As the death toll from the Wuhan coronavirus outbreak rose last week, mainland Chinese and Hong Kong stocks started taking a beating. While Chinese stocks fell to their biggest daily loss in eight months on Wednesday, the last trading day of the Year of the Pig, the Hong Kong market fell 3.8 per cent for the week, ending seven straight weeks of gains.
And as the illness spreads, comparisons are inevitably being made with the 2003 Sars (severe acute respiratory syndrome) outbreak. Sars sank Hong Kong retail sales by 11 per cent in May 2003 from a year earlier, led to a 17.5 per cent drop in tourist arrivals during the three months to May 2003, and shrank the city's economy by 0.5 per cent during the second quarter.
Last week, the MSCI Asia ex-Japan index fell 2 per cent on the confirmation of human-to-human transmission of the new coronavirus.
Investors responded to the news of the outbreak by backing the shares of pharmaceutical and medical diagnostic companies, as these appeared to be obvious beneficiaries of the illness. Travel-related stocks, as well as those of Macau's casinos, meanwhile, took a hit.
But will these trends hold once the markets reopen, in Hong Kong on Wednesday, and in mainland China on Friday?
"While there is no cure for this new virus, the wider health care sector could benefit from higher demand for products and services related to prevention and diagnosis of seasonal viral diseases with similar symptoms, since now is the peak flu season," said Carol Dou, senior health care analyst at Singapore-based investment bank UOB-Kay Hian.
Shenzhen-listed clinical diagnostic and machines and reagents makers Shenzhen Mindray Biomedical Electronic and Guangzhou Wondfo Biotech are among stocks backed by investors.
Shenzhen Mindray, whose shares at one point last week reached a record high of 200 yuan, is one of China's largest medical device manufacturers. Its immunoassay machines are used for testing the presence and concentration of biochemicals in body fluids, and are among the various diagnostic techniques used for viral infections. Guangzhou Wondfo, meanwhile, makes rapid point-of-care testing instruments that can be used at patients' bedsides, and can be used to test for influenza.
Hong Kong-listed Yichang HEC ChangJiang Pharmaceutical, which makes antiviral drug Tamiflu, also reached a record high of HK$50.75 on Wednesday. Yichang HEC's core product, Oseltamivir Phosphate, is a first-line medication for treating influenza and was included in China's national essential drug list late in 2018. It represented 95.4 per cent of the company's total revenue for the first half of 2019.
Yang Yan, fund manager at Hong Kong-based Atlantis Investment Management, said while drugs for influenza were no cure for the Wuhan coronavirus, investors were paying more attention to this stock during peak influenza season.
Jay Lee, analyst at independent investment research provider Morningstar Investment Management Asia, said he did not expect any of the big diversified Chinese drug makers to see a long-term financial benefit from the epidemic.
"However, we could see a modest boost in short-term earnings due to increased sales of over-the-counter cold medicines and even prescription drugs, such as Arbidol (umifenovir) and Ribavirin, which are broad-spectrum antiviral medicines," he said.
That would explain the 24 per cent rally in Star Lake Bioscience shares last week. The company makes Ribavirin, which was combined with corticosteroids to treat Sars patients in Hong Kong in 2003, despite a lack of conclusive evidence of its efficacy, Lee said.
It might also explain a 10 per cent rally early last week in the shares of Hong Kong-based China Traditional Chinese Medicine Holdings, which has been marketing its "yupingfeng" and "chongcao qingfei" products as immunity boosters against viral infections. It. however, gave back all its gains by Friday amid a wider market rout.
Travel has been hit by the outbreak, which in turn has led to drops in airline stocks. In Shanghai, China Southern Airlines lost 8.5 per cent last week to 6.43 yuan, China Eastern Airlines lost 8 per cent to 5.1 yuan and Air China lost 10 per cent to 8.25 yuan. in Hong Kong, Cathay Pacific fell 7.6 per cent.
Morningstar analyst Ivan Su said China Southern was most exposed to the Wuhan outbreak among the three big Chinese carriers, even though the central Chinese city accounted for just 4 per cent to 6 per cent of its capacity.
According to US financial services company Jefferies, Wuhan primarily services domestic flights, and China Southern accounts for a third of this market in term of total seats, the largest among the three airlines. The domestic segment accounts for 67 per cent of China Southern's total revenue, also highest among the three.
"Based on the number of cases and ability to spread between humans, it bears some similarity to Sars in 2003," Jefferies analysts Andrew Lee and Lois Zhou said in a report. "We believe the sector will remain under pressure as confirmed cases are set to increase."
During the Sars epidemic, Chinese airlines' share prices reacted ahead of air passenger traffic declines recorded in April. The stock prices of China Eastern and China Southern dropped 30 per cent and 23 per cent, respectively, in the three months between February and April 2003. By April, these declines had bottomed out, as new cases of infection started to taper off.
The Macau casinos have been affected by the two confirmed cases of the coronavirus. Moreover, its chief executive, Ho Iat-seng, said the government would not rule out closing all casinos if the situation worsened.
Several casino operators plunged by more than 10 per cent last week. Wynn Macau lost 12.8 per cent, Galaxy Entertainment Group lost 9.9 per cent, MGM China Holdings lost 16.7 per cent and SJM Holdings plunged 12.6 per cent.
Chelsey Tam, a Morningstar analyst, said the Macau gambling sector reported reduced tourism and gambling revenues amid the Sars outbreak. In April 2003, SJM said the number of gambling visitors it welcomed fell by 30 per cent.
"The Macau casinos will be the losers as the demand for travelling will reduce, as people prefer to stay home," she said.
And until there is more evidence that the situation is not getting worse, most analysts said it was hard to pinpoint when the sell-off in Macau casino stocks would end.
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