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China’s Top Leaders Meets To Set Policy Direction For The Next 5 Years

China’s Top Leaders Meets To Set Policy Direction For The Next 5 Years

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China's Top Leaders Meets To Set Policy Direction For The Next 5 Years Tyler Durden Mon, 10/26/2020 - 23:45

Today China's top leaders represented by the Chinese Communist Party’s Central Committee started the Fifth Plenum of its 19th Party Congress where they will chart the course for the economy’s development for the next 15 years and set the country’s long-term priorities, with are expected to focus on boosting technological self-sufficiency and domestic demand while Xi cements his influence over the party.

The Plenum will run until Thursday, and will conduct the country’s most important exercise in central-planning: drafting the next Five-Year Plan against the backdrop of a worsening global economy and US sanctions (it's unclear what if any role the recordings China intelligence has of Hunter Biden will play in this exercise). The plenum will also discuss a broad plan for the next 15 years, with goals that are likely to endure for at least the rest of 67-year-old President Xi Jinping’s rule, who as a reminder made himself ruler for life several years ago.

According to the FT, the process to draft a plan typically reveals the biggest worries and priorities for the Chinese leadership, although these are usually for private consumption and rarely officially disclosed to the public. This year’s meeting comes as the deadline for meeting the previous overarching goal of achieving a “moderately prosperous society”, is due to expire in 2021, the centenary of the founding of the Chinese Communist party.

Beijing has recently hinted it would broaden out its focus on economic growth to include targets for environmental protection, innovation and self-sufficient development — such as in food, energy, and in chips. The Planum will also explain how the government will meet Xi’s target of zero net carbon emissions by 2060, which is ironic since China is the world's biggest emitter of CO2.

Xi is also expected to use the exercise to consolidate his influence over the party and the party’s influence over governance, said Holly Snape, a fellow in Chinese politics at the University of Glasgow. "It’s useful to understand these broad goals in the context of an expression Xi seems fond of: the party, government, military, people, education, east, west, south, north, and centre — the party leads everything."

At the end of the meeting, China will release a brief summary of the proposals to describe the broader directions of the 14th Five-Year Plan at a high level, including discussions on “dual circulation" - in which China will develop domestic demand and self-sufficiency as the rest of the world remains stalled by coronavirus - strategy, a focus on technological innovation and a push for factor market reform. However, Goldman does not expect a GDP growth target to be announced in either the proposals or the detailed plan when it is released next March.

Below is a preview from Goldman on what to expect from China's 14th Five-Year Plan:

Main points

The Chinese Communist Party (CCP) will hold the Fifth Plenum of its 19th Party Congress on October 26–29 to discuss the proposals for the 14th Five-Year Plan. The finalized proposals from the party will be released to the public shortly afterwards in a brief summary. Over the next several months, the National Development and Reform Committee (NDRC) will consult specialists and coordinate efforts from other government ministries to prepare a detailed plan draft to be submitted to the National People’s Congress (NPC) for final approval during the “Two Sessions” in March 2021.

Challenging external environment and key domestic development stage

The external environment is likely to get more challenging for China in the next five years, and China's senior leadership's view on the external environment has changed significantly. As President Xi has emphasized since the 19th Party Congress, the world is undergoing profound changes , both economically and politically, which are being accelerated by the COVID-19 pandemic. In particular, on the economic front, global growth may be low in the coming years, and trade protectionism, which has increased in recent years may continue, with disturbances to the global supply chain.

On the domestic front, the 14th Five-Year Plan period (2021-2025) will mark the first five years of China's moves towards its second centenary goal to build a “modern socialist country” after achievement of the first centenary goal of building a “moderately prosperous society”. And as the government has emphasized, China's development has entered a new stage, focusing more on quality. However, Chinese economic growth has decelerated notably in recent years, with accumulation of many structural issues/imbalances. The contribution of total factor productivity (TFP) to GDP growth has declined notably in recent years. The share of household consumption in China remains low at 39%, compared to 51% for the upper middle income countries and 60% across OECD countries. The share of service sector value-added in GDP has been trending up in recent years to around 54%, but remains below the average level for upper middle income (56%) and OECD (70%) countries. Regional disparity/household income inequality in China has increased or remained large.

Overall, how China can achieve sustainable, balanced and high quality growth in coming years and enter the high income group from the upper middle income group currently is the key long-term question for policymakers in China. Although the Chinese government has been calling for a transition in the development model for a number of years, we think the next five years will be particularly important, both politically and economically.

Growth target expectation

In proposals for prior five-year plans, the government typically mentioned their growth expectation for the next five years, citing “doubling income” goals (except for the 12th five-year plan), and an average GDP growth rate target was included as a key indicator in the detailed plan. These “doubling income” goals were proposed by Deng Xiaoping (for the period between 1980 and 2000) and Jiang Zemin (for the period between 2000 and 2020), with the goal of doubling income between 2010 and 2020 reiterated by President Xi. But for the period beyond 2020, there have been no official comments like these goals so far, and although President Xi mentioned in 19th Party Congress about the second centenary goal beyond 2020, he didn’t make similar numerical remarks on growth.

With the increasing focus on growth quality, we think there is a high chance that the government may not mention growth expectations in the proposals for the 14th five-year plan (and probably the five-year average growth rate indicator could be also missing from the detailed plan released next year). For major indicators in the detailed plan, we think the government may adjust to reflect a focus on quality (there were 25 indicators in the 13th Five-Year Plan, categorized into four groups--economic development, people's well-being, innovation, resources and environment).

“Dual circulation” strategy to follow in coming years

Against a more challenging external environment, and at a key domestic development stage, recently President Xi has stressed the facilitation of national economic circulation to establish a new development pattern, which takes the domestic market as the mainstay and allows the domestic and foreign markets to boost each other. This has been called the “dual circulation” strategy. There has been a lot of discussion on how to interpret “dual circulation”. Based on President Xi’s remarks, we think there are two key elements:

  • First, an emphasis on demand and supply being more domestically driven ("internal circulation"). From a demand perspective, this means growth more driven by consumption and investment. This is consistent with the “expanding domestic demand strategy”. From a supply perspective, this could imply production to rely more on domestic technology and supply chains. In our view, this does not mean “external circulation” is not important, but the way China participates in global trade/supply chain and the role it plays could change.
  • Second, an emphasis on supply-side structural reform to facilitate economic circulation and to make supply better match demand. As Chinese policymakers have said, currently the major issues with China’s development are on supply side and are structural. On the top of supply-side reform initiated in 2015 focusing on “five major tasks”, in 2018 the government expanded the content and came up with a more comprehensive strategy—reinforcing previous structural adjustments, energizing micro market entities, promoting innovation and supply chain upgrading; and facilitating economic circulation.

Overall, “dual circulation” is about the long-term development landscape Chinese policymakers would likely to achieve, primarily through supply-side structural reform. The key elements are actually not new and have been mentioned previously by policymakers. From an economic perspective, this means boosting total productivity factor and rebalancing economic development across sectors/regions. But given that the broad external and domestic environment has changed, as we mentioned, we think the government should accelerate the pace of relevant reforms. From a high level, we think the government may stress several key broad areas (the table at the end of this report lists some announcements from government authorities related to 14th Five-Year Plan).

Promoting innovation—key for TFP growth

As President Xi recently mentioned, strengthening innovation capacity and achieving breakthroughs in core technologies is key for the “dual circulation” strategy. The Chinese government has been fostering innovation and industrial upgrading (and development of the digital economy) in recent years, but there remains significant room to improve. R&D expenditure in GDP has been rising and reached around 2.2% in 2019, higher than the average level in upper middle income countries but still well below the OECD level (also likely to fall short of the 2.5% target set in 13th five-year plan). The Economic Complexity Index for China, measuring the capability of a country to produce varied and more complex goods has been trending higher persistently, but still has notable gap with the frontier economy Japan.[1] We have seen strong policy support through measures such as the establishment of government supported funds (e.g., national chip funds) and tax incentives, we believe the efforts would ramp up in coming years. In addition to provide financing support/policy incentive, in order to upgrade supply chain, optimizing industrial allocation across regions based on their comparative advantage would be also key, which is also part of coordinated regional development strategy the government has been pushing.

Factor market reform—key for TFP growth and economic rebalancing

The Chinese government has released two important documents this year aiming to accelerate improving the market economy/allocation, particularly in factor markets (e.g., labor, capital, land, technology, data). One source of slowdown in China’s TFP growth in recent years may reflect misallocation. And distortions in the markets have also contributed to economic imbalances. For instance, regarding the relatively low household consumption to GDP ratio in China, in theory, this could potentially be related to several factors—distribution of national income (between labor and capital), income inequality which is also affected by redistribution effects of tax/benefit systems, and consumption/saving propensity. Distortions in the labor market, such as Hukou system and related regional segregation of the social security system (China’s public spending on healthcare and pension benefits is also quite low as a share of GDP based on international comparisons) has negatively affected household consumption.[2] Spatial mismatch of supply/demand in the land market (undersupply in regions with more population inflow) may have also pushed up housing prices and negatively affected household consumption. As a major part of the “new urbanization” strategy, reform on labor market and land market could accelerate in coming years. Existing regulation on interest rates and SOE privilege in credit availability may have distorted capital allocation and contributed to a high investment ratio in China. Recently, the government released an SOE reform plan for the next three years, as a guide to optimize sectoral distribution of SOEs and improve their efficiency. Further pushes in market reform and reducing distortions will be important to mitigate economic imbalances and boost TFP growth, in our view.

Reduce inequality across regions/households

Less inequality across both households and regions is a focus for the government. China’s Gini index, which measures household income inequality, remains at a high level relative to many other countries and has even increased in recent years, and inequality in wealth is higher still.[3] Regional inequality has also trended up in recent years. On the one hand, these may reflect structural issues/distortions in the economy as we mentioned above, and on the other hand, these may worsen economic imbalances. To address this, the government has been trying to reform the personal income tax system, but in China the share of people paying personal income tax is small. Also, the share of GDP that makes up spending on the social assistance that targets the poor and vulnerable is comparatively low. The overall redistribution effect of China’s tax/benefit systems is pretty limited currently. On a regional basis, the Chinese government has implemented a coordinated regional development strategy, which is also related to factor market reform and could help narrow regional disparity.

Environment

Over the past decades, the Chinese economy has expanded at a very fast pace but at the expense of deterioration in environmental conditions. In recent years, the Chinese government has been increasingly strict on environmental regulations. For instance, ten of the 25 indicators in the 13th five-year plan concerned the environment and resources, with the targets for these indicators all required (in contrast, some other targets are just for guidance, e.g., urbanization ratio). As a key element in high quality growth, we think the government will continue to focus on environment protection in coming years. There might be economic costs incurred by environment regulations -- in addition to a short-run shock on growth, environmental regulations might lead to lower long-run growth. [4] But innovation and further market-oriented reforms could help offset.

 

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EyePoint poaches medical chief from Apellis; Sandoz CFO, longtime BioNTech exec to retire

Ramiro Ribeiro
After six years as head of clinical development at Apellis Pharmaceuticals, Ramiro Ribeiro is joining EyePoint Pharmaceuticals as CMO.
“The…

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Ramiro Ribeiro

After six years as head of clinical development at Apellis Pharmaceuticals, Ramiro Ribeiro is joining EyePoint Pharmaceuticals as CMO.

“The retinal community is relatively small, so everybody knows each other,” Ribeiro told Endpoints News in an interview. “As soon as I started to talk about EyePoint, I got really good feedback from KOLs and physicians on its scientific standards and quality of work.”

Ribeiro kicked off his career as a clinician in Brazil, earning a doctorate in stem cell therapy for retinal diseases. He previously held roles at Alcon and Ophthotech Corporation, now known as Astellas’ M&A prize Iveric Bio.

At Apellis, Ribeiro oversaw the Phase III development, filing and approval of Syfovre, the first drug for geographic atrophy secondary to age-related macular degeneration (AMD). The complement C3 inhibitor went on to make $275 million in 2023 despite reports of a rare side effect that only emerged after commercialization.

Now, Ribeiro is hoping to replicate that success with EyePoint’s lead candidate, EYP-1901 for wet AMD, which is set to enter the Phase III LUGANO trial in the second half of the year after passing a Phase II test in December.

Ribeiro told Endpoints he was optimistic about the company’s intraocular sustained-delivery tech, which he said could help address treatment burden and compliance issues seen with injectables. He also has plans to expand the EyePoint team.

“My goal is not just execution of the Phase III study — of course that’s a priority — but also looking at the pipeline and which different assets we can bring in to leverage the strength of the team that we have,” Ribeiro said.

— Ayisha Sharma

Remco Steenbergen

→ Sandoz CFO Colin Bond will retire on June 30 and board member Remco Steenbergen will replace him. Steenbergen, who will step down from the board when he takes over on July 1, had a 20-year career with Philips and has held the group CFO post at Deutsche Lufthansa since January 2021. Bond joined Sandoz nearly two years ago and is the former finance chief at Evotec and Vifor Pharma. Investors didn’t react warmly to Wednesday’s news as shares fell by almost 4%.

The Swiss generics and biosimilars company, which finally split from Novartis in October 2023, has also nominated FogPharma CEO Mathai Mammen to the board of directors. The ex-R&D chief at J&J will be joined by two other new faces, Swisscom chairman Michael Rechsteiner and former Unilever CFO Graeme Pitkethly.

On Monday, Sandoz said it completed its $70 million purchase of Coherus BioSciences’ Lucentis biosimilar Cimerli sooner than expected. The FDA then approved its first two biosimilars of Amgen’s denosumab the next day, in a move that could whittle away at the pharma giant’s market share for Prolia and Xgeva.

Sean Marett

→ BioNTech’s chief business and commercial officer Sean Marett will retire on July 1 and will have an advisory role “until the end of the year,” the German drugmaker said in a release. Legal chief James Ryan will assume CBO responsibilities and BioNTech plans to name a new chief commercial officer by the end of the month. Marett was hired as BioNTech’s COO in 2012 after gigs at GSK, Evotec and Next Pharma, and led its commercial efforts as the Pfizer-partnered Comirnaty received the first FDA approval for a Covid-19 vaccine. BioNTech has also built a cancer portfolio that TD Cowen’s Yaron Werber described as “one of the most extensive” in biotech, from antibody-drug conjugates to CAR-T therapies.

Chris Austin

→ GSK has plucked Chris Austin from Flagship and he’ll start his new gig as the pharma giant’s SVP, research technologies on April 1. After a long career at NIH in which he was director of the National Center for Advancing Translational Sciences (NCATS), Austin became CEO of Flagship’s Vesalius Therapeutics, which debuted with a $75 million Series A two years ago this week but made job cuts that affected 43% of its employees six months into the life of the company. In response to Austin’s departure, John Mendlein — who chairs the board at Sail Biomedicines and has board seats at a few other Flagship biotechs — will become chairman and interim CEO at Vesalius “later this month.”

→ BioMarin has lined up Cristin Hubbard to replace Jeff Ajer as chief commercial officer on May 20. Hubbard worked for new BioMarin chief Alexander Hardy as Genentech’s SVP, global product strategy, immunology, infectious diseases and ophthalmology, and they had been colleagues for years before Hardy was named Genentech CEO in 2019. She shifted to Roche Diagnostics as global head of partnering in 2021 and had been head of global product strategy for Roche’s pharmaceutical division since last May. Sales of the hemophilia A gene therapy Roctavian have fallen well short of expectations, but Hardy insisted in a recent investor call that BioMarin is “still very much at the early stage” in the launch.

Pilar de la Rocha

→ BeiGene has promoted Pilar de la Rocha to head of Europe, global clinical operations. After 13 years in a variety of roles at Novartis, de la Rocha was named global head of global clinical operations excellence at the Brukinsa maker in the summer of 2022. A short time ago, BeiGene ended its natural killer cell therapy alliance with Shoreline Biosciences, saying that it was “a result of BeiGene’s internal prioritization decisions and does not reflect any deficit in Shoreline’s platform technology.”

Andy Crockett

→ Andy Crockett has resigned as CEO of KalVista Pharmaceuticals. Crockett had been running the company since its launch in 2011 and will hand the keys to president Ben Palleiko, who joined KalVista in 2016 as CFO. Serious safety issues ended a Phase II study of its hereditary angioedema drug KVD824, but KalVista is mounting a comeback with positive Phase III results for sebetralstat in the same indication and could compete with Takeda’s injectable Firazyr. “If approved, sebetralstat may offer a compelling treatment option for patients and their caregivers given the long-standing preference for an effective and safe oral therapy that provides rapid symptom relief for HAE attacks,” Crockett said last month.

Steven Lo

→ Vaxart has tapped Steven Lo as its permanent president and CEO, while interim chief Michael Finney will stay on as chairman. Endpoints News last caught up with Lo when he became CEO at Valitor, the UC Berkeley spinout that raised a $28 million Series B round in October 2022. The ex-Zosano Pharma CEO had a handful of roles in his 13 years at Genentech before his appointments as chief commercial officer of Corcept Therapeutics and Puma Biotechnology. Andrei Floroiu resigned as Vaxart’s CEO in mid-January.

Kartik Krishnan

→ Kartik Krishnan has taken over for Martin Driscoll as CEO of OncoNano Medicine, and Melissa Paoloni has moved up to COO at the cancer biotech located in the Dallas-Fort Worth suburb of Southlake. The execs were colleagues at Arcus Biosciences, Gilead’s TIGIT partner: Krishnan spent two and a half years in the CMO post, while Paoloni was VP of corporate development and external alliances. In 2022, Krishnan took the CMO job at OncoNano and was just promoted to president and head of R&D last November. Paoloni came on board as OncoNano’s SVP, corporate development and strategy not long after Krishnan’s first promotion.

→ Genesis Research Group, a consultancy specializing in market access, has brought in David Miller as chairman and CEO, replacing co-founder Frank Corvino — who is transitioning to the role of vice chairman and senior advisor. Miller joins the New Jersey-based team with a number of roles under his belt from Biogen (SVP of global market access), Elan (VP of pharmacoeconomics) and GSK (VP of global health outcomes).

Adrian Schreyer

→ Adrian Schreyer helped build Exscientia’s AI drug discovery platform from the ground up, but he has packed his bags for Nimbus Therapeutics’ AI partner Anagenex. The new chief technology officer joined Exscientia in 2013 as head of molecular informatics and was elevated to technology chief five years later. He then held the role of VP, AI technology until January, a month before Exscientia fired CEO Andrew Hopkins.

→ Paul O’Neill has been promoted from SVP to EVP, quality & operations, specialty brands at Mallinckrodt. Before his arrival at the Irish pharma in March 2023, O’Neill was executive director of biologics operations in the second half of his 12-year career with Merck driving supply strategy for Keytruda. Mallinckrodt’s specialty brands portfolio includes its controversial Acthar Gel (a treatment for flares in a number of chronic and autoimmune indications) and the hepatorenal syndrome med Terlivaz.

David Ford

→ Staying in Ireland, Prothena has enlisted David Ford as its first chief people officer. Ford worked in human resources at Sanofi from 2002-17 and then led the HR team at Intercept, which was sold to Italian pharma Alfasigma in late September. We recently told you that Daniel Welch, the former InterMune CEO who was a board member at Intercept for six years, will succeed Lars Ekman as Prothena’s chairman.

Ben Stephens

→ Co-founded by Sanofi R&D chief Houman Ashrafian and backed by GSK, Eli Lilly partner Sitryx stapled an additional $39 million to its Series A last fall. It has now welcomed a pair of execs: Ben Stephens (COO) had been finance director for ViaNautis Bio and Rinri Therapeutics, and Gordon Dingwall (head of clinical operations) is a Roche and AstraZeneca vet who led development operations at Mission Therapeutics. Dingwall has also served as a clinical operations leader for Shionogi and Freeline Therapeutics.

Steve Alley

→ MBrace Therapeutics, an antibody-drug conjugate specialist that nabbed $85 million in Series B financing last November, has named Steve Alley as CSO. Alley spent two decades at Seagen before the $43 billion buyout by Pfizer and was the ADC maker’s executive director, translational sciences.

→ California cancer drug developer Apollomics, which has been mired in Nasdaq compliance problems nearly a year after it joined the public markets through a SPAC merger, has recruited Matthew Plunkett as CFO. Plunkett has held the same title at Nkarta as well as Imago BioSciences — leading the companies to $290 million and $155 million IPOs, respectively — and at Aeovian Pharmaceuticals since March 2022.

Heinrich Haas

→ Co-founded by Oxford professor Adrian Hill — the co-inventor of AstraZeneca’s Covid-19 vaccine — lipid nanoparticle biotech NeoVac has brought in Heinrich Haas as chief technology officer. During his nine years at BioNTech, Haas was VP of RNA formulation and drug delivery.

Kimberly Lee

→ New Jersey-based neuro biotech 4M Therapeutics is making its Peer Review debut by introducing Kimberly Lee as CBO. Lee was hired at Taysha Gene Therapies during its meteoric rise in 2020 and got promoted to chief corporate affairs officer in 2022. Earlier, she led corporate strategy and investor relations efforts for Lexicon Pharmaceuticals.

→ Another Peer Review newcomer, Osmol Therapeutics, has tapped former Exelixis clinical development chief Ron Weitzman as interim CMO. Weitzman only lasted seven months as medical chief of Tango Therapeutics after Marc Rudoltz had a similarly short stay in that position. Osmol is going after chemotherapy-induced peripheral neuropathy and chemotherapy-induced cognitive impairment with its lead asset OSM-0205.

→ Last August, cardiometabolic disease player NeuroBo Pharmaceuticals locked in Hyung Heon Kim as president and CEO. Now, the company is giving Marshall Woodworth the title of CFO and principal financial and accounting officer, after he served in the interim since last October. Before NeuroBo, Woodworth had a string of CFO roles at Nevakar, Braeburn Pharmaceuticals, Aerocrine and Fureix Pharmaceuticals.

Claire Poll

→ Claire Poll has retired after more than 17 years as Verona Pharma’s general counsel, and the company has appointed Andrew Fisher as her successor. In his own 17-year tenure at United Therapeutics that ended in 2018, Fisher was chief strategy officer and deputy general counsel. The FDA will decide on Verona’s non-cystic fibrosis bronchiectasis candidate ensifentrine by June 26.

Nancy Lurker

→ Alkermes won its proxy battle with Sarissa Capital Management and is tinkering with its board nearly nine months later. The newest director, Bristol Myers Squibb alum Nancy Lurker, ran EyePoint Pharmaceuticals from 2016-23 and still has a board seat there. For a brief period, Lurker was chief marketing officer for Novartis’ US subsidiary.

→ Chaired by former Celgene business development chief George Golumbeski, Shattuck Labs has expanded its board to nine members by bringing in ex-Seagen CEO Clay Siegall and Tempus CSO Kate Sasser. Siegall holds the top spots at Immunome and chairs the board at Tourmaline Bio, while Sasser came to Tempus from Genmab in 2022.

Scott Myers

→ Ex-AMAG Pharmaceuticals and Rainier Therapeutics chief Scott Myers has been named chairman of the board at Convergent Therapeutics, a radiopharma player that secured a $90 million Series A last May. Former Magenta exec Steve Mahoney replaced Myers as CEO of Viridian Therapeutics a few months ago.

→ Montreal-based Find Therapeutics has elected Tony Johnson to the board of directors. Johnson is in his first year as CEO of Domain Therapeutics. He is also the former chief executive at Goldfinch Bio, the kidney disease biotech that closed its doors last year.

Habib Dable

→ Former Acceleron chief Habib Dable has replaced Kala Bio CEO Mark Iwicki as chairman of the board at Aerovate Therapeutics, which is signing up patients for Phase IIb and Phase III studies of its lead drug AV-101 for pulmonary arterial hypertension. Dable joined Aerovate’s board in July and works part-time as a venture partner for RA Capital Management.

Julie Cherrington

→ In the burgeoning world of ADCs, Elevation Oncology is developing one of its own that targets Claudin 18.2. Its board is now up to eight members with the additions of Julie Cherrington and Mirati CMO Alan Sandler. Cherrington, a venture partner at Brandon Capital Partners, also chairs the boards at Actym Therapeutics and Tolremo Therapeutics. Sandler took the CMO job at Mirati in November 2022 and will stay in that position after Bristol Myers acquired the Krazati maker.

Patty Allen

→ Lonnie Moulder’s Zenas BioPharma has welcomed Patty Allen to the board of directors. Allen was a key figure in Vividion’s $2 billion sale to Bayer as the San Diego biotech’s CFO, and she’s a board member at Deciphera Pharmaceuticals, SwanBio Therapeutics and Anokion.

→ In January 2023, Y-mAbs Therapeutics cut 35% of its staff to focus on commercialization of Danyelza. This week, the company has reserved a seat on its board of directors for Nektar Therapeutics CMO Mary Tagliaferri. Tagliaferri also sits on the boards of Enzo Biochem and is a former board member of RayzeBio.

→ The ex-Biogen neurodegeneration leader at the center of Aduhelm’s controversial approval is now on the scientific advisory board at Asceneuron, a Swiss-based company focused on Alzheimer’s and Parkinson’s. Samantha Budd-Haeberlein tops the list of new SAB members, which also includes Henrik Zetterberg, Rik Ossenkoppele and Christopher van Dyck.

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Deflationary pressures in China – be careful what you wish for

Until recently, China’s decelerating inflation was welcomed by the West, as it led to lower imported prices and helped reduce inflationary pressures….

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Until recently, China’s decelerating inflation was welcomed by the West, as it led to lower imported prices and helped reduce inflationary pressures. However, China’s consumer prices fell for the third consecutive month in December 2023, delaying the expected rebound in economic activity following the lifting of COVID-19 controls. For calendar year 2023, CPI growth was negligible, whilst the producer price index declined by 3.0 per cent.

China’s inflation dynamics

China’s inflation dynamics

Chinese consumers are hindered by the weaker residential property market and high youth unemployment. Several property developers have defaulted, collectively wiping out nearly all the U.S.$155 billion worth of U.S. dollar denominated-bonds. 

Meanwhile, the Shanghai Composite Index is at half of its record high, recorded in late 2007. The share prices of major developers, including Evergrande Group, Country Garden Holdings, Sunac China and Shimao Group, have declined by an average of 98 per cent over recent years. Some economists are pointing to the Japanese experience of a debt-deflation cycle in the 1990s, with economic stagnation and elevated debt levels.

Australia has certainly enjoyed the “pull-up effect” from China, particularly with the iron-ore price jumping from around U.S.$20/tonne in 2000 to an average closer to U.S.$120/tonne over the 17 years from 2007. With strong volume increases, the value of Australia’s iron ore exports has jumped 20-fold to around A$12 billion per month, accounting for approximately 35 per cent of Australia’s exports. 

For context, China takes 85 per cent of Australia’s iron ore exports, whilst Australia accounts for 65 per cent of China’s iron ore imports. China’s steel industry depends on its own domestic iron ore mines for 20 per cent of its requirement, however, these are high-cost operations and need high iron ore prices to keep them in business. To reduce its dependence on Australia’s iron ore, China has increased its use of scrap metal and invested large sums of money in Africa, including the Simandou mine in Guinea, which is forecast to export 60 million tonnes of iron ore from 2028.

The Chinese housing market has historically been the source of 40 per cent of China’s steel usage. However, the recent high iron ore prices are attributable to the growth in China’s industrial and infrastructure activity, which has offset the weakness in residential construction.

Whilst this has continued to deliver supernormal profits for Australia’s major iron ore producers (and has greatly assisted the federal budget), watch out for any sustainable downturn in the iron ore price, particularly if the deflationary pressures in China continue into the medium term.

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Deterra Royalties half-yearly result: stable performance and growth Initiatives

Deterra Royalties (ASX:DRR) was established through a strategic demerger from Iluka Resources Ltd (ASX:ILU) in 2020. At the core of Deterra Royalties portfolio…

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Deterra Royalties (ASX:DRR) was established through a strategic demerger from Iluka Resources Ltd (ASX:ILU) in 2020. At the core of Deterra Royalties portfolio lies long-life, Mining Area C (MAC), a premier iron ore mining operation in the Pilbara region of Western Australia, operationally managed by BHP. This key asset is underpinned by a royalty agreement that ensures Deterra Royalties receives quarterly payments equivalent to 1.232 per cent of the revenue generated, alongside substantial one-off payments of A$1 million for each dry metric tonne increase in annual production capacity. 

South flank, a critical component of the MAC, exemplifies BHP’s latest advancement in iron ore mining, marking its inaugural production in May 2021. In financial year 2023, MAC annual iron ore production amounted to 126 million wet metric tonnes, up 14 per cent on the prior year. The company has reiterated that capacity payments have been set at 118 million tonnes last year and are expected to be updated to current production of 126 million tonnes in June 2024, with potential upside to 145 million tonnes shortly after that. Thus, there is potential upside to dividends of $8 million in capacity payments by June 2024. Meanwhile, revenue amounted to $215.2 million plus a $13 million capacity payment from south flank expansion. Net profit after tax came in at $152.5 million. 

The company distributes 100 per cent of its profits as dividends. 

In a global landscape marked by burgeoning uncertainty and China’s post-COVID-19 economic malaise, Deterra Royalties emerges as providing iron exposure with greater stability. Deterra Royalties offers investors exposure to the iron ore market with distinctly reduced volatility compared to traditional mining entities. 

With that background established, the company released its half-yearly results for FY24, reporting figures that were largely in line with both internal expectations and market consensus. The company continues to explore avenues for portfolio expansion, particularly in bulk, base, and battery commodity royalties, although no deals have been finalised. With substantial undrawn debt facilities of $500 million and recent declines in junior mining company stocks, Deterra Royalties may be moving closer to securing new deals to create new royalties or purchase existing royalties. 

Deterra Royalties reported a net profit after tax (NPAT) of $78.7 million for the first half of FY24, matching internal projections and closely aligning with market estimates, albeit slightly below consensus by three per cent. The declared dividend of $14.89 conditions precedent, representing 100 per cent of NPAT in accordance with Deterra Royalties dividend policy, also fell within anticipated ranges but slightly missed consensus. Revenue for the period stood at A$119 million, consistent with the pre-reported royalty revenue update. 

Operating costs dipped by two per cent from the previous half-year to A$4.3 million but were up by four per cent year-on-year. Notably, business development costs surged to A$1.3 million, marking a 50 per cent increase from the previous period and a 140 per cent rise from the same period last year. This uptick reflects Deterra Royalties intensified efforts to evaluate growth opportunities, as managing director Julian Andrews highlighted. 

Deterra Royalties remains steadfast in its pursuit of growth opportunities, maintaining a flexible approach in both the size and type of investments/royalties sought. The company’s focus spans non-precious metals, including bulk, base, and battery metals, primarily targeting developed mining jurisdictions across Australia, North America, South America, and Europe. Deterra Royalties continues to prioritise royalties for production or near-production companies. 

A company that pays 100 per cent of its earnings as a dividend is relatively easy to value with a discounted cash flow (DCF). Adopting a required return of 6-7 per cent of the weighted average cost of capital (WACC), Deterra Royalties valuation falls in a range between A$4.70 and $5.10 per share. 

In summary, Deterra Royalties’ half-yearly results provided the stable and somewhat predictable operational performance our portfolio managers value, whilst also providing iron ore exposure. 

The Montgomery Fund and the Montgomery [Private] Fund owns shares in Dettera Royalties. This blog was prepared 19 February 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Deterra Royalties, you should seek financial advice. 

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