The Hong Kong Stock Connect innovative drug sector has recently staged a strong counterattack. The 100% pure-play biotech R&D ETF—Huabao Hong Kong Stock Connect Innovative Drug ETF (520880)—has emerged as a leading force in this rebound. The first week of July saw a historic surge of 16.4%, followed by a further gain of 2.05% in the second week on heavy volume, with weekly turnover reaching 42.83 billion yuan, marking the second-highest level in its history.

On July 13th, following the significant gains, the Hong Kong Stock Connect innovative drug sector underwent a consolidation phase, with the intraday price of ETF 520880 closing down 1.11% and experiencing a daily amplitude of 3.79%. Notably, during intraday declines, the ETF maintained a wide premium in the secondary market, indicating particularly active buying interest.

With the sector oscillating higher from its recent bottom, what are the driving factors? Is this a short-term rebound or a trend reversal? The latest insights from Feng Chencheng, the fund manager of Huabao Hong Kong Stock Connect Innovative Drug ETF (520880), are now available.

The current market movement initially began around June 9th, driven by CXO companies benefiting from both interim results and new order announcements, alongside pharmaceutical stocks listed on the STAR Market. The Hong Kong Stock Connect innovative drug sector itself started its move on June 29th, when the intraday price of the Huabao Hong Kong Stock Connect Innovative Drug ETF (520880) surged 7.94%, setting a record for its largest single-day gain.

Analyzing the causes, there have been no significant fundamental changes within the sector. This rebound is likely due to capital rebalancing, where sectors like innovative drugs—which experienced sharp declines previously but maintain solid fundamentals—have become a haven for funds seeking safety (a "seesaw effect" between hard tech and non-tech lagging sectors).

Simultaneously, the US-China market correlation may have aided the biotech rally. The US-listed XBI ETF (primarily composed of small and mid-cap biotech companies) began a continuous upward trend from June 11th, rising 27% over 19 trading sessions, outperforming the XLV ETF (large pharmaceutical companies). The catalyst appears to be the acquisition of companies like NUVL (June 22nd) and APGE (June 9th) by large pharmaceutical firms for deals exceeding $10 billion, stimulating share prices of US biotech companies and causing the biotech sector to significantly outperform indices like the S&P Equal Weight Index.

Domestic supportive policies have further catalyzed the market. On July 9th, the "National Essential Medicine List (2026 Edition)" was comprehensively updated and released for the first time in eight years, with the number of chemical drugs and biological products increasing by 14.1%. The selection criteria for essential drugs saw a major breakthrough, incorporating several innovative drugs: in oncology, high-priced targeted drugs like Osimertinib and Olaparib were included; in immunology, biologics such as Spesolimab (from ConjuChem Biotechnologies) and Telitacicept (from RemeGen) entered the list (both having entered national medical insurance reimbursement within the last eight years); in metabolic diseases, Semaglutide made its debut. Following this list adjustment, some innovative drugs are expected to gain volume opportunities in the primary care market.

Looking ahead, can the Hong Kong Stock Connect innovative drug rally be sustained?

Returning to the underlying fundamentals, the sustainability of the innovative drug theme requires support from major industry trends, which hinge on the global recognition of clinical data from these companies. Only then can overseas sales, as modeled, contribute meaningfully to valuations. Therefore, beyond the disclosure of clinical data ahead of major conferences like WCLC (September) and ESMO (October), a key industry event to watch for within the year is the overall survival (OS) data from the global clinical trial of IMMUNOTECH-B's (06978) HARMi-3 study, which warrants close attention.

To capture the rebound opportunity in innovative drugs, consider these two key investment instruments:

Huabao Hong Kong Stock Connect Innovative Drug ETF (520880): A 100% allocation to innovative drug R&D companies, with its top ten holdings accounting for over 70% of the portfolio, highlighting its focus on sector leaders. Its underlying assets are Hong Kong-listed stocks, offering high volatility and T+0 trading.

Huabao Pharmaceutical ETF (562050): The only ETF tracking the pharmaceutical index in the secondary market, featuring a unique allocation of "75% innovative drugs + 25% traditional Chinese medicine." It is a scarce offering in the market, combining the high growth potential of innovative drugs with the high dividend characteristics of traditional Chinese medicine stocks.

Data sourced from the Shanghai, Shenzhen, and Hong Kong stock exchanges, China Securities Index Co., Ltd., and Hang Seng Indexes Company.

Note: ETF funds do not charge sales service fees. When investors subscribe for or redeem fund units, the subscription/redemption agency broker may charge a commission of up to 0.5%, which includes relevant fees charged by the stock exchange and registration institutions. Please refer to the respective fund's legal documents for detailed fee structures.

Risk Disclosure: The constituent stocks of the indices mentioned herein are for illustrative purposes only. Descriptions of individual stocks do not constitute any form of investment advice nor represent the holdings or trading动向 of any fund managed by the fund manager. The fund manager assesses the risk rating of Huabao Pharmaceutical ETF and its feeder fund as R3-Medium Risk, suitable for Balanced (C3) and above investors. The risk rating for Huabao Hong Kong Stock Connect Innovative Drug ETF and its feeder fund is assessed as R4-Medium to High Risk, suitable for Aggressive (C4) and above investors. Any information appearing in this article (including but not limited to individual stocks, commentary, forecasts, charts, indicators, theories, and any form of expression) is for reference only. Investors must be responsible for any independent investment decisions. Furthermore, any views, analysis, or forecasts herein do not constitute investment advice of any kind to the reader, and no liability is accepted for any direct or indirect losses arising from the use of this content. The performance of other funds managed by the fund manager does not guarantee the performance of this fund. Past performance of a fund is not indicative of its future results. Fund investment carries risks.