China biotech valuations and liquidity rebounded after bottoming at the end of June

Overview

This report is Morgan Stanley's monthly update on valuations and liquidity in the China biotech sector, focusing on changes in valuation multiples, trading liquidity, and fund flows for China biotech and related 18A stocks from the end of May 2026 to mid-July. The report shows that sector valuations rebounded quickly after bottoming at the end of June, while liquidity also improved significantly by mid-July.

Core views

The core view is that the China biotech sector experienced short-term valuation compression and a pullback in liquidity, but had already shown a notable recovery by mid-July. The valuation recovery may have come from period-end fund rebalancing, capital rotation from technology into biotech, and policy and transaction catalysts at the industry level. On liquidity, ASCO-related fund flows temporarily boosted trading activity, which later pulled back under geopolitical concerns and fund outflows, but reversed after the end of June and rose to a higher level.

Analysis framework

The report mainly tracks sector valuation multiples and liquidity indicators to monitor changes in the China biotech industry's momentum, and combines fund flows, policy events, industry news, and progress in individual company transactions to explain changes in valuation and liquidity.

Methodology notes

• Valuation methodsprice-to-sales ratio

  P/S valuation multiple

  Uses the multiple of price relative to sales to measure valuation in the China biotech sector; the report tracks 2030e P/S compressing from about 3.5x to about 3.0x before rebounding to 3.8x.

• Valuation methodsenterprise-value-to-sales ratio

  EV/S valuation multiple

  Uses enterprise value relative to sales as a supplementary valuation indicator; the report shows EV/S declining from about 2.8x to about 2.4x before rebounding to 3.2x.

• liquiditysector liquidity tracking

  sector liquidity

  Measures trading activity by the proportion of sector liquidity relative to the relevant index or market metric; the report shows this indicator rising from 7.5% in mid-June and about 6% in late June to 9.7% by mid-July.

• rating_frameworkMorgan Stanley industry view

  Attractive industry view

  Morgan Stanley defines Attractive as meaning that analysts expect the covered industry basket to deliver attractive performance relative to the relevant broad market benchmark over the next 12-18 months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China biotech sector

  core research target

  Strengths

  Valuations recovered quickly after the end of June, liquidity rose to 9.7% by mid-July, and the sector received support from policy, transactions, and capital rotation.

  Weaknesses

  In late June, it was affected by geopolitical concerns and sector fund outflows, and valuation multiples remain sensitive to changes in market liquidity.

  Comparison

  Relative to the technology sector, the report mentions capital rotating from technology into biotech.

  Risks

  If capital rotation reverses, policy tailwinds disappoint, or transaction momentum slows, the valuation recovery may give back gains.

• China healthcare covered basket

  industry view target

  Strengths

  Morgan Stanley's industry view is Attractive, indicating expected attractive performance relative to the relevant market benchmark over the next 12-18 months.

  Weaknesses

  The report discloses extensive investment banking and non-investment-banking relationships, so investors should use this research as one input in decision-making rather than the sole basis.

  Comparison

  Attractive is above In-Line and Cautious in terms of industry view implications.

  Risks

  The industry view is a relative performance assessment, not equivalent to a stock-specific buy or sell recommendation; stock dispersion and investors' own constraints will still affect actual outcomes.

Key data

• China biotech P/Sabout 3.5x → about 3.0x → 3.8xCompressed from the end of May 2026 to a low at the end of June, then rebounded by mid-July.
• China biotech EV/Sabout 2.8x → about 2.4x → 3.2xFollowed a path similar to P/S, bottoming at the end of June and recovering by mid-July.
• Sector liquidity7.5% → about 6% → 9.7%Rose in mid-June driven by ASCO-related trading, fell back in late June, and rebounded by mid-July due to capital rotation and sector updates.
• Industry viewAttractiveApplies to the China healthcare sector perspective and includes a 12-18 month relative performance assessment.
• Global equity rating distributionOverweight/Buy 42%; Equal-weight/Hold 43%; Underweight/Sell 15%Morgan Stanley global equity rating disclosure as of June 30, 2026.

Impact & implications

In terms of investment implications, the report supports maintaining a relatively positive view on the China biotech sector: valuations and liquidity have recovered from end-June lows, indicating improved risk appetite among investors; however, the recovery includes factors such as fund rotation and event catalysts, so its sustainability still needs to be validated through subsequent trading activity, policy implementation, and transaction progress.

Risks

• Geopolitical concerns may weigh on capital inflows and sector risk appetite.
• The sustainability of capital rotation from technology into biotech is uncertain.
• If favorable policy developments, easing BINSA uncertainty, and transaction progress fail to continue materializing, the valuation recovery may lack follow-through momentum.
• Morgan Stanley discloses investment banking, securities-related service, or shareholding relationships with many covered companies, which may create conflicts of interest, and investors should exercise independent judgment.

What to watch

• Whether China biotech P/S can hold or break above the 3.8x level seen in mid-July.
• Whether EV/S continues to expand from around 3.2x or falls back toward the end-June lows.
• Whether the sector liquidity share can remain around 9.7% or continue improving.
• Post-ASCO fund flows, capital rotation from the technology sector, progress on Essential Drug List policy, BINSA-related uncertainty, and deal momentum from Dizal, Innovent, and others.