Chinese healthcare stocks are back in vogue after a $142 billion wipeout, as signs grow that the worst of a government crackdown is over.

The Hang Seng Composite Healthcare Index, dominated by Chinese companies, has rallied 11% in the past month, having plunged 37% from a January peak after Beijing launched an anti-graft clampdown on the pharmaceutical sector.

Investor mood has started brightening since mid-September, when authorities clarified that the crackdown was just aimed at a “critical minority” of corrupt professionals. Strong earnings and cheap valuations also have rekindled enthusiasm for healthcare stocks amid a background of an aging population and expanding middle class.

Read: China Health-Care Shares Plunge as Anti-Graft Campaign Widens

“Sentiment has turned around after authorities set the tone and principles for the anti-graft campaign, as traders have reached consensus that such a policy move would benefit high-quality pharmaceutical equipment makers in the long run,” said Chu Kefan, fund manager at Maxwealth Fund Management Co. Other catalysts, such as technological innovation, also will help sustain the rally, she said.

Thanks to a slew of encouraging third-quarter earnings, analysts have since raised the forward earnings forecast for the Hang Seng sub-gauge by more than 130% to a three-year high, Bloomberg data showed.

And even with the latest rebound, the sector still looks enticing: the sub-index is trading at 17 times forward earnings, less than half of its five-year average.

The index has been the top performer among the sub-gauges of the broader benchmark in the past month.

Chinese healthcare stocks, including Huadong Medicine Co. and Gan & Lee Pharmaceuticals Co., also got a boost Thursday amid positive sentiment in the sector after Eli Lilly & Co. received US approval for its diabetes drug to treat obesity.

Read: Lilly Wins FDA Nod for Obesity Drug That Rivals Wegovy (4)

Leading Innovation

Another driver of the recent rally has been the leading roles that Chinese firms played in a wave of biotech industry innovation, resulting in a flurry of deals with global pharmaceutical companies.

Shanghai-based biotech firm Laekna Inc., which has a licensing agreement with Swiss giant Novartis Pharma AG, was among the top gainers of Hang Seng Composite’s healthcare sub-gauge in the past month, rising 36%. Hansoh Pharmaceutical Group Co., another star performer, surged 44% after forming a $1.5 billion drug pact with GSK Plc.

“At the current stage, as many global pharmaceutical MNCs are re-strategizing their pipelines, the business development environment has become increasingly favorable for Chinese companies to strike more deals with MNCs,” said Yiqi Liu, an analyst at Exome Asset Management LLC.

To some observers, uncertainties still persist over the sector. There are concerns that the broader anti-graft campaign may continue for a few more quarters and that may at least weigh on bio-pharmaceutical and medical device firms that rely heavily on sales activities targeted by the authorities.

“It is hard to judge if the worst has already passed for the anti-corruption campaign but with the 3Q23 numbers, the impact could be mitigated by companies,” Deutsche Bank AG analyst Cyrus Ng wrote in a note. Any fallout would be relatively mild for manufacturers of well-established drugs for centralized procurement or innovative medicines, such as Shanghai Junshi Biosciences Co. and BeiGene Ltd.

--With assistance from Jeanny Yu and Ken Wang.

(Updates with prices, adds eighth paragraph)