Last week, Hong Kong biotech stocks fell for just three days, and some investors complained about losses from purchasing what they believed were reasonably valued Hong Kong biotech stocks based on recommendations.

From the peak, the sector only corrected about 5%, which didn't seem particularly severe. However, considering that "Cambricon" and other AI stocks were surging during the same period, with AI and semiconductor indices gaining over 5% in a single day, the biotech performance indeed appeared lackluster by comparison.

Nevertheless, just one day after these complaints on August 28th, Hong Kong biotech stocks bottomed out and rebounded. Taking the Hong Kong Stock Connect Biotech ETF (520880) as an example, it surged 9.08% over three days from August 29th to September 2nd.

Particularly notable was Tuesday (September 2nd), when all three major A-share and Hong Kong stock indices declined, and high-flying technology sectors corrected significantly. Yet Hong Kong biotech stocks not only avoided losses but actually gained 1%.

Why do Hong Kong biotech stocks demonstrate such resilience and upward momentum?

**Hong Kong Biotech vs. Technology Stocks**

Compared to the AI and semiconductor sectors that surged in the previous two weeks, Hong Kong biotech stocks' greatest advantage lies in their low valuations.

As of September 1st, 2025: - "Artificial Intelligence" sector trades at 75x PE, at the 95th percentile of the past 10 years - "Semiconductor" sector trades at 132x PE, at the 99th percentile of the past 10 years - both at historically high levels - "Hong Kong Biotech" trades at 38x PE, only at the 40th percentile, representing reasonable valuation levels

Moreover, compared to early this year, Hong Kong biotech valuations have actually decreased. This occurs because PE valuation equals stock price divided by earnings - while stock prices have risen, earnings have grown even faster, continuously compressing valuations.

This explains why Hong Kong biotech PE ratios have been declining recently. This year marks China's innovative drug sector's "turnaround to profitability" year. As pharmaceutical companies strengthen their earning capabilities, performance-backed growth provides stronger safety margins compared to AI and semiconductor technology sectors.

During bull markets, especially when market sentiment runs high, high valuations aren't problematic as long as capital inflows remain sustained - the "deposit migration" phenomenon many previously focused on. However, when any headwinds emerge, overvalued sectors typically bear the brunt of selling pressure first.

**Hong Kong Biotech vs. Low-Valuation Stocks**

The "rotation from high to low" strategy has been widely discussed. However, when market sentiment weakens, low-valuation sectors often lack sufficient downside protection and decline nonetheless, albeit less severely than overvalued technology sectors.

Compared to "low-valuation sectors," Hong Kong biotech stocks' greatest advantage is "high certainty."

Previously identified low-valuation sectors include liquor, consumer goods, real estate, chemicals, and infrastructure. Compared to Hong Kong biotech stocks that have doubled this year, these "low-valuation sectors" have shown minimal gains.

As one astute observer noted: there are reasons why certain sectors haven't rallied - their fundamentals simply aren't impressive, particularly in liquor, consumer goods, and real estate.

Among low-valuation sectors, chemicals appear to offer the "highest probability of success," benefiting from "anti-involution" policies with significant potential for "turnaround to profitability and distressed recovery."

How high is the earnings certainty for Hong Kong biotech stocks?

Profit equals revenue minus expenses. Hong Kong biotech has succeeded in both "expanding revenue sources" and "reducing costs."

**Expanding Revenue Sources: Accelerating Drug Export Trend**

Latest data shows that License-out deals from January to July totaled nearly $80 billion, representing over 160% year-over-year growth.

Recent positive developments from multiple Chinese innovative drug companies include:

- CSPC Pharmaceutical reached a global licensing agreement with Madrigal, including $120 million upfront payment and up to $1.955 billion in milestone payments - China Biologic Products announced its wholly-owned subsidiary's collaboration with Merck on the LM-299/MK-2010 project is progressing smoothly, with $300 million in technology transfer milestone payments expected soon - Hengrui Medicine announced a License-out collaboration with British pharmaceutical giant GlaxoSmithKline with total potential value reaching $12.5 billion

The process from Chinese innovative drug companies signing BD agreements with multinational pharmaceutical companies to final commercial sales typically requires 3-7 years. "Signing agreements" and "upfront payments" represent initial catalysts, with upfront payments comprising the smallest portion of total collaboration value.

Subsequent "milestone payments" and "sales royalties" constitute the bulk of value - these will be released continuously over the next three years and beyond, providing long-term support for the current biotech sector rally.

**Reducing Costs: Declining Overall Sales Expense Ratios**

According to research data, this year's biotech company interim reports show significant declines across multiple expense ratios, particularly "sales expense ratios" falling from over 30% in previous years to just 20% currently.

Under the dual impact of "expanding sources and reducing costs," Hong Kong biotech companies' revenue capabilities continue strengthening. Looking at semi-annual reports over the past seven years, this year's net profit totals are the highest on record.

Leading companies benefit more obviously from cost reduction through scale effects:

- BeiGene: Released H1 2025 results showing revenue of RMB 17.52 billion (46% year-over-year growth), net profit of RMB 450 million, and adjusted net profit of RMB 261 million - all representing turnarounds to profitability, marking the company's first profitable period since listing - Transcenta: Achieved total product revenue exceeding RMB 5.2 billion in H1 2025, maintaining robust growth of over 35% year-over-year

Therefore, my conclusion remains: as long as these core fundamentals for innovative drugs remain unchanged, any short-term corrections present opportunities for gradual accumulation.

Perhaps reflecting this logic, recent significant news shows that according to Hong Kong Exchange data, BlackRock increased its holdings in Sunshine Guojian Pharmaceutical by 47.60475 million shares on August 26th, totaling approximately HK$1.433 billion, bringing its latest shareholding to 5.1%.

The three leading biotech companies mentioned above are all major holdings in the "Hang Seng Hong Kong Stock Connect Biotech Select Index."

**Why is the "Hang Seng Hong Kong Stock Connect Biotech Select Index" Superior?**

Recent updates to Hong Kong biotech-related indices clearly exclude CXO companies, focusing on core innovative drug companies. New rules take effect on September 8th (next Monday). Post-adjustment, indices will focus more precisely on drug R&D companies, with market capital flowing more accurately toward innovative drug enterprises.

The "Hang Seng Hong Kong Stock Connect Biotech Select Index" offers higher concentration and greater focus on leading biotech stocks. The index's top 10 holdings comprise 78.62%, with the top three biotech leaders "BeiGene + Transcenta + WuXi Biologics" accounting for 39.6% combined.

This concentration matters because innovative drug development requires substantial capital and talent investment. As AI and robotics technologies advance, biotech companies must also expand into technology arms races to improve R&D success rates and reduce time costs. Companies must withstand potential new drug development failures.

Capital investment, talent attraction, technology upgrades, and risk resistance capabilities all require well-capitalized leading enterprises. Moreover, leading companies more easily benefit from "scale effects" in cost reduction.

Currently, very few funds track the "Hang Seng Hong Kong Stock Connect Biotech Select Index." Only two ETFs trade on-exchange, with the largest being the Hong Kong Stock Connect Biotech ETF (520880). Its corresponding off-exchange feeder funds (A: 025220, C: 025221) conclude their subscription period today.

Despite Hong Kong biotech stocks gaining over 100% this year, the "Hang Seng Hong Kong Stock Connect Biotech Select Index" tracked by the Hong Kong Stock Connect Biotech ETF (520880) still has nearly 35% upside potential to reach its 2021 peak levels.

**Currency Impact Analysis**

Many wonder why Hong Kong biotech stocks declined for several days last week despite strong fundamentals. While "capital absorption" by AI and semiconductor sectors offers one explanation, another important factor was rapid Hong Kong dollar appreciation tightening Hong Kong stock liquidity.

Hong Kong has maintained a linked exchange rate system since 1983, pegging the Hong Kong dollar to the US dollar within a 7.75-7.85 range per USD. The Hong Kong Monetary Authority intervenes when these thresholds are reached.

In May, the HKMA injected HK$129.4 billion in liquidity, reversing Hong Kong dollar appreciation trends. This massive capital injection created extremely abundant Hong Kong dollar liquidity, coinciding with strong biotech performance from May-July.

However, as rates approached the 7.85 threshold, the HKMA withdrew HK$7.065 billion and HK$3.376 billion on August 13th and 14th respectively to stabilize the currency, significantly tightening market liquidity and causing Hong Kong dollar appreciation.

Biotech companies are extremely sensitive to market liquidity. Liquidity tightening directly pressures biotech stocks short-term, explaining the late-August price pressure on Hong Kong biotech stocks.

Currency fluctuations represent normal short-term volatility. Encouragingly, the Hong Kong dollar has begun depreciating again since September, providing another short-term positive for Hong Kong biotech stocks.

MACD golden cross signals are forming, with these stocks showing strong upward momentum.