China Healthcare: Potential Opportunities From One Of The Fastest Growing Major Global Healthcare Markets

An Overview of the KraneShares MSCI All China Healthcare Index ETF (Ticker: KURE)

KURE | 9/30/2024

Introduction to KraneShares

About KraneShares

Krane Funds Advisors, LLC is a specialist investment manager focused on China, Climate, and Alternative assets. KraneShares seeks to provide innovative, high conviction, and first to market strategies. The firm was founded in 2013 and manages for institutions and individuals globally. In 2017, KraneShares formed a strategic partnership with China International Capital Corporation (CICC) when they acquired a majority ownership stake. The firm is a signatory of the United Nations-supported Principles for Responsible Investment (UN PRI).

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Product Suite

China Focused

Thematic Equity

• KWEB – Internet & E-Commerce*
• KURE – Healthcare
• KGRN – Clean Technology*
• KSTR – STAR Market*
• KTEC – Hang Seng Tech
• KPRO – 100% KWEB Defined Outcome
• KBUF – 90% KWEB Defined Outcome

Core Equity

• KBA – MSCI China A 50
• KALL – MSCI All China
• KCAI – China Onshore Alpha Index

Options Income

• KLIP – China Internet & Covered Call

Climate Aligned

Carbon

• KRBN – Global Carbon Strategy*
• KEUA – European Carbon Allowance
• KCCA – California Carbon Allowance

Equity

• KSEA – Ocean Engagement

Fixed Income

• KCSH – Sustainable Ultra Short Duration

Alternatives

Fixed Income

• IVOL – Quadratic Interest Rate Volatility & Inflation Hedge
• BNDD – Quadratic Deflation ETF

Managed Futures

• KMLM – Mount Lucas Managed Futures

Equity

• KSPY – Hedgeye Hedged Equity
• BUYO – Man Buyout Beta Index

Global

Asia Fixed Income

• KHYB – Asia High Income USD Bond

Global Equity

• KARS – Electric Vehicles & Future Mobility*
• OBOR – One Belt One Road
• KLXY – Global Luxury
• AGIX – Artificial Intelligence & Technology
• SAUD – MSCI Saudi Economic Transformation

EM Equity

• KEMX – MSCI Emerging Markets ex China
• KEMQ – Emerging Markets Consumer Tech
• KEM – Dynamic Emerging Markets

US Equity

• KVLE – Value Line® Dynamic Dividend Equity

Strategy also available in UCITS

KraneShares MSCI All China Healthcare Index ETF — KURE

Investment Strategy

KURE seeks to measure the performance of MSCI China All Shares Healthcare 10/40 Index. The Index is a free float adjusted market capitalization weighted index designed to track the equity market performance of Chinese companies engaged in the healthcare sector. The securities in the Index include all types of publicly issued shares of Chinese issuers, which are listed in Mainland China, Hong Kong, and the United States. Issuers eligible for inclusion must be classified under the Global Industry Classification Standard (GICS) as engaged in the healthcare sector. The issuers included in the Underlying Index may include small-cap, mid-cap, and large-cap companies.

China Healthcare Sector Highlights

• China is the second largest healthcare market globally with total healthcare expenditures reaching $479 billion in 2023, after increasing by three times over the past ten years.
• There is still opportunity for considerable growth in China's healthcare market with per capita healthcare spending at just over $340, compared to an average of $4,986 among the Organization for Economic Cooperation and Development (OECD) countries.
• China's aging population, rising incomes, and increasing urbanization may provide a sustained catalyst for growth in China's healthcare sector.

KURE Features

• Exposure to Chinese companies listed in Mainland China, Hong Kong and the United States that are involved in the healthcare industry.
• Exposure to key healthcare subsectors: Biotechnology, General Pharmaceuticals, Care Providers, Medical Devices, and Traditional Chinese Medicine.
• Exposure to companies that may benefit from China's growing middle class and aging population.
• Access to major global healthcare companies that are often not captured by broad indexes.

An aging population means a growing healthcare market.

• China's population is aging rapidly, and this demographic shift is likely to have significant implications for the country's healthcare system.
• China's population aged over 60 is expected to more than double by 2050 to more than the entire US population.
• China's healthcare expenditure is still small compared to the OECD average.

Population in China aged 65+ as % of Total Population

(2014–2023, rising from ~10% to ~15%)

Number of People aged 60+

• 2023: ~200 million
• 2050 Projection: ~500 million

As China's population moves to cities and wages increase, healthcare is becoming a greater focus.

• As average household income and urbanization rates have risen, Chinese citizens have greater access to healthcare knowledge and have a greater ability to pay for medical-related costs.
• This is leading to a surge in the diagnosis and treatment of noncommunicable diseases such as cancer. China accounted for 24% of all new cancer diagnoses worldwide in 2020.
• In 2016, the government responded to growing healthcare concerns by launching the "Healthy China 2030 Plan", which is a national initiative that promotes diet, exercise, and access to healthcare services.

China Urban Population

(Population in Millions: 142 in 1970 → 927 in 2023)

Disposable Income of Urban Households in China

(RMB: ~22,000 in 2015 → ~39,000 in 2023)

China's domestic pharmaceutical market could be poised for significant future growth after regulatory overhaul.

• China's pharmaceutical sales are expected to reach $119 billion in 2024 and maintain a compound annual growth rate (CAGR) of 7.22% through 2028.
• Per capita, out-of-pocket health spending remains low at $340, as compared to an average of $4,986 for OECD countries, implying significant upside potential for health spending.
• Thanks to universal single-payer health insurance established in 2011, 95% of China's population has access to health care services.

China Total Annual Pharmaceutical Sales

(Billions of RMB, 2012–2023)

• Launch of "Healthy China 2030 Plan"
• The expansion of the scope of centralized drug and device approvals and purchasing led to a sales slump in the short term.
• Sales return to growth.

We believe recent declines in the share prices of China's leading health care companies have not been fundamentally driven.

China Health Care — Total Earnings Before Interest and Taxes (EBIT) vs. Price

(KURE Price vs. EBIT, June 2018 – September 2024)

S&P World Health Care Index — Total EBIT vs. Price

(Index Level vs. EBIT, June 2018 – September 2024)

China's leading health care companies, as measured by KURE, currently trade at a significant discount to their global peers despite higher revenue growth rates.

Price-to-Earnings (P/E)

• KURE: 22x
• S&P Global 1200 Health Care Index: 33x (January 2023 – September 2024)

3-Year Average Revenue Growth Rate

• S&P Global 1200 Health Care Index: ~10%
• China Health Care (KURE): ~26%

China's Healthcare Ecosystem

• General Pharmaceuticals
• Medical Devices
• Care Providers
• Biotechnology
• Traditional Chinese Medicine

China has become a top location for medical outsourcing services and drug innovation.

The transition from a generic health care model to one based on innovation and competition is supported by public policy in China.

Contract Research Organizations (CRO) Overview

• CROs use their state-of-the-art, turn-key labs with advanced technological capabilities, and access to a deep bench of scientists to develop new drugs and treatments for companies that wish to outsource their R&D processes.
• They are thereby able to profit from the global R&D process without bearing as much risk, which makes for a defensive business model.
• Industry leaders Wuxi Biologics and Wuxi Apptec provide end-to-end support to pharmaceuticals from discovery to commercialization.

Main Beneficiaries of Research and Development (R&D) Spending

• Contract organizations are the main beneficiaries of the strong growth in R&D spending in China as more companies outsource their R&D needs.
• Contract research organizations also receive R&D spending from abroad as multinationals hire them to test and develop new drugs.

Innovations

• The aptly-named Innovent Biologics created a lung cancer treatment that is currently being sought after by Eli Lilly.

Contract Research Organizations

WuXi AppTec is a global tech platform that offers a portfolio of medical R&D resources to shorten the lag time in biomedical discovery and innovative development.

WuXi Biologics is a leading global contract research, development, and marketing (CRDMO) offering end-to-end solutions that enable partners to discover, develop, and manufacture biologics.

Biotechnology Innovations

Innovent Biologics is committed to developing, manufacturing, and commercializing high quality, innovative medicines for the treatment of major diseases such as cancer.

Innovent Biologics has increased revenues sixfold since 2019.

The biotechnology firm has developed one of the most effective treatments for lung cancer.

Innovent Biologics' Annual Revenue

Year	Revenue (RMB, Billions)
2019	~1
2020	~3.8
2021	~4.3
2022	~4.6
2023	~6.1

Out-Licensing and In-Licensing represent a significant opportunity for China's pharmaceutical firms.

Definitions

• Out-Licensing: The practice of selling pharmaceuticals or medical devices developed in China in international markets.
• In-Licensing: The practice of selling pharmaceuticals or medical devices developed in international markets in China.

Favorable Policies

Several market-friendly policies have been introduced encouraging joint ventures between multinational companies and domestic companies, which include:

• Increasing efficiency and transparency of drug review and approval processes

• Maximizing quality of generic drugs

• Enhancing efficiency in R&D innovations

• The Chinese government has been working to speed up the approval process for new drugs and to encourage the development of innovative drugs in recent years.

• In the first half of 2023, 24 new drugs were approved for market launches.

Pharmaceutical In-Licensing

The Hisun-Pfizer joint venture is mutually beneficial in international marketing and in the commercialization of generic medicines in China.

Medical Devices In-Licensing

Fosun Pharma and Intuitive Surgical's joint venture is mutually beneficial in biomedical technology and pharmaceutical manufacturing and distribution.

Pharmaceutical Out-Licensing

Eli Lilly is currently seeking to distribute Innovent's lung cancer treatment in the United States, pending FDA approval.

The number of out-licensing deals has increased in recent years, leading to an even more global customer base for China's pharmaceutical firms.

No. of China Licensing Deals: In vs. Out

Year	In-Licensing	Out-Licensing
2017	37	3
2018	64	10
2019	85	12
2020	83	21
2021	128	42
2022	66	48
2023	170	70

China's medical device market is very internationalized though demand for domestically-produced devices is poised to increase.

• Due to perceived quality advantages medical equipment imports from the U.S. and Europe remain high. However, as quality increases, Chinese domestic medical device companies are increasingly competing with U.S. and European companies making particularly strong gains in medium-level technology niches.
• The government's "Made in China 2025" initiative to improve industry efficiency, product quality, and brand reputation aims to further spur the development of domestic medical device manufacturers and increase the competitiveness of Chinese medical device brands.
• In addition to benefitting from strong domestic demand, China's top medical devices companies have overseas operations and serve customers globally.

China Medical Devices Market

Metric	Medical Devices
Total Market Size ($ Billions)	44.8
Expected Compound Annual Growth Rate (CAGR) 2023-2025 (%)	5

Medical Devices

Mindray is a leading global supplier of in-vitro fertilization equipment, ventilators, among other key medical devices.

Global medical devices giant Mindray has doubled revenue since 2019.

Mindray's Annual Revenue

Year	Revenue (RMB, Billions)
2019	~16.5
2020	~21
2021	~25.3
2022	~30.5
2023	~34.5

The Traditional Chinese Medicine (TCM) industry represents a sizable portion of the entire market.

• TCM has a rich 2,000-year history encompassing herbal medicine, acupuncture, massage and dietetics.
• In December 2016, China's State Council issued the "Strategic Plan on the Development of Traditional Chinese Medicine" making the development of TCM a national strategy. The policy emphasizes promoting a balance between Western medicine and TCM practices.
• The TCM industry was valued at $30.2 billion in 2023 and is expected to grow to $49.6 billion by 2033.
• TCM makes up over 20% of China's drug market.
• TCM has a global presence in roughly 196 countries and regions.
• TCM practitioners emphasize preventative medicine and treating diseases before they occur through healthy living and proper diets. This is especially important in China which has increasing obesity, diabetes and smoking rates.
• TCM companies can also benefit from increasing incomes and consumer spending as many TCM products are popular for personal wellness purposes, rather than urgent medical needs.

TCM has over 2,000 years of tradition

In Traditional Chinese Medicine, good health is believed to be achieved by a balance between yin and yang.

Traditional Chinese Medicine

Tong Ren Tang manufactures and sells traditional remedies in China and abroad.

As China's population becomes more health conscious, the demand for high quality preventative care also increases, providing a catalyst for private hospitals and facilities that offer health examinations, evaluations, and consulting services.

Privatization

• Rising demand from wealthier Chinese seeking quality care and diverse services has led to increased privatization of hospitals to match demand, but public hospitals still far outnumber private hospitals.
• We believe China's public hospital system will be insufficient to satisfy the need of the population through 2050, leading to the establishment of more private hospitals.

Healthy China 2030: Upgrading Primary Care Institutions

• The "Healthy China 2030" policy outlines the government's plans to upgrade the standards and quality of service in primary care institutions.
  • The government sees general practitioners as the gatekeepers of people's health and primary method of controlling medical expenditures.
  • By 2030, the goal is to have five qualified general practitioners available for every 10,000 residents in China.
  • The National Health and Family Planning Commission estimates China needs to add 210,000 general practitioners.
  • The establishment of a medical network and referral system may help reduce overcrowding in China's largest tertiary hospitals.

Care Provider

Aier Eye Hospital is a leading private hospital administrator in China and globally. Aier operates 718 ophthalmology facilities in Mainland China, 101 clinics in Europe, 8 clinics in Hong Kong, 14 clinics in Southeast Asia, and one clinic in the United States.

Example Holdings in the KraneShares MSCI All China Healthcare Index ETF (Ticker: KURE)

Subsector	Top Holding in Subsector by Weight	Holding Weight (as of 9/30/2024)	5-Year Average Revenue Growth	Ex-China Comparable Company	5-Year Average Revenue Growth
General Pharma.	Jiangsu Hengrui	7.76%	10.49%	Pfizer	12.35%
Medical Devices	Mindray	8.26%	21.27%	Thermo Fisher Scientific	11.59%
Care Providers	Aier Eye Hospital	3.45%	18.11%	Community Health Systems	0.04%
Biotech	Beigene	6.99%	62.72%	Gilead Sciences	4.56%
Traditional Chinese Medicine	Tong Ren Tang	1.34%	-1.29%	Natural Alternatives International	2.26%

Many of China's leading healthcare companies operate and serve customers globally. Nonetheless, they are under allocated to in global healthcare portfolios.

WuXi Biologics

• Market Cap ($, Billions): 9
• % of S&P Global Health: 0

Country	No. of Facilities
USA	4
Germany	2
Ireland	2
Singapore	1

WuXi AppTec

• Market Cap ($, Billions): 21
• % of S&P Global Health: 0

Country	No. of Facilities
USA	12
Germany	1
Switzerland	1
United Kingdom	1

Mindray

• Market Cap ($, Billions): 46
• % of S&P Global Health: 0

Country	No. of Facilities
USA	3

KURE Portfolio Characteristics

Subsector Breakdown

• General Pharmaceuticals: 45%
• Biotechnology: 35%
• Medical Devices: 15%
• Care Providers: 4%
• TCM: 1%

TCM = Traditional Chinese Medicine

Market Cap Breakdown

• Large Cap: 88%
• Mid Cap: 12%

Listing Location Breakdown

• China: 65%
• Hong Kong: 33%
• United States: 2%

KraneShares MSCI All China Health Care Index ETF

Investment Strategy

The KraneShares MSCI All China Health Care Index ETF (KURE) seeks to measure the performance of MSCI China All Shares Health Care 10/40 Index. The Index is a free float adjusted market capitalization weighted index designed to track the equity market performance of Chinese companies engaged in the health care sector. The securities in the Index include all types of publicly issued shares of Chinese issuers, which are listed in Mainland China, Hong Kong and United States. Issuers eligible for inclusion must be classified under the Global Industry Classification Standard (GICS) as engaged in the healthcare sector. The issuers included in the Underlying Index may include small-cap, mid-cap and large-cap companies.

Fund Details (Data as of 09/30/2024)

Field	Value
Primary Exchange	NYSE
CUSIP	500767835
ISIN	US5007678353
Total Annual Fund Operating Expense (Gross)	0.79%
Total Annual Fund Operating Expense (Net)*	0.65%
Inception Date	01/31/2018
Distribution Frequency	Annual
Underlying Index	MSCI China All Shares Health Care 10/40 Index (USD)
Net Assets	$47,495,310
Number of Holdings	64

Top 10 Holdings as of 09/30/2024

Holding	%
SHENZHEN MINDR-A	8.26
JIANGSU HENGRU-A	7.76
BEIGENE LTD	6.96
WUXI BIOLOGICS CAYMAN INC	4.31
INNOVENT BIOLOGICS INC	4.12
CSPC PHARMACEUTI	3.53
AIER EYE HSPTL-A	3.45
ZHANGZHOU PIEN-A	3.35
WUXI APPTEC CO LTD-A	3.07
AKESO INC	2.92

KURE Performance History as of 09/30/2024

	Cumulative %			Average Annualized %
	3 Mo	6 Mo	Since Inception	1 Yr	3 Yr	5 Yr	Since Inception
Fund NAV	27.33%	15.93%	-21.24%	-4.53%	-19.44%	-1.49%	-3.52%
Closing Price	26.30%	15.00%	-22.35%	-5.29%	-19.81%	-1.68%	-3.72%
Underlying Index	27.18%	15.92%	-17.52%	-3.76%	-19.04%	-0.65%	-2.85%

Index Definitions

S&P Global 1,200 Health Care Index: The S&P Global 1200 Health Care index consists of all members of the S&P Global 1200 that are classified within the GICS® health care sector. The index was launched on September 30, 1999.

Term Definitions

Earnings before Interest and Taxes (EBIT): A company's total revenue before deducting interest and taxes.

Price to Earnings Ratio (P/E): A company's share price divided by its earnings per share. The P/E ratio is meant to provide a sense of whether a company is over or under-valued.

Revenue: The money a company makes from selling goods and services, before the deduction of any expenses.

Revenue Growth: The change in a company's revenues over a specified period of time.

Compound Annual Growth Rate (CAGR): The compound annual growth rate is the rate of return would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment's life span.

Urban Population: Population of urban and suburban areas.

Disposable Income: The income that does not go towards housing and basic necessities.

Important Notes

Carefully consider the Funds' investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds' full and summary prospectus, which may be obtained by visiting www.kraneshares.com/kure/ Read the prospectus carefully before investing.

Risk Disclosures

Investing involves risk, including possible loss of principal. There can be no assurance that a Fund will achieve its stated objectives. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses. Derivatives are also subject to liquidity and counterparty risk.

The ability of the Fund to achieve its respective investment objectives is dependent, in part, on the continuous availability of A Shares and the ability to obtain, if necessary, additional A Shares quota. The Fund is subject to political, social or economic instability within China which may cause decline in value. Emerging markets involve heightened risk related to the same factors as well as increase volatility and lower trading volume.

Narrowly focused investments typically exhibit higher volatility. The Fund's assets are expected to be concentrated in a sector, industry, market, or group of concentrations to the extent that the Underlying Index has such concentrations. KURE is non-diversified.

ETF shares are bought and sold on an exchange at market price (not NAV) and are not individually redeemed from the Fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.

The KraneShares ETFs and KFA Funds ETFs are distributed by SEI Investments Distribution Company (SIDCO), 1 Freedom Valley Drive, Oaks, PA 19456, which is not affiliated with Krane Funds Advisors, LLC, the Investment Adviser for the Funds, or any sub-advisers for the Funds.