Since the second quarter of this year, the Hong Kong stock price of HEPALINK (09989) has continued to decline, with a drop of nearly 20% over the period. The pressure on heparin industry chain prices and overseas policy risks have been key factors driving capital outflows, leading to the sustained downtrend. This prolonged decline has, however, pushed the proportion of profitable on-market holdings in HEPALINK's Hong Kong shares to below 0.1% recently. The persistently low trading volume also suggests that selling pressure may be nearing exhaustion. Against this backdrop, Southbound Stock Connect funds, which have been buying the dip for two consecutive months, could become a significant force for a subsequent rebound in HEPALINK's share price.

Confluence of Heparin Cycle Downturn and Policy Risks

Taking a longer-term view, HEPALINK's current downtrend began in late July last year. After hitting an intraday high of HK$7.26 on July 21st, the price consolidated for about a week before initiating a decline with four consecutive down days. The first phase of the decline lasted approximately two months from late July until September 26th. During this time, the stock price largely oscillated mechanically along the middle and lower Bollinger Bands, which themselves gradually contracted. The market then entered a second phase of low-level sideways consolidation, which lasted until January 28th of this year. Following a surge of over 8% on January 29th, HEPALINK's Hong Kong shares embarked on a new round of decline.

Investors can observe a period of continuous, gradual decline from January 29th to March 20th this year, with the stock falling 11.48%. This was primarily driven by a confluence of disappointing company performance and industry competition pressures. Firstly, the company's 2025 earnings forecast indicated a year-on-year decrease in net profit attributable to shareholders of 41.71% to 56.09%. This was mainly due to a RMB 198 million investment loss (approximately 50% of net profit) from the failed R&D of associate company Resverlogix. Although non-GAAP net profit showed year-on-year growth of 42.78% to 81.43%, the substantial non-recurring loss dampened market sentiment. Secondly, the heparin industry faced structural challenges during this period: the U.S. FDA's approval of new competitors like Dongcheng Pharmaceutical and Changshan Pharmaceutical into the market led to a 20% quarter-on-quarter decline in export prices. Additionally, a 15% temporary tariff imposed by the U.S. government further squeezed profit margins. While HEPALINK's U.S. factory can partially avoid these tariffs, the overall industry valuation benchmark experienced downward pressure.

After the market digested these negative factors, signs of a bottom emerged in HEPALINK's Hong Kong shares, and the trend shifted to sideways consolidation. However, this stability was short-lived. Continued pressure on heparin industry chain prices and policy risks led to another near-20% decline in HEPALINK's stock price during the second quarter of this year. It is understood that the average export price of heparin API in 2025 fell by 20% year-on-year. This directly resulted in the gross margin for the company's API business plummeting by 13.6 percentage points to a historical low of 15.7% as shown in the 2025 annual report. Concurrently, a Morgan Stanley research report in April pointed out that intensifying industry competition has led to low visibility for a price recovery, indirectly contributing to short-term market pessimism regarding this business's future profit contribution.

Furthermore, the implementation of the EU's Critical Medicines Act in May this year also triggered market concerns to some extent. The act prioritizes EU-produced active pharmaceutical ingredients in public procurement. With over 90% of HEPALINK's revenue coming from overseas markets, and Europe accounting for more than 60% of its finished dosage form sales, investors worry that its flagship product, enoxaparin sodium, may face market share pressure abroad. This expectation was subsequently reflected in the company's share price.

Southbound Stock Connect's Two-Month Accumulation at Lows

It was precisely during this cool period in the market that Southbound Stock Connect funds became active again, showing signs of bargain-hunting in HEPALINK at low levels. Examining the investment trajectory of Southbound funds in HEPALINK reveals that their trading logic for the stock this year has leaned more towards "buying the dip" or left-side trading. Moreover, their willingness to hold the stock has shown a noticeable increase this year.

Looking at recent two-month broker trading data, the top five sellers for HEPALINK were Citibank, HSBC, Morgan Stanley, Shenwan Hongyuan, and CICC, selling 2.5139 million, 2.0829 million, 1.5625 million, 527,500, and 299,500 shares respectively. On the buying side, China Investment (Shanghai-Hong Kong Stock Connect) and China Creation (Shenzhen-Hong Kong Stock Connect) were the top two buyers, purchasing 2.7755 million and 2.0815 million shares respectively. Furthermore, data shows that from April this year to the present, the shareholding ratio of Southbound funds in HEPALINK's Hong Kong stock has continued to rise. As of June 11th, this ratio has exceeded 50%, reaching 50.33%, with a holding of 111 million shares corresponding to a market value of HK$438 million.

The reason Southbound funds continue to increase their positions may be a bet on a potential upcoming upcycle in the heparin market. Statistics show that China possesses over 70% of the world's pig intestine resources. In 2022, global sales of crude heparin reached $3.45 billion, with China accounting for approximately $1.725 billion. This forms the fundamental supply-side landscape for heparin. This market structure means that, unlike other pharmaceutical sectors with weak cyclicality, a complete heparin cycle is essentially synchronized with the hog cycle, typically lasting 3-4 years. This cyclicality can be summarized as: "During a rising hog cycle, hog prices are high, and heparin prices are high; conversely, when hog prices fall, heparin prices fall."

Although the hog market was in a "strong supply, weak demand" situation in previous years, domestic policy adjustments last year shifted from "flexible guidance" to "rigorous攻坚" in "anti-involution" regulation, with increasing policy intensity. The market has grown more optimistic about reducing sow production capacity. Driven by the lagged effects of capacity reduction, it is expected that since May this year, domestic sow and hog inventories have declined simultaneously, showing a clear divergence in capacity adjustment. Data from 196 sample breeding enterprises shows that in May, both sow and hog inventories in China declined month-on-month. Sow inventory continued the downward trend from April, though the rate of decline narrowed to 0.09% in May. The decline in hog inventory, however, expanded from 0.43% in April to 1.23% in May.

From a cycle transmission perspective, domestic sow inventory was at a relatively low level overall about 4-5 months ago, which directly led to a decrease in the number of newborn piglets in May, indicating a contraction in the industry's incremental hog production capacity. Guided by this trend, the market expects that after June this year, the domestic hog supply side may continue to tighten, with hog inventory expected to steadily decline. This suggests that the domestic hog market's supply-demand dynamics and price trends may gradually see adjustment opportunities as capacity continues to be cleared. Consequently, hog prices are expected to continue recovering in the coming period, moving towards the industry's breakeven point, with the probability of a mild upward trend strengthening in the second half of the year increasing.

Against the backdrop of an expected strengthening hog cycle, the reversal of the heparin cycle is also expected to become clearer. The Southbound funds' accumulation of HEPALINK at low levels may well be based on this very logic.