19 August 2013

Sector Weekly Healthcare Sector

Healthcare Sector Weekly Dose

Valuation summary

Company Ticker CCY Px Mkt ––––– P/E ––––– EPS CAGR –––– PEG –––– –––– P/B –––– –––– ROE –––– This weekly product is designed to provide investors with key sector cap '13E '14E '15E ('12E -'15E) '13E '14E '15E '13E '14E '15E '13E '14E '15E updates and our attempt to identify (USD) (x) (x) (x) (%) (x) (x) (x) (x) (x) (x) (%) (%) (%) stock implications and insights. Shandong Weigao Group Medical 1066 -HK HKD 8.09 1,965 24.2 19.9 16.4 22 1.1 0.9 0.7 2.9 2.6 2.3 12.1 13.2 14.3 Polymer Co. Ltd. Class H Topics this week: Bribery investigation, China Shineway Pharmaceutical 2877 -HK HKD 12.72 1,356 11.8 10.5 9.4 12 1.0 0.9 0.8 1.8 1.7 1.5 16.0 16.3 16.5 H7N9 resurfacing, NDRC might adjust Group Limited originator drug px, June ’13 hospital United Laboratories International 3933 -HK HKD 2.92 613 18.3 13.0 10.6 26 0.7 0.5 0.4 0.7 0.7 0.7 3.8 5.2 6.1 patient traffic data Holdings Ltd.

Sinovac Biotech Ltd. SVA -US USD 4.61 254 -26.3 -43.9 46.1 2.3 2.6 2.7 -8.7 -6.0 5.9 Companies mentioned: Weigao (1066-HK), Shineway (2877.HK) and The China Nepstar Chain Drugstore NPD -US USD 1.58 156 21.3 Ltd. Sponsored ADR United Labs (3933.HK), Sinovac (SVA.O) and Nepstar (NPD.N) Source: Factset/Bloomberg

SAIC anti-bribery investigation to begin: The State Administration for Industry and Commerce (SAIC) has initiated a round of bribery investigation that is expected to last 3 months until November ‘13. The goal is to crack down on bribery during Christopher Lui tender activities between drug manufacturers and hospitals. Our worst case scenario for this anti-bribery activity could mean -7% to earnings and the duration [email protected] Tel: (852) 2977 9203 could last for three quarters.

H7N9 resurfacing : Experts from the recently held international symposium on the prevention and treatment of new types of influenza indicated since the avian H7N9 virus does not kill poultries, it is hard to estimate the embedded risk of poultries carrying the viral strand. Experts believe there could be more H7N9 cases later this autumn/winter.

Stock implications: Companies that could benefit from the marketing expense slowdown include: 1) Weigao (1066.HK) – Doctors could increase tests and services to increase revenues, involving the usage of more medical consumables; 2) Shineway (2877.HK) – Its drugs are low-priced and hospital sales only account for 20% of total sales; and 3) The United Labs (3933.HK) – Doctors may prescribe more TUL’s antibiotics given they are of decent quality and are priced higher than generics, as well as to avoid prescribing too many MNC drugs. Two companies could benefit from H7N9 scare: 1) Sinovac (SVA.O) – Developing H7N9 vaccines for China, and 2) Nepstar (NPD.N) – patients may want to visit drugstores instead of going to hospitals for minor illnesses to avoid H7N9 exposure.

NDRC may adjust prices of originator drugs: Media reported the NDRC could adjust pricing methodologies for originator drugs. Options NDRC is considering are: 1) removal of the retail ceiling price, 2) usage of drug reference pricing, and 3) review of independent pricing statuses for originator drugs.

June ’13 hospital patient traffic data highlights: 1) 2Q13 growth accelerated vs. 1Q13, 2) June grew 5% YoY, though slower than in April and May, and 3)Class III hospitals continue to record double digit growth albeit a slowdown in pace.

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Healthcare Sector 19 August 2013

SAIC anti-bribery investigation to begin

A 3-month long bribery investigation targeting tender activities: The State Administration for Industry and Commerce (SAIC) has initiated a round of bribery investigation that is expected to last 3 months until November ‘13. The goal is to crack down on bribery during tender activities between drug manufacturers and hospitals.

Link to news: http://finance.sina.com.cn/world/20130814/181716447967.shtml

Our comments: Recall the topic has been under the spotlight since the GSK incident. We believe this 3-month investigation is a warning to those that have conducted heavy activities related to bribery. It could also offer a preview to a more stringent environment as no company wants to make the headlines as GSK did.

As tender activities will be under the microscope, we expect marketing activities from manufacturers to decline throughout 4Q13 and possibly in 1Q14. Although less marketing activities may affect top-line sales growth, we believe this may not be a bad thing because companies may be able to optimize the marketing strategies for their products under the new and fairer environment.

On impact:

We believe earnings impact would be -7% YoY at worst, and the duration could be three quarters or so. We attempt to quantify potential earnings impact using the data collected during the 2006 anti-bribery period. The data used and assumptions include:

1) We used the sales, operating expense and operating profit data from 70 A-share companies that have reported quarterly financials since 2004.

2) We assume the worst case of this anti-bribery exercise to mirror that in 2006.

Figure 1: Assuming 2006 was the worst case scenario, earnings could be hit by -7% YOY% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q 06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Sales 15% 12% 24% 7% -3% -7% -7% 5% 7% 18% 30% 42% 31% SG&A 12% 10% 13% -0.4% -2% -10% -7% -0.4% 2% 33% 9% 57% 29% Operating income 17% 13% 28% 10% -4% -6% -7% 7% 8% 14% 36% 37% 32% Source: Factset, BOCOM Int’l

Data suggested SG&A spending decreased over five quarters (4Q05 through 4Q06) in the range of -0.4% YoY to -10% YoY. This led to three quarters of operating income decrease (1Q06 through 3Q06) and the magnitude ranged from -4% YoY to -7% YoY.

On industry:

We believe tender activities will re-accelerate in 4Q13 as inventories in hospital could be low after the slow 2Q13/3Q13 tender activities. If that is the case, sales could improve in 4Q13 while SG&A spending will be low. This could give an upside surprise for 4Q13.

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Healthcare Sector 19 August 2013

Figure 2: SG&A growth vs. operating income growth

SG&A (YOY%) Operating income (YOY%) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Factset, BOCOM Int’l

Figure 3: SG&A growth vs. sales growth

SG&A (YOY%) Sales (YOY%) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Factset, BOCOM Int’l

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Healthcare Sector 19 August 2013

Stock Implications: We believe the upcoming tenders will be biased towards domestic drug manufacturers with lower-priced drugs compared with the previous tenders. Therefore, we think MNCs will take a harder hit than domestic companies in the next three months, if not longer. We also believe the mix of generic drugs could go up compared with the previous quarters.

Besides the three companies we introduced in last week’s issue of Weekly Dose (Lee’s Pharm, Kingworld, and China Biologics, see below) that could be immune to/less impacted by such anti-bribery activities, we are listing three more companies that may benefit from the industry slowdown in marketing activities.

1) Shandong Weigao (1066.HK) - Weigao is one of the top medical consumable companies with consumables accounting for 85% of its sales. With less revenues/incentives from drugs, doctors could increase service usage (such as diagnostics and tests) to increase hospital revenues. This could benefit consumable players such as Weigao (1066-HK).

2) China Shineway (2877.HK) – Most of the products Shineway carries are listed in the NDRL/EDL. This fits the criteria of low priced drugs. Moreover, hospital sales only account for 20% of the company’s total sales. The rest goes to second/third-tier medical institutions such as clinics (60% of sales) and OTC (20% of sales).

3) The United Labs (3933.HK) – The United Labs sells its premium priced antibiotics to hospitals. We believe doctors may use more of TUL’s antibiotics vs. MNCs’ given TUL’s quality is decent and is priced higher than other generic versions. Doctors can also avoid the heat from prescribing too much MNC drugs.

Other stocks we mentioned in last week’s issue:

4) Kingworld Medicines (1110.HK) - Kingworld is an OTC drug/supplement promoter. Over 90% of its sales come from drugstores. Since it is a player with low exposure to hospitals, the company should not be affected.

5) Lee’s Pharm (0950.HK) – Lee’s is an R&D-driven drug manufacturer and also a drug promoter for foreign small/mid-sized drug manufacturers. Its ‘original producer’ drugs are not MNC drugs and have only 10-20% premium to other generics. Therefore, they should not be targets for the government.

6) China Biologic Products (CBPO) – CBPO is a Chinese plasma-based biotech company listed in the US. Its products, including human albumin and human immunoglobulin, are used usually during emergencies and/or surgeries. Therefore, the products are high in demand in hospitals where minimal, if any, marketing activities are needed. It is unlikely that bribery is necessary to push ASP/volume up.

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Healthcare Sector 19 August 2013

H7N9 resurfacing

More H7N9 cases could come in autumn/winter: Experts from the recently held international symposium on the prevention and treatment of new types of influenza indicated since the avian H7N9 virus does not kill poultries, it is hard to estimate the embedded risk of poultries carrying the viral strand. Since July, there have been cases of human infection of H7N9 in Hebei ad Guangdong. This indicated H7N9 has not been stopped. Experts believe there could be more H7N9 cases later this autumn/winter.

Link to news: http://www.cq.xinhuanet.com/2013-08/16/c_116963786.htm

Our comments: It was March when the first case of human infection of H7N9 happened in China. After that, the number of cases skyrocketed in April. It was not until May that the prevalence tapered down. We note the flu season usually starts as the weather cools down after summer. The H7N9 bird flu has killed 44 people out of a total of 135 confirmed infections in China. The mortality rate with data collected so far is 33%. This is lower than 67% of H5N1. However, the prevalence for H7N9 is much higher than H5N1. Figure 4: H7N9 stats in China & H5N1 stats ––––––– ––––– H7N9 –––––––––––– –––––––––––– H5N1 –––––––––––– 2013 New cases Deaths New cases Deaths February 2 2 2003 1 1 March 30 12 2004 0 0 April 88 7 2005 8 5 May 3 0 2006 13 8 June 0 0 2007 5 3 July 2 0 2008 4 4 Unknown 10 23 2009 7 4 2010 2 1 2011 1 1 2012 2 1 2013 2 2 Total 135 44 Total 45 30

Mortality rate 32.6% Mortality rate 66.7%

As of August 12 th 2013 Source:WHO, BOCOM Int’l

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Healthcare Sector 19 August 2013

Figure 5: 135 confirmed human cases of avian influenza A (H7N9) reported to WHO

*Green indicate areas of provinces with confirmed cases As of August 12 th 2013 Source: WHO, BOCOM Int’l

Stock Implications: We highlight two companies that could benefit from the resurfacing of H7N9:

Sinovac (SVA.O) - As a premium vaccine player, the company could benefit as it is developing a vaccine for H7N9. Three batches of H7N9 vaccine fluid have been prepared and are ready for rationing/vaccine formulation. SVA’s H7N9 vaccine has already proved to be effective in animal studies. Moreover, vaccines prepared by Sinovac for pandemic flu do not need to undergo clinical trial as the production method is pre-tested and approved.

Nepstar Chain Drugstore (NPD.N) - We believe more patients with minor illness would prefer to go to drugstores for self-cure instead of going to hospitals. This is to avoid exposure to potential H7N9 patients in hospitals.

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Healthcare Sector 19 August 2013

NDRC might adjust originator drugs pricing

Three things the NDRC is considering: Media reported the NDRC could adjust pricing methodologies for originator drugs. Options NDRC is considering are: 1) removal of the retail ceiling price, 2) usage of drug reference pricing, and 3) review of independent pricing statuses for originator drugs.

Link to news: http://news.pharmnet.com.cn/news/2013/08/15/381521.html

Our comments: We think the goal of the government is to lower the ASP of originator drugs and narrow the gap between originator drugs and their generic versions. This, in turn, will lower medical bills paid by the government. Doctors usually prescribe originator drugs because 1) the drugs are of higher quality, 2) their prices are higher (hospital books 15% of the drug price as commission) and 3) some manufacturers provide incentives to doctors when prescribing their drugs. Since the originator drugs are given a pricing premium (average MNC originator drug is 50%+ above its domestic generic version), the government thinks it is unfair for other drug manufacturers, especially originators, to take this privilege to rebate to doctors and gain market share. Moreover, the government is indirectly funding these activities given it is the ultimate payer to the reimbursable drugs.

On removal of retail ceiling price: We think the removal of retail ceiling prices may be too big of a change. After all, it is the ceiling price that the government is paying (reimbursing). It will be useful to keep the ceiling price under control.

On the use of drug reference pricing: We believe this is a long-term solution. The reason is that the government can better control its budget and spending on different diseases from a more macro, high-evel point of view.

The idea is that the government will categorize the drugs by therapeutic area and molecules, then group them by average production cost and efficacies. From which, a reference price is set by the government. Therefore, doctors and patients can choose to use their desired products and the government will only reimburse the reference price set. Patients have to pay out of their pockets for products that cost more than the reimbursable price. We note the National Development and Reform Commission (NDRC) has recently made queries with 60 MNC and domestic drug manufacturers on drug production cost and pricing.

On the review of independent pricing statuses for originator drugs

This is the mostly likely scenario in the near term as the strategy has been in place. Since the goal is to narrow the gap between originator drugs and the generic versions of the same drugs, independent pricing statuses can be lifted or adjusted to a lower level.

Stock implications: If originator drug prices were to be reviewed, companies that have originator drugs priced 30% or higher vs. domestic generic drugs will be worst hit. We note most of these companies are MNCs. Companies like Lee’s Pharm (950.HK) do sell originator drugs, but the premium is 10-20%, which is justifiable for higher quality.

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Healthcare Sector 19 August 2013

June ’13 hospital patient traffic data

Highlights 1) 2Q13 patient traffic accelerated slightly compared with 1Q13.

2) Overall patient traffic in June grew 5.4% YoY, slower than that in April and May.

3) Class III hospitals continued to record double-digit growth despite a slowdown.

Figure 6: June ’13 hospital patient traffic data Patient traffic ('000) Jan+Feb Mar -13 1Q13 Apr -13 May -13 Jun -13 2Q13 Total 1,069,489 589,607 1,659,096 592,586 600,052 588,651 1,781,289 Hospitals 374,692 224,735 599,427 225,382 232,601 222,899 680,882 Class III 156,976 98,356 255,332 98,527 103,710 98,121 300,358

YOY (%) Total 7.7% 4.9% 6.7% 9.8% 8.3% 5.4% 7.8% Hospitals 10.2% 5.7% 8.5% 12.1% 9.0% 4.9% 8.6% Class III 18.9% 15.3% 17 .5% 22.5% 18.5% 13.8% 18.2% Source: MOH, BOCOM Int’l

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Healthcare Sector 19 August 2013

Comp Table

Figure 7: HK and US Listed: Company Ticker CCY Px Mkt cap ––– EV/EBITDA ––– –––––– P/E –––––– EPS CAGR –––––– PEG –––––– –––––– P/B –––––– –––––– ROE –––––– (USD) '13E '14E '15E '13E '14E '15E ('12E -'15E) '13E '14E '15E '13E '14E '15E '13E '14E '15E Sihuan Pharmaceutical Holdings Group Ltd. 460 -HK HKD 4.99 3,330 13.1x 10.5x 8.5x 18.3x 15.1x 12.5x 21% 0.9x 0.7x 0.6x 2.8x 2.4x 2.2x 15.0% 16.0% 17.3% Sino Biopharmace utical Limited 1177 -HK HKD 5.15 3,282 10.2x 8.1x 7.1x 23.1x 18.8x 15.1x 19% 1.2x 1.0x 0.8x 4.6x 4.0x 3.1x 19.8% 20.8% 20.3% Sinopharm Group Co., Ltd. Class H 1099 -HK HKD 20.60 2,640 7.4x 6.5x 5.6x 17.7x 14.9x 12.5x 15% 1.2x 1.0x 0.8x 1.9x 1.5x 1.4x 10.6% 10.3% 11.4% China Medical System Holdings Ltd. 867 -HK HKD 6.47 2,015 15.0x 11.2x 8.4x 19.6x 14.5x 11.8x 16% 1.2x 0.9x 0.7x 3.9x 3.3x 2.8x 20.3% 23.6% 24.6% CSPC Pharmaceutical Group Ltd. 1093 -HK HKD 4.04 1,993 8.2x 5.7x 3.8x 18.2x 14.6x 11.6x 25% 0.7x 0. 6x 0.5x 2.3x 2.0x 1.7x 12.6% 13.7% 15.0% Shandong Weigao Group Medical Polymer Co. Ltd. Class H 1066 -HK HKD 8.09 1,965 19.9x 16.1x 13.3x 24.2x 19.9x 16.4x 22% 1.1x 0.9x 0.7x 2.9x 2.6x 2.3x 12.1% 13.2% 14.3% Shanghai Pharmaceuticals Holding Co. Ltd. Class H 2607 -HK HKD 15.22 1,503 5.2x 4.9x 5.4x 14.0x 12.2x 10.4x 12% 1.2x 1.0x 0.9x 1.2x 1.1x 1.0x 8.3% 8.7% 9.5% Beijing Tong Ren Tang Chinese Medicine Co., Ltd. 8138 -HK HKD 14.00 1,498 41.1x 17.9x 11.4x 50.0x 25.0x 16.9x 72% 0.7x 0.3x 0.2x 7.6x 6.6x 4.9x 14. 4% 25.1% 27.3% China Shineway Pharmaceutical Group Limited 2877 -HK HKD 12.72 1,356 6.3x 5.2x 4.5x 11.8x 10.5x 9.4x 12% 1.0x 0.9x 0.8x 1.8x 1.7x 1.5x 16.0% 16.3% 16.5% Lijun International Pharmaceutical (Holding) Co., Ltd. 2005 -HK HKD 2.55 963 19.6x 13 .8x 10.2x 39% 0.5x 0.4x 0.3x 2.8x 2.5x 2.2x 14.0% 17.8% 21.1% MicroPort Scientific Corp. 853 -HK HKD 5.00 908 9.1x 7.4x 5.9x 16.5x 14.3x 11.7x 19% 0.9x 0.8x 0.6x 2.1x 1.9x 1.7x 13.2% 13.3% 14.3% Tong Ren Tang Technologies Co., Ltd. Class H 1666 -HK HKD 26. 35 890 28.4x 22.2x 16.8x 30% 0.9x 0.7x 0.6x 4.8x 4.2x 4.0x 17.1% 19.3% 24.2% Guangzhou Pharmaceutical Company Limited Class H 874 -HK HKD 29.70 842 30.0x 22.4x 16.8x 30.4x 22.6x 19.5x 25% 1.2x 0.9x 0.8x 4.3x 3.8x 3.4x 14.1% 16.9% 17.6% United Laborator ies International Holdings Ltd. 3933 -HK HKD 2.92 613 7.9x 6.3x 5.6x 18.3x 13.0x 10.6x 26% 0.7x 0.5x 0.4x 0.7x 0.7x 0.7x 3.8% 5.2% 6.1% Shanghai Fosun Pharmaceutical (Group) Co., Ltd. Class H 2196 -HK HKD 13.36 579 24.7x 19.6x 16.5x 12.3x 11.0x 9.5x 9% 1.4x 1.3x 1.1x 1.3x 1.2x 1.2x 11.3% 11.3% 12.6% Bloomage Biotechnology Corp. Ltd. 963 -HK HKD 11.18 479 16.0x 11.4x 7.8x 20.3x 14.4x 10.2x 41% 0.5x 0.3x 0.2x 5.6x 4.1x 3.0x 27.1% 28.5% 28.8% Lee's Pharmaceutical Holdings Limited 950 -HK HKD 6.24 432 14.7x 10.7 x 9.7x 19.5x 14.1x 14.5x 16% 1.2x 0.9x 0.9x 4.3x 3.5x 3.2x 22.3% 24.9% 21.9% Kingworld Medicines Group Ltd. 1110 -HK HKD 1.44 116 12.7x 11.0x 9.5x 15% 0.8x 0.7x 0.6x 1.6x 1.4x 1.3x 12.2% 13.0% 13.8% Average 15.3x 10.9x 8.7x 20.8x 15.7x 12.7x 24% 1.0x 0.8x 0.6x 3.1x 2.7x 2.3x 14.7% 16.5% 17.6%

Company Ticker CCY Px Mkt cap ––– EV/EBITDA ––– –––––– P/E –––––– EPS CAGR –––––– PEG –––––– –––––– P/B –––––– –––––– ROE –––––– (USD) '13E '14E '15E '13E '14E '15E ('12E -'15E) '13E '14 E '15E '13E '14E '15E '13E '14E '15E Mindray Medical International Ltd. Sponsored ADR Class A MR -US USD 42.18 3,704 15.8x 13.0x 10.9x 20.9x 19.0x 16.6x 12% 1.7x 1.6x 1.4x 3.2x 2.9x 2.5x 15.5% 15.0% 15.1% Wuxi Pharmatech (Cayman) Inc. Sponsored ADR WX -US USD 23.69 1,684 10.3x 8.8x 7.4x 14.6x 13.6x 12.2x 13% 1.1x 1.0x 0.9x 2.6x 2.2x 1.9x 18.0% 16.4% 15.5% Simcere Pharmaceutical Group Sponsored ADR SCR -US USD 9.42 483 China Cord Blood Corporation CO -US USD 4.14 302 18.8x 14.8x Sinovac Biotech Ltd. SVA -US USD 4.61 254 21.6x -26.3x -43.9x 46.1x 2.3x 2.6x 2.7x -8.7% -6.0% 5.9% Concord Medical Services Holding Ltd. ADR CCM -US USD 4.82 229 7.1x 5.2x 4.8x 10.4x 9.0x 7.9x 15% 0.7x 0.6x 0.5x 0.7x 0.7x 0.6x 6.7% 7.4% 7.7% China Nepstar Chain Drugstore Ltd. Sponsored ADR NPD -US USD 1.58 156 21.3x Average 11.1x 9.0x 11.2x 10.0x 2.5x 20.7x 14% 1.2x 1.1x 0.9x 2.2x 2.1x 1.9x 7.9% 8.2% 11.1% Source: Factset, BOCOM Int’l

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Healthcare Sector 19 August 2013

Figure 8: By Sub-sectors: Company Ticker CCY Px Mkt cap ––– EV/EBIT DA ––– ––––––– P/E ––––– EPS CAGR –––––– PEG ––––– –––––– P/B –––––– –––––– ROE ––––– (USD) '13E '14E '15E '13E '14E '15E ('12E -'15E) '13E '14E '15E '13E '14E '15E '13E '14E '15E Devices Mindray Medical International Ltd. Sponsored AD R Class A MR -US USD 42.18 3,704 15.8x 13.0x 10.9x 20.9x 19.0x 16.6x 12% 1.7x 1.6x 1.4x 3.2x 2.9x 2.5x 15.5% 15.0% 15.1% Shandong Weigao Group Medical Polymer Co. Ltd. Class H 1066 -HK HKD 8.09 1,965 19.9x 16.1x 13.3x 24.2x 19.9x 16.4x 22% 1.1x 0.9x 0.7x 2. 9x 2.6x 2.3x 12.1% 13.2% 14.3% MicroPort Scientific Corp. 853 -HK HKD 5.00 908 9.1x 7.4x 5.9x 16.5x 14.3x 11.7x 19% 0.9x 0.8x 0.6x 2.1x 1.9x 1.7x 13.2% 13.3% 14.3% China Cord Blood Corporation CO -US USD 4.14 302 18.8x 14.8x Average 14.9x 12.2x 10.0x 20.1x 17.0x 14.9x 18% 1.2x 1.1x 0.9x 2.8x 2.5x 2.2x 13.6% 13.8% 14.6%

Chemical drugs Sihuan Pharmaceutical Holdings Group Ltd. 460 -HK HKD 4.9 9 3,330 13.1x 10.5x 8.5x 18.3x 15.1x 12.5x 21% 0.9x 0.7x 0.6x 2.8x 2.4x 2.2x 15.0% 16.0% 17.3% Sino Biopharmaceutical Limited 1177 -HK HKD 5.15 3,282 10.2x 8.1x 7.1x 23.1x 18.8x 15.1x 19% 1.2x 1.0x 0.8x 4.6x 4.0x 3.1x 19.8% 20.8% 20.3% CSPC Pharmaceutical Group Ltd. 1093 -HK HKD 4.04 1,993 8.2x 5.7x 3.8x 18.2x 14.6x 11.6x 25% 0.7x 0.6x 0.5x 2.3x 2.0x 1.7x 12.6% 13.7% 15.0% Lijun International Pharmaceutical (Holding) Co., Ltd. 2005 -HK HKD 2.55 963 19.6x 13.8x 10.2x 39% 0.5x 0.4x 0.3x 2.8x 2.5x 2.2x 14.0 % 17.8% 21.1% United Laboratories International Holdings Ltd. 3933 -HK HKD 2.92 613 7.9x 6.3x 5.6x 18.3x 13.0x 10.6x 26% 0.7x 0.5x 0.4x 0.7x 0.7x 0.7x 3.8% 5.2% 6.1% Shanghai Fosun Pharmaceutical (Group) Co., Ltd. Class H 2196 -HK HKD 13.36 579 24.7x 19.6x 16.5x 12.3x 11.0x 9.5x 9% 1.4x 1.3x 1.1x 1.3x 1.2x 1.2x 11.3% 11.3% 12.6% Simcere Pharmaceutical Group Sponsored ADR SCR -US USD 9.42 483 Lee's Pharmaceutical Holdings Limited 950 -HK HKD 6.24 432 14.7x 10.7x 9.7x 19.5x 14.1x 14.5x 16% 1.2 x 0.9x 0.9x 4.3x 3.5x 3.2x 22.3% 24.9% 21.9% Average 13.1x 10.1x 8.5x 18.5x 14.3x 12.0x 0.2x 0.9x 0.8x 0.6x 2.7x 2.3x 2.0x 14.1x 15.7x 16.3x

TCM Beijing Tong Ren Tang Chinese Medicine Co., Ltd. 8138 -HK HKD 14.00 1,498 41.1x 17.9x 11.4x 50.0x 25.0x 16.9x 72% 0.7x 0.3x 0.2x 7.6x 6.6x 4.9x 14.4% 25.1% 27.3% China Shineway Pharmaceutical Group Limited 2877 -HK HKD 12.72 1,356 6.3x 5.2x 4.5x 11.8x 10.5x 9.4x 12% 1.0x 0.9x 0.8x 1.8x 1.7x 1.5x 16.0% 16.3% 16.5% Ton g Ren Tang Technologies Co., Ltd. Class H 1666 -HK HKD 26.35 890 28.4x 22.2x 16.8x 30% 0.9x 0.7x 0.6x 4.8x 4.2x 4.0x 17.1% 19.3% 24.2% Guangzhou Pharmaceutical Company Limited Class H 874 -HK HKD 29.70 842 30.0x 22.4x 16.8x 30.4x 22.6x 19.5x 25% 1.2x 0.9 x 0.8x 4.3x 3.8x 3.4x 14.1% 16.9% 17.6% Average 25.8x 15.2x 10.9x 30.2x 20.1x 15.6x 0.3x 1.0x 0.7x 0.6x 4.6x 4.1x 3.5x 15.4x 19.4x 21.4x

Biotech Bloomage Biotechnology Corp. Ltd. 963 -HK HKD 11.18 479 16.0x 11.4x 7.8x 20.3x 14.4x 10.2x 41% 0.5x 0.3x 0.2x 5.6x 4.1x 3.0x 27.1% 28.5% 28.8% Sinovac Biotech Ltd. SVA -US USD 4.61 254 21.6x -26.3x -43.9x 46.1x 2.3x 2.6x 2.7x -8.7% -6.0% 5.9% Average 16.0x 11.4x 14.7x -3.0x -14.8x 28.1x 0.4x 0.5x 0.3x 0.2x 3.9x 3.4x 2.8x 9.2x 11.2x 17.4x

Distributor Sinopharm Group Co., Ltd. Class H 1099 -HK HKD 20.60 2,640 7.4x 6.5x 5.6x 17.7x 14.9x 12.5x 15% 1.2x 1.0x 0.8x 1.9x 1.5x 1.4x 10.6% 10.3% 11.4% China Medical Syst em Holdings Ltd. 867 -HK HKD 6.47 2,015 15.0x 11.2x 8.4x 19.6x 14.5x 11.8x 16% 1.2x 0.9x 0.7x 3.9x 3.3x 2.8x 20.3% 23.6% 24.6% Shanghai Pharmaceuticals Holding Co. Ltd. Class H 2607 -HK HKD 15.22 1,503 5.2x 4.9x 5.4x 14.0x 12.2x 10.4x 12% 1.2x 1.0x 0.9x 1.2 x 1.1x 1.0x 8.3% 8.7% 9.5% Kingworld Medicines Group Ltd. 1110 -HK HKD 1.44 116 12.7x 11.0x 9.5x 15% 0.8x 0.7x 0.6x 1.6x 1.4x 1.3x 12.2% 13.0% 13.8% Average 9.2x 7.5x 6.5x 16.0x 13.1x 11.1x 0.1x 1.1x 0.9x 0.8x 2.1x 1.8x 1.6x 12.9x 13.9x 14.8x

Drugstore Concord Medical Services Holding Ltd. ADR CCM -US USD 4.82 229 7.1x 5.2x 4.8x 10.4x 9.0x 7.9x 15% 0.7x 0.6x 0.5x 0.7x 0.7x 0.6x 6.7% 7.4% 7.7%

Hospital China Nep star Chain Drugstore Ltd. Sponsored ADR NPD -US USD 1.58 156 21.3x

Contract Research Organization Wuxi Pharmatech (Cayman) Inc. Sponsored ADR WX -US USD 23.69 1,684 10.3x 8.8x 7.4x 14.6x 13.6x 12.2x 13% 1.1x 1.0x 0.9x 2.6x 2.2x 1.9x 18.0% 16.4% 15.5% Source: Factset, BOCOM Int’l

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Healthcare Sector 19 August 2013

BOCOM International 11/F, Man Yee Building, 68 Des Voeux Road, Central, Hong Kong Main: + 852 3710 3328 Fax: + 852 3798 0133 www.bocomgroup.com

Rating System Company Rating Sector Rating Buy: Expect more than 20% upside in 12 months Outperform (“OP”): Expect more than 10% upside in 12 months LT Buy: Expect more than 20% upside but longer than 12 months Market perform (“MP”): Expect low volatility Neutral: Expect low volatility Underperform (“UP”): Expect more than 10% downside in 12 months Sell: Expect more than 20% downside in 12 months

Research Team

Head of Research @bocomgroup.com @bocomgroup.com Raymond CHENG, CFA, CPA, CA (852) 2977 9393 raymond.cheng

Strategy Economics Hao HONG, CFA (852) 2977 9384 hao.hong Miaoxian LI (86) 10 8800 9788 - 8043 miaoxian.li

Banks Metals & Mining Qingli YANG (852) 2977 9212 yangqingli Jovi LI (852) 2977 9243 jovi.li Shanshan LI (86) 10 8800 9788 - 8058 lishanshan Benjamin PEI (86) 10 8800 9788 - 8041 benjaminpei Li WAN (86) 10 8800 9788 - 8051 wanli

Coal/ Chemicals & Fertilizers Oil & Gas/ Gas Utilities Rongjuan WANG (86) 10 8800 9788 - 8046 wangrongjuan Fei WU (852) 2977 9392 fei.wu Tony LIU (852) 2977 9390 xutong.liu

Consumer Property Phoebe WONG (852) 2977 9391 phoebe.wong Alfred LAU, CFA, FRM (852) 2977 9235 alfred.lau Summer WANG (852) 2977 9221 summer.wang Toni HO, CFA, FRM (852) 2977 9220 toni.ho Albert YIP, CFA (852) 2977 9205 albertyip Kevin WANG (852) 2977 9386 kevin.wang

Healthcare Telecom & Small/ Mid-Caps Christopher Lui (852) 2977 9203 christopher.lui Zhiwu LI (852) 2977 9209 lizhiwu

Insurance Technology Jerry LI (86) 10 8800 9788 - 8053 liwenbing Miles XIE (852) 2977 9216 miles.xie

Internet Transportation & Industrial/ Automobile Yuan MA (86) 10 8800 9788 - 8039 yuan.ma Geoffrey CHENG, CFA (852) 2977 9380 geoffrey.cheng Connie GU, CPA (86) 10 8800 9788 - 8045 conniegu Wei YAO (86) 21 6065 3675 wei.yao Ian FENG (852) 2977 9381 Yinan.feng

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Healthcare Sector 19 August 2013

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