According to a research report released by JPMorgan, as global interest rates, particularly 10-year and 30-year U.S. Treasury yields, climb higher, the risk-free rate used in the bank's DCF models and DCF-based equity valuations are facing greater pressure than before. As a result, the bank re-examined the potential impact of interest rates on China's healthcare valuations, especially in the biotech and CXO sub-sectors.

The bank noted that if a higher risk-free rate is applied in DCF calculations, the valuations of Insilico Medicine (HKEX: 03696) in the AI-driven drug discovery space, GenScript Bio (HKEX: 01548) and WuXi AppTec (HKEX: 02359) in the CXO space, and Junshi Biosciences (HKEX: 01877) in the biotech space appear to be less sensitive compared to their respective peers.

On the other hand, the valuations of SKB Bio (HKEX: 06990) in biotech, WuXi XDC (HKEX: 02268) in CXO, and MicroPort Medical (HKEX: 00853) in medical devices appear to be more sensitive.

The bank pointed out that there is no consistent correlation pattern between interest rates and China's healthcare stock valuations. For instance, the 10-year U.S. Treasury yield and the market-cap-weighted average forward five-year price-to-sales ratio of Chinese biotech stocks have shown a negative correlation since January 2025, but turned slightly positive since July 2026. Interest rates are more relevant to long-duration biotech assets, while CXO valuations have a weaker direct link to interest rate movements, with performance driven more by earnings.

Additionally, the bank expects the current rate hike cycle to end after one more hike in December, rather than extending into a prolonged tightening period next year. Therefore, it is not overly concerned about rising rates affecting China's healthcare valuations and continues to favor the biotech and CXO sub-sectors.

Innovent Biologics and SKB Bio are its top picks in the biotech space, with Innovent Biologics' valuation appearing less sensitive to interest rates than that of SKB Bio. WuXi Bio (HKEX: 02269) and WuXi AppTec are its top picks in the CXO space, with WuXi AppTec's valuation appearing less sensitive to interest rates than that of WuXi Bio.