics to limit the serious cases so as not to overwhelm the healthcare system.

(2)      China develops its own mRNA vaccine or approves foreign ones.

For therapeutics, China has approved Pfizer’s (PFE US) Paxlovid. For mRNA vaccines, China would prefer to develop and use its own. At the moment, China has not approved Pfizer-BioNtech’s or Moderna’s (MRNA US) vaccines.

The frontrunner for China’s mRNA vaccine is estimated to complete its Phase 3 study on 30 May 2023. If successful, it will pave the way for the reopening of China in summer 2023.

Of all the candidates, the three that are the most advanced in the process are: Walvax Biotech (300142 CH), Stemirna Therapeutics, and AIM Vaccine. The mRNA candidate for Walvax is in Phase 2 and 3 trials, for Stemirna Phase 2 and for AIM Phase 1. Walvax is also running a study using ARCoV as a booster and working with RNACure to develop vaccines to deal with variants such as omicron. Honeywell (HON US) USA has provided the equipment and completed the installation for Walvax’s mRNA factory. Currently, it has the capacity to manufacture base ingredients for 400m doses and the capacity can be further expanded.

Current Covid outbreak to subside toward summer. Meanwhile, Covid continues to spread and stay high in China and Hong Kong (Figure 1). However, drawing from the experience in the US and UK, the current Covid outbreaks in the various parts of China and Hong Kong should subside to pre-omicron levels as summer approaches. In the US and UK, it took approximately six weeks to peak and another six weeks to fully subside (Figure 2). If China and Hong Kong follow the same pattern, daily new cases should return to low levels near summer.

Figure 1: Daily new cases in Hong Kong and China (5D MA)


Source: Bloomberg, DBS

Figure 2: Daily new cases in the US and UK (5D MA)


Source: Bloomberg, DBS

Border reopening between Mainland China and Hong Kong a possibility this summer.
Prior to the escalation of omicron Covid cases, the news reported that government officials had completed the preparation for border reopening between Mainland China and Hong Kong, and when the cases drop to zero, the borders would reopen starting with a daily quota of 1,000 and gradually increase to 5,000.

With the government’s measures taking effect and the vaccination rate expected to rise further, we believe the daily new cases will ultimately come under control. As such, we expect economic and commercial activities to recover to previous levels, especially domestic consumption, store front retail, tourism, and manufacturing output.

Risk-reward in favour of being invested. China’s forward price-to-earnings ratio (P/E) has dropped to below historical mean while the price-to-book (P/B) ratio is at -1 standard deviation (SD), both at the lowest in seven years (Figures 4 and 5). Such compelling valuations will serve as additional support against downside risk.  We see asymmetric risk-reward in favour of being invested, on the back of a return to normalcy in the summer, the compelling valuations today, and the eventual emergence of a China mRNA vaccine.

Figure 3: Forward P/E below historical mean


Source: Bloomberg, DBS

Figure 4: P/B at deep value


Source: Bloomberg, DBS

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