Company Report: Sinopharm

Se Source

公司报告：国药控股 Company Report: 52 Weeks high/low (HK$) 52 (HK$) high/low 52 Weeks vol. average 3 month m) (HK$ cap. Market (m) issue in Shares 2017F 2016F 2015A 2014A 12/31 年结 End Year 2018F           e

中国最大的医药分销商 Distributor, Pharmaceutical Largest PRC's th

︰ e

the Company,

S 部的资料，公司在

2 市场份额间接销售加以及受行业整合影响下两票制、飞行检查以及新版风险考虑到国药控股我们的目标价为元、预计国药控股将长期受益于行业整合并进一步巩固其龙头地位。国药控股是中国最大的药品零售商和分销商，并长期保持高于行业平均的增长率。 solidify Commerce in the the in Commerce the Ministry according to 2015, in pharmacy business retail in share market industry and approximately in of 2.7% distribution share pharmaceutical the above sustainable - PRC, with S 更多的市场份额以及保持高于行业平均水平的增长速度。 the market share and the above - share maintain the market GSP will as the such two- polices period FY2016 - period RMB289,268 and million ,410RMB256,337 RMB326 million, millionin R competition caused by of caused entry industry. the the from newlogistics competition rivals think that the that TP think TP leasing. financial as such businesses and3) innovative and impact, apromisingoutlook for its integration business tr sales as growth direct from share sales gaining in well as market the indirect loss effect of the from combinational deriving segment distribution pharmaceutical Risk las ）医药零售业务的快速扩展以及相应的整合效应， inopharm will benefit from further industry consolidation and inopharm is the largest pharmaceutical distributor and retailer in the and retailer distributor pharmaceutical the is largest inopharm evenue is estimated to 12.8% estimated by grow YoY and is 12.8% evenue 12.9%, to

is HK$39.89, representing 19.0x FY17F PER and 16.9x and 16.9x PER. FY18F 19.0x PER FY17F representing HK$39.89, is ： 289,268 e pag 2016- s 1 :

2 ）利润率由于药品进一步降价遭到侵蚀；

1) 1)

iggered by industry consolidation, 2) by iggered expansion consolidation, fast of theindustry retail (RMB m) (RMB its leading position in for the foreseeable future. Turnover drive out small out drive fo 289,268 256,337 200,131 227,069 326,410 2018 margin triggered by erosion drug pricefurther cuts

Guotai Junan

r 百万元、

总股数

disclaimer 3 市值收入国际同行的估值范围，我们认为目标价是合理的。

个月平均成交股数 39.89 财年 ( 01099 HK 2015

FY2018, FY2018,

People's Republic of China Republic People's (HK$ m) (HK$ 收入将分别同比增长 (m)

周高 justified given the valuations of Sinopharm's global peers. of Sinopharm's the given valuations justified 326,410 港元，

International. 年占有医药分销行业

Sinopharm Group Co. Ltd. Co. Group Sinopharm / Net Profit Net - (RMB m) (RMB 低 invoice system, unannounced Inspections, and stricter and stricter unannounced Inspections, system, invoice 股东净利

GSP and medium

相 ) respectively, 1) growth aresult of stable the as of

5,170 4,644 3,761 2,875 5,825 百万元。当于）将会挤出中小型的医药分销商，并有利于国药控股获得

，

( industry growth. It aboutof 16.0% took market

‘ 000) 19.0 “ 收入的增长主要基于

收集

倍 12.9%

每股净利 - 损失的共同影响下的医药分销业务的稳定增长，

sized distributors, which is likely to boost likely is which to distributors, sized (RMB) 2017 16.0% 1.868 1.678 1.359 2.105 1.112 EPS average growth of the Company. the of average growth 、 ” ）行业竞争因物流公司的进入而升级。 3 财年以及 12.8%

）创新业务（如融资租赁）的良好前景。以及零售药店业务 (

" 每股净利变动 MOFCOM 42.500 42.500

和我们相信近期的政府政策（包括

101,137.3 101,137.3 12.8% ( 16.9 △ 1 EPS 19.0 31.9 24.7 22.0 23.7 / ）受直接销售的市场份额增

4,549.2 4,549.2 2,767 2 %) 8. 倍

55 ). 至人民币

2018 . 0 1 , We believeWe recent

2.7% and 2) increased

财年的市盈率。市盈率

的市场份额。 ( PER 256,337 17. 19. 23. 2 15. FY1 FY1 (%) float Free shareholder Major

01099 HK 9.3 (x) 4 4 9 5

根据商务

7 7

EV / EBITDAFY1 (x) gearing Net 每股净资产

百万 will will We We of of

13.493 12.129 10.860 10.592 15.038 (RMB)

B 自由流通比率 PS ) (%)

大股东

: Source 股价表现 performance Stock

平均股价（港元） Avg 相对恒指变动 %Rel. to HS index 绝对变动 % Abs. 股价变动 Change Sharein Price Share price price Share 6 评级： Rating: FY1 35.0 35.0 40.0 45.0 50.0 10.0 10.0 15.0 20.0 25.0 30.0

市净率 0.0 0.0 5.0 - 18m TP Mar/16 P .

share price(HK$) BR 2.4 2. 3.0 3. 2. 7 (x)

, Bloomberg % of return of %

7 1 2 净负债 “ 企业值 (%)

% Accumulate”

/ 股东资金目标价

股价： May/16 / EBITDA/ (x)

i Guota

HSI 每股股息

(RMB)

0.560 0.503 0.410 0.332 0.631 DPS

n Juna :

( %

) Aug/16 International. 36.6 个月 1.1 3.1 1 M

Sinopharm

股息率

Yield -

H (%) [email protected] 755 23976685 +86 1. 1.6 1.3 1.0 1.9 Kay Mai Kay 3 Accumulate (2.3) 35.0 个月 Nov/16 7 1.7 CNPGC 29.06% 3 M 2 March 2017

净资产收益率 HK Page $

$ 麦梓琪 39.89 36.550 35.9 26.0 10.47 43.11 3.5 Feb/17 1 ROE 1 Y 1 14.6 14.6 13.1 14.8 11.7 收集 (%) 年 8.2

of of

Company Report Sinopharm、国药控股 (01099 HK) GTJA Research 国泰君安研究

Se Financial Statements and Ratios RISK VALUATION ANALYSIS FINANCIAL ANALYSIS COMPANY INDUSTRY BACKGROU e DCF Valuation Peers Comparison Cash Conversion Cycle Profit Net Cost Financial Operating Profit Margin Margin Profit Gross Revenue Future Development Segment Business Company The PRC Pharmaceutical Retail Industry Th PRC The HealthcareIndustry th e e PRC Pharmaceutical Distribution Industry S las

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20 21 24 22 20 19 26 25 22 18 18 17 10 18 10 11 27 7 6 3 3

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Source: Figure business retail business with growing in both urban and rural areas, leading to higher affordability for healthcare products and services. According to disposable income in the PRC experienced has faster growth than per capita GDP in recent years and is expected to continue manuf NHFPC expects that total healthcare expenditure in China will increase to represent China RMB4 Commission Se NBS andthe Per capita disposable income and per capita healthcare expenditure in Industry Drivers 2. development In China, the pharmaceutical industryvalue chain mainly includes five primary stages, namely (i) research and Source: Figure growing components of the national economy in China. the pharmaceutical distribution and retail industry) in China, Sinopharm Group Co. Ltd. (the “Company” or “Sinopharm”) 1. Overview PRC HealthcareThe Industry I NDUSTRYN BACKGROU e 10.0% 15.0% 20.0% 25.0%

0.0% 5.0% th e

, Guotai Junan International. Junan Guotai NHFPC ("NBS"), in 2015, total healthcare expenditure in China accounted for 5.92% of GDP, compared to 5.08% in 2009. The - acturing 058.8 billion in 2015, representing a CAGR of 15.0%. According to the NHFPC and - las 3 1 : es : 2009 t

P Healthcare Expenditure in China 20.7% 2009 pag 9.4%

harmaceutical such as consulting andfinancial leas

, NBS, , ”), (“NHFPC healthcare expenditure in China has significantly increased from RMB1,754.2 billion in 2009 to e Pharmaceutical Manufacturers Pharmaceutical ,

National Development and Reform Commission of the fo - , (ii) intermediate and active pharmaceutical ingredient manufacturing 2015 Annual Growth Rate of GDP and r 10.6% 13.9% (iv) distribution, 2010

Guotai Junan International. Junan Guotai disclaimer Agents of Foreign Agents of Foreign GDP GDP Pharmaceutical Pharmaceutical Manufacturers

a certain 21.8% 2011 9.5%

ndustry

Healthcare expenditure Healthcare 15.5%

2012 7.9% amount of

and (v) retail sales.

13.3% 2013 7.8% V alue

penetration into D 10.8% 2014 7.3% C

hain Distributors ing 14.9% 2015

6.9%

etc. ,

2016 6.7% Sinopharm primarily engages in the pharmaceutical distribution and

the

Figure Source: Source: pharmaceutical manufacturing business and other innovative

operates business in the healthcare industry (mainly in 2,500 3,000 3,500 4,000 4,500 1,000 1,500 2,000 Bn in RMB in Bn According tothe and 500 NHFPC 0 - S 2 Retail Pharmacies Retail

ervices ervices : is one of the largest and one of the Pri Healthcare expenditure Healthcare 5.08% 2009 2009 People Healthcare Expenditure/GDP in China mary Hospital , Guotai Junan International. Junan Guotai I nstitutions

- H the the 2015 Healthcare Expenditure and ealth ealth 4.89% 2010

’ s PRC PRC R

around

epublic of C of epublic National Health and Family Planning 5.03% 2011 is

expected to increase.

6.50%to 7. 5.26% 2012 National Bureau of Statistics of ,

(iii) finished dosage form End End End

hina Healthcare expenditure/GDP Healthcare 5.39% - - - 2013 customers customers customers

("NDRC"), per capita per ("NDRC"), 00% of GDP 2020.in 5.55% 2014

most rapidly

5.92% 2015

Page Page

Per capita 3 4.5% 5.0% 5.5% 6.0% 6.5% 3.0% 3.5% 4.0% 2.0% 2.5% of of

the the 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 China’s population aged 60 or above, leading to higher demand for healthcare products and medical services. chronic health problems, such hypertension, as cardiovascular the average life expectancy expectancy is expected to contribute to the growth the proportion of China representing a CAGR of 4.68%, while the CAGR of total population population, along with increasing life expectancy Se the industry, thus significantly bolstering the PRC healthcare market. The PRC Government has supported the healthcare industry Source: Figure The increase of the Source: Figure 6.5%. In view of the huge distinction between healthcare expenditure as disposable income 201 in 6 developed countries, we expect that from the PRC Government, from 2010 to 2015, the weight of individual increased from RMB120 per to capita RMB420 per capita, representing aCAGR allocation of 23.2%. As a result increasing of subsidy for Urban Resident Basic Medical Insurance Program or New Rural Cooperative Medical Insurance Scheme expansion of the to 30.0%, leading to higher affordability for healthcare products and services of citizens. comparedthan10%to less 2015. in e 60,000 10,000 20,000 30,000 40,000 50,000

100 150 200 250 Million th 50 YoY of Per Capita GDP Capita Per YoY of GDP Capita Per 0 e 0 NBS, NDRC, NDRC, NBS, NBS, NBS, - - las 6 4 : 20 : 2011 40,007 t 13.7%

Disposable Income in China Population Aged over Years 60 185.0 185.0 2011 pag 10.6% Guotai Junan International. Junan Guotai 7.3% 2012 16,510 11 e Proportion of Population Agedover 60 Years Number of Population Agedover 60 Years fo - - 2015 Per Capita GDP and Per Capita 2015 r Guotai Junan International. Junan Guotai

middle 43,852 disclaimer 14.3% 193.9 193.9 2012 7.2% 8.1% 2013 18,311 Number and Proportion of

ag ’ - s income groupChina in ,

ing population aged 60 or above has increased from 185.0 million 2011 in to 222.1 million in 2015,

47,203

was was 202.6 202.6 in China 2013

14.9% 6.8% 2014 20,167

8.0% population leads to

RMB 49,992 YoY of Per Capita Disposable Income Disposable Capita Per YoY of Per Capita Disposable Income Disposable Capita Per

15.6%

212.7 212.7 is expected to rise to 79 2014 6.3% 7.4% 2015 healthcare expenditure China in will co 2 21,966

, 821.

53,980 0 and is exp toected grow to more than RMB30,000 in 2020, with aCAGR of 16.2% 222.1 222.1 2015 6.1% 6.3% 2016 23,821 ,

which is expected to represent 75% of is expected to drive demand for healthcare in China. According to China in

a China 10.0% 12.0% 0.0% 2.0% 4.0% 6.0% 8.0% 6.0% 8.0% 0.0% 2.0% 4.0% 10.0% 12.0% 14.0% 16.0% 18.0%

higher prevalence rate of chronic disease ’ s ’s ag ’s

Source: Source: Figure

years Source: Figure diseases and cancer expected is to increase with the growth 10.0 20.0 30.0 40.0 50.0 60.0 ing 10.0 12.0 14.0 16.0 18.0 0.0

0.0 2.0 4.0 6.0 8.0 in China

NBS, NBS, The in 2030in from 76.1 in 2015. In addition, the prevalence of - population in the future. According to the State Council, in in the corresponding period - 7 ‰ 5 : 17.1 s :

2012

2014 Guotai Junan International. Junan Guotai spending Population Aged over Years 60 in China orld orld Selected Countries a percentage

11.5 2012 For instance, from 2010 to 2016, the government 48.2 5.0

H by increasing -

2015 YoY Growth of Total Population and ntinue growing the in future, supported by the ealth ealth Healthcare Expenditure as% of GDP of YoY Aged Population of overYears 60 YoY Total of Population 11.3 O on rganization 9.1 healthcare expenditure fell from 35.5%

10.4 the 2013 of GDP China in and those in other 44.9 4.9

total population in China in 2030 10.2 , the Guotai Junan International. Junan Guotai

allocation 8.8 was 8.3

2014 49.8 only 0.50%. Rising life life Rising 0.50%. only 5.2 s .

7.4 The rapidly aging

of resources

7.1

Page Page 5.5

5.0 2015 44.4

the the 4 4.7 NBS, of of

27 to to in

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Supply Practices ( Se a related to health reform such as medical insurance fee control The p 3. Continuous healthcare reform Source: Figure Table and efficiency of the healthcare industry with healthy competition and sustainable development. inspections and New version of GSP Zero mark value-added tax replaced with Business tax (两票制) Two Policy zero mark zero e 100.0 150.0 200.0 250.0 300.0 350.0 400.0 450.0

50.0 th 0.0 -invoice system e -1: Recent Policies of Healthcare Reform Related to Pharmaceutical Distribution and harmaceutical market landscape has been changing through NDRC, NDRC, - las

8 : Governm t 120.0

2010 Cooperative Medical Insurance Scheme Medical Insurance Program RMB pag - up policy Guotai Junan International. Junan Guotai -up policy ( e per capita per fo r

200.0

2011 a disclaimer

hierarchical medical system, etc. ent Subsidy for Urban Resident Basic

“ GSP 240.0 2012 released2016. July in New version of GSP was executed in May 2016. value-added taxwas fully Business tax replaced with two province fully implementing the 2018. Fujian Province is the only to be executed nationwide in The two-invoice system is going 2015. drug price was eliminated May in The mark 零加成

”

) -invoice system currently. and 280.0 2013

), separation of medical treatment from drug sale (

- Latest Status up policy of hospital Good Manufacturing Practices 320.0 2014 or

New Rural Rural New 380.0 2015

420.0 2016

Overall be forcedbe out. small will also befacilitated and large distributors will benefit since distributors.The consolidationthe pharmaceutical of industry which will lead to income reduction of pharmaceutical layers. It is aim at cutting drug price in those pilot provinces, manufacturers to hospitals, resulting fewerin distribution two the in distribution process from pharmaceutical The two margins individual pharmacies may be phased out by pressure on lower pharmacies,thus small operational expenses of both the distributors and retail qualifications traceability system of drugs Price transparency will be increased with the application small scale would be benefit from this policy for lower tax rate while effectively combat commercial bribery. Enterprises in large The implement of value- pharmacies will be gradually narrowed down. since the price difference between retail and hospital the ownership. Yet, pharmaceutical retail industry also suffered enterprises which operate chain pharmacies without changing pharmacies were taken over by pharmaceutical retail Revenue of hospitals is negatively impacted andsome hospital

Source: Source: Figure ,

healthcare reform is expected to further improve the quality 100.0 120.0 20.0 40.0 60.0 80.0 s - - 0.0 , provincialtender and middle- and middle- NHFPC, NHFPC, - - . 9 egto niiul Spending Individual of Weight Spending Government of Weight

invoice system limits the number of invoices to only :

2010 % in China 2010 (“ 36.0 28.7 35.3 the intensive introduction of national policies

asked by the new GSPwill increase the GMP Guotai Guotai

- 2015 Breakdown of Healthcare Expenditure sized enterpriseswithdisqualified ones sized enterprises may suffer. ” Impact/Estimated Impact Junan International. Junan ) 2011 30.7 34.6 34.8

for medicaldevices , unannounced - added tax instead of business taxwill and middle -sized distributors and s , national essential drug systems, 医药分家 . More stringent requirement for 2012 30.0 35.7 34.3

the

), new version new ), Weight of Social Insurance Social of Weight 2013 33.9 30.1 36.0

Retail Industry

2014 30.0 38.1 32.0

s ofs Page Page

2015 30.9 39.1 30.0

5 Good

will of of 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 polic 33.5%/46.9%/68.9% market share2015,in policy dropped from 33.1% to 10.6% as 2011 to RMB1661.3 billion in 2015, representing a CAGR of 14.6%. Yet, from 2011 to 2015, the YoY growth According to Duringyears, the last 5 the pharmaceutical distribution industry been confrontedhas with Se number of distributors Chinain fell to 13,508 from 16,295 in 2012. The encouragement, drug price import agenc inventory tracking and management, delivery of specialty pharmaceutical products, technical support and sales assistance, reprocessing services, product insurance brokerage, payment collection on behalf of manufacturers, product returns manufacturers and downstream customers, including daily management of logistics, tailored packaging, repackaging and institutions. Pharmaceutical distributors generally in engage consolidating 1. Industry Distribution Pharmaceutical PRC The Source:

During the same period, the industry also under of approximately 12% in respect of the sales amount. insurance control,drug price for downstream customers such as pharmaceutical manufacturers or agents of foreign pharmaceutical manufacturers into pharmacy Inspections Unannounced plan Healthy China 2030 the hospitalof sales to total revenue proportion of Controlthe of e th Overview ies

, which brought huge challenges to many enterprises e NDRC, NHFPC, State Council of PRC, State Council NHFPC, NDRC, las

such as the t pag

ies the e Some large distributors are also capable of offering complementary logistics and value- drug fo

, c r MOFCOM disclaimer ustoms clearance, cold chain, free trade zone warehousing,

zero mark Measures for introduced in May 2015. and Medical were Devices policy Inspections of Pharmaceutical released Octoberin 2016. Healthy China 2030 plan was by the end of 2017. hospital to achieve less than 30% sales to total revenue of the control the proportion of drug reform pilotrequired cities are to Public hospitals in healthcare

cut of of

-up policy. In the first half of 2016, the industry saw improving sign the s cut , th s PRC, total sales of the pharmaceutical distribution industry grew from RMB942.6 billion in

e enforcement of the the indust

brought by the provincial tenders ( Guotai Junan International. Junan Guotai

the in

Unannounced retail, hospitals respectively,

ry ry faced

challenge

went comparedto 28.8%/41.9%/64.0% 2012.in more stringent

, primaryhealth services institutions and other he

, consolidation is expected to be triggered by this policy. pharmacies had their GSP licenses revoked. Industry industry. A number of pharmaceutical distributors and retail governmentinspections stepped up thepharmaceutical on With the introduction of unannounced inspections, the PRC n ealidsr. and retail industry. transformation and upgrade of the pharmaceutical distribution The plan suggests to raise the concentration ratio and conduct Retail pharmacies will benefit of the market share of drug sales from hospital.

significant industry consolidation especially the small s

resulting from top Good Supply Practices for Pharmaceutical Products 省级药品招标),

3, 3, product orders from number a of local

top andother services.

10 and the national economy slowdown, medical

- and medium

and the gradual implement top

from this policy for gaining some 100 largest distributors claimed s a slowdowna in

and recorded a YoY growth -

size , drivengovernment by d

-specific deliveries ones. In 2015, the added services to rate

of total sales sales total of growth rate. Page Page althcare

ation 6 of of 27 of of ,

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 pharmaceutical distributors will transfer into supply investment in other area benefit management, zero inventory management, etc. innovative servicessuch as operatingprofit and improve earnings pharmaceutical distribution industry is low compared to those of Vertical integration as aswell business innovation is expected to improve operating margin. Themargin gross of the P. GS manufacturing industry,thus vulnerable to further drugprice cut may Se pharmacies. Apart from drugs, necessary. In 2015, according to CAPC, drugs accounted for approximately 72.7% of the total sales of urban retail In China, retail pharmacies are the second major sales terminal 1. PRC PharmaceuticalThe RetailIndustry enterprises two Higher concentration ratio is encouraged by the PRC Government. 2. occupied33.5% market share in account Despite progressive consolidation Source: Figure three remains fragmented compared to those of developed countries. A classic comparison is instrument pharmacies while many Chinese people choose to most of the drug sales of retail pharmacies, mainly because out over drugs), with hospital pharmacies claiming the biggest market share of drugs sold. Bothprescriptions and

1,000 1,200 1,400 1,600 1,800 -invoice system, business tax replaced with value-added tax, and Bn in RMB in Bn th -the Overview Trends 200 400 600 800 remain e of the MOFCOM 0 - las 10 ed -counter medicines ("OTC m t

24.6% PharmaceuticalDistribution Industry : s 2010 pag , along for more than 90% of the U.S. market. 2010

and prevalent in the future to relieve the stress triggered by drug price cut largest pharmaceutical distributors, i.e., Mckesson Corp., Cardinal Health Inc. and AmerisourceB e ,

fo Guotai Junan International. Junan Guotai

33.1% - even groceries can be purchased from retail pharmacies China. in r 2011 1H16 Total Sales of the PRC

disclaimer with disqualified ones will be forced out from the market or be acquired by large enterprises. Acquisition Total sales Total 2012 18.5% s

of the pharmaceutical value chain, especially the pharmaceutical retail market. More and more

16.7% c 2013 old old t raditional Chinese the c 15.2% hain hain 2014

PRC 2015.in edicines") can be purchased retailin pharmacies. However, OTC medicines make up within , large distributors may start l ogistics, pharmacy outsourcing, 10.6% 2015

YoY China 12.0% 1H16

-chain serviceproviders m purchase OTC medicine from edicine, medicaldevices, health products, chemicalreagent ’ In s

pharmaceutical distribution market in recentyears, the market contrast, the three largest pharmaceutical distributors in China only 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 0.0% 5.0% Source: Source: Figure

patients in China typically fill their prescriptions at hospital hospital at prescriptions their fill typically China in -patients s 10,000 12,000 14,000 16,000 18,000 2,000 4,000 6,000 8,000

and more stringent operational requirement

for for Number of Distributors of Number

the MOFCOM - or have already 0 11 drugs (including pharmaceuticals, Chinese patent

: dustry and pharmaceutical pharmaceutical pharmaceutical and retail dustry in With theWith gradual application of policies such as Market Share of the 100 Largest Distributors - 2010 2010 , 1.0% a h

which enjoy higher operating margin ospital , new version Guotai Junan International. Junan Guotai - 2015 2011 2.9%

retail pharmacies if seeing a doctor is not s l ogistics ogistics

and implement and Number of Distributors in China and startedpenetrating into 64.0% 2012 YoY 17.6% of GSP,of small i ntelligence solutions, pharmacy

the Market share of 100 largest distributors largest 100 of share Market 64.3% - 2013 8.6%

United States

ation - 65.9% 10.9% 2014 - of of

and middle -sized a new version of 68.9% 2015 1.8% s and , in which the the which , in or increas

s s ergen Corp. . To To . , glassware Page Page

p 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% - - secure 7 20.0% 10.0% rovid of of

the ing 27 e s

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 (of drug sales) shrinkage. According to Menet ( representing aC from sales to referring Se Source: Figure Inyears, recent the pharmaceutical retail industry been has Source: Figure (医保控费) andthe gradual implement From 2010 to 2015, retail pharmacy business has experienced policy retail pharmacies and raised operational expenses of all pharmacies, and by the gradual implement C period, resulting from the slowdown public primary health services seized more market share in recent years, leading to a low the rapid at development of the public primary institutions healthrvices se 201522.5% in retail pharmacies was to reduce hospitals’ reliance on sales from hospital pharmacies, but the outflow of drug sales from hospital pharmacies to pharmacies. concentration ratio is still low compare chain pharmacies by the total number of retail pharmacies) reached 45.7% in 2015, compared to 34.3% in 2010. However proportion of retail chain pharmacies (which is defined as "concentration rate", calculated by dividing the total number of retail 5.9%/16.3%/36.7% 2011,in indicating fierce competition in individual pharmaceutical retail enterprise claimed 6.7%/15.9%/28.8% market share of the industry in 2015, onsolidation in the past few years was mainly driven by the application of stricter GSPs which disqualified many individual e 1,000 1,200 1,400 1,600 Bn in RMB Bn in

200 400 600 800 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 th From Retail Pharmacies Retail From End to Total Sales 50,000 0 , e

Menet, Menet, MOFCOM - - las which cut down drug price 14 12 0 25.8% 67.7% t 6.5%

: : 2010 retail pharmacies dropped from 261,996 in 2011 to 243,162 in 2015. The top pag 137,073 261,996 Number of Retail Pharmacies in China Total Sales of Drugs to End 34.3% 2010

Guotai Junan International. Junan Guotai e , , - NumberRetailChain Pharmacies/Total of Retail Pharmacies NumberRetailIndividual of Pharmacies Pharmacies Chain Retail Number of

customers fo Guotai Junan International. Junan Guotai while that of public hospital pharmacies increased from 67.7% to 68.8% according to Menet. By contrast, with r AGR of 12.3%. Yet, the YoY growth

24.7% 68.7% 6.6% disclaimer 2011 146,703 277,085 34.6% 2011

not significant as the marketshare of drug sales

retail pharmacies) grew from RMB173.9 billion in 2010 to RMB311.1 billion 2015in by drug sales, 23.7% 7.4% 152,580 271,143 2012

68.9% 36.0% 2012

158,244 274,415 23.3% 68.8% 36.6% 7.9% 2013 2013 From Public Primary Health Services Institutions Services From Health Primary Public Pharmacies Hospital Public From s,

in thein

thus deteriorating revenue throughout ation d 171,431 263,489

39.4% C 22.7% 69.0% 2014 to 8.3% 2014

national economy, drug price ustomers of of

that of the 204,895 243,162 45.7% 2015

22.5% 68.8% zero mark 8.7% 2015 米内网，南方所旗下子公司), the PRC pharmaceutical retail market

the the

change 15.0% 20.0% 25.0% 30.0% 35.0% 10.0% 40.0% 45.0% 50.0% 0.0% 5.0% United State 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 10.0% 20.0% 0.0%

the industry. -up policy. Figure Source: Source: Figure Source:

in 20.0% 25.0% 30.0% 35.0% 40.0% 10.0% 15.0%

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 5.0% drug sales fell from 16.9% to 10.0% in the corresponding 0.0% 5.0%

ulcHsia Pharmacies Hospital Public a increasingly MOFCOM Menet, - - s, 13 1 slowdown slowdown

22.9% 5 The healthcare reform plan the in recent years aimed

5.9% 16.9% for

which 34.0% : : 2010 cut Three Largest Drugs Largest Pharmaceutical Retail Enterprises YoY Growth of Different Sales Terminals of Market Share Market of 16.3% Guotai Junan International. Junan Guotai

2011 retail pharmaciesdropped from 25.8% 2010to in s -tier level ,

21.7% Guotai Junan International. Junan Guotai 36.7% brought the industry. the , According to the MOFCOM is more than 60%. Moreover, the numbe

15.0%

in in 6.1% 2011 21.3% focused growth rate 16.3% 2012 furthermarket share shrinkage for s in from in Retail Pharmacies Retail

18.4% favored by government policies, those 34.3% 13.4% 31.4% 2012

the top Ten Largest Ten 6.2% on 3, top 10, and top

medical insurance fee control

14.4% 2013

14.8% mergersand acquisitions.

resulting in

28.3%

respectively, 12.8% 3 ation 23.5% Public Primary Health Services Institutions Services Health Primary Public 2013 / top 6.3% 13.7% of of 15.2% 10 2014 the the / 10.6% top 28.1% 19.0% 100 Largest 2014

market share

zero mark

compared to to compared 6.7% 100 100 largest Page Page 10.7% 15.9% 2015 10.0% 16.3% 2015 8

28.8%

(only retail of of ,

r of of r up -up the the 27 s

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 transferred from hospital from transferred purposemainly isto m Se disease management, nutrition consulting, d Pharmaceutical retail enterprises are actively exploring innovative business models with high margins such as chronic Innovative business models and increased concentration ratio 2. new GSP and that on revenue caused by drug price cut expected to further increase in order to offset the negative effect on operating expenses of pharmacies brought pharmaceutical e-commerce, the pharmaceutical retail e- years. e th Trends e las t pag e fo r disclaimer aintain sustainablegrowth and to seizeopportunit s

resulting from

the the irect separ -to ation of medical treatment and drugs -p atient pharmacy ("DTP pharmacy"), O2O business model, etc. The commerce market is expected to grow at high speed in s . Moreover,with the solid support from the PRC Governmen s

are triggered by policies related to healthcare reform. ies

to obtain part of the market share of drug sales

sale s . The c The oncentration ratio is is ratio oncentration

over the Page Page

coming coming by the 9 of of t for 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Su 29.06% stake Se The unique state distribution,retail, scientificresearch anddevelopment, and the Sinopharm core isa subsidiaryof China National Pharmaceutical Group Corporation (“CNPGC”) clinic e Sinopharm, established in January 2003, is Company Profile ANALYSIS COMPANY pharmaceutical products, chemical reagents, laboratory supplies and other innovative business distribution business, operates a nationwide network of retail pharmacies and penetrates into production and sale of products and leading a supply the Modern Pharmac Sinopharm Accord Medicines Co., Ltd. (000028 CH), Beijing Tiantan Biological Products Co., Ltd. (600161 CH), Shanghai subsidiaries, including 6 listed companies, i.e., Sinopharm (01099 HK), China National Medicines Co., Ltd. state advantage of the SOE background since the Company sits on also access the centralized drug procurement relatively eas provides Sinopharm with two important subsidiaries of Sinoph Accord Medicines Co., Ltd. (“Sinopharm Accord”) and China National Medicines Co., Ltd. (“China National Medic Sinopharm is optimizing the As one of the Company as at the date of this announcement, was granted to 190 management group members and key employees at the On 16 November 2016, 7.23 million restricted shares, representing approximately 0.2613% of the 2019 are challenging but achievable. believeWe that it reform, in August 2016, the Company announced arestricted share incentive scheme -commerce, financial leasing, l equipment agent business, and medica retail healthcare investment,logistics, third-party Source: Figure has been e pervision and Administration Commission of the State Council the in ir th

- s special government background with a e owned . las

the Company the - 1 t

6 page : approved by shareholders.

Sinopharm enterprise SOE pioneers in the healthcare industry that have been appointed to conduct mixed ownership reform, in the Company the in fo r

eutical Co., Ltd. (600420 CH) and China Traditional Chinese Medicine Co. Ltd. (00570 HK) disclaimer , -owned enterprise (“SOE”) background of Sinopharm, think,we offers distinct advantages. Guotai Junan International. Junan Guotai

Pharmaceutical Group s

’s ’s as relatively low risk. China National better

Corporation

Shareholder

. bargaining power with both upstream and downstream customers. Similarly, Sinopharm

CNPGC the largest is pharmaceutical and healthcare group under the State- 51 corporate structure in order to improve operating efficiency. In 0.10 -chain service provider in the PRC. Sinopharm primarily engages in pharmaceutical %

arm.

Management indicated that the

Structure nationwide distribution anddelivery network and comprehensive product portfolio Sinopharm Industrial

Investment Co., Ltd. Co., Investment China The

as of FY2015 Company ’ the incentive scheme will facilitate the sustained growth of the Company. s

largest wholesaler and retailer of pharmaceutical and healthcare 56.79

ily %

. Moreover,. the Company enjoys low financial cost

a strong cash bank cash a strong manufacture of healthcare related product (Group)Co., Ltd.

Shanghai Fosun Pharmaceutical 49 %

PRC (“SASAC”), with core inbusiness pharmaceutical vesting Social SecurityFund and The National

conditions Public Shareholders

and investors and banks commonly view which will bein Council for Council

43.11 with a net profit CAGR of 12% by %

es issued share capitalthe of

such as pharmaceutical effect for ten years and accordance with the . CNPGC . s . CNPGC has

owned Assets (600511 CN),

Page Page s Sinopharm Sinopharm

i by taking are nes”) owns a owns

10 First of of can

10 ly 27 ,

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 company Modern Pharma. integration of the newly injected as subscription sharesnon- by Modern Pharma RMB284.78 restructuring scheme of Sinopharm Accord also included the acquisition of Southern Pharmaceutical Sinopharm will Se market share in the retail pharmacies approximately 12.6 Sinopharm contributed over 80%, far surpassing the second largest distributor MOFCOM Sinopharm is the largest player in both pharmaceutical distribution business and retail pharmacy. Business Segment Pharmaceutical price of HK Sinopharm as a res Medicines Beijing Huahong, 51% equity interest Beijingin Kangchen and 51% equity interest in Beijing pharmaceutical distribution business in Beijing, The restructuring plan of China National Medicines is under restructuring, Sinopharm's interest in Sinopharm Accord increased to 56.06% from 51.00% . RMB2,945 injected also expected Tongrentang Co.,Ltd by approximately 0.6 m pharmaceutical manufacturingbusiness, namely asset In order to eliminate the competition with its subsidiaries significant. subscription offering by shares non-public Sinopharmabout is restructuring of Sinopharm Accord was completed in early 2017. As part of the M edicines illion e th e s , las

which was satisfied by restructur t

to 55 to rise to

, 2015, in Sinopharm's parent company CNPGC claim page . by the Company and some minority interests of those assets byother minority shareholders. T $ 5 at RMB25.10 per share. In the restructuring plan, China National Medicines T 35.46 per restricted share. 9 m Guoda Pharmacy and its pharmaceutical hrough the restructuring plans of Sinopharm’s two main subsidiaries

illio fo better focus on its illio r to Modern Pharmaceutical Co., Ltd. (

in exchangein of 86.42 million newly issued shares of Modern disclaimer n ing n from 55.06 million newly issued Sinopharm Accord shares at pts. The Sinophar paidcash by ult of ult RMB .

38% of Sinopharm Accord in March 9, 2016

5,339.70

efficiency efficiency from 44.01% through the asset restructuring. public offering. T

the core distribution and innovative business and and new issued shares issuance of 16.73 million

set m m Holdingm Guoda Drugstores Co., Ltd., asubsidiary of Sinopharm accounted for 2.74% improvement illio

industry into n and will be

pts. at price of 25.10 per share.

he financial impact Sinopharm Accord, , outperforming the second largest pharmaceutical retail enterprise Beijing

including 26% equity interest in Sinopharm A

ofthe entire distribution “ Modern Pharma satisfie 96% equity interest in Sinopharm Beijing, 51% equity ,the disposalits of pharmaceutical manufacturing businessto shares and achieve b d by issuance of 212.74 million National shares of China

of the restructuring

China National Medicines g assets Guangdongin Province and China National Medic roup.

ed at RMB29.06 way

a marketa share of 19.6% distribution, in of which Sinopharm's interest in China National Medicines is

. ”

By streamlining the distribution and retail assets, The financial impact of the restructuring plan is not ) The plan at a consideration of approximately RMB etter asset China Resources Pharmaceutical Group by

long Pharma per shareModern by Pharma. Sinopharm

a efficiency on Sinopharm is limited. is -Think and51% equity i

, v s -term synergies price of RMB53.50. The overall assets

restructur principally alue is expected to be created for

and the issuance of 5.11 million

and

, will also issue 41 i Sinopharm nes , ing

Tianxing into Sinopharminto Accord Sinopharm's related to the injection of on Sinopharm are expected

at a consideration of

otal consideration to July 20, 2016 to to announced nterest in Sanyi Sanyi in nterest

China National After the asset

stake holding holding stake

According to

disposed its its disposed Page Page

. 0 interest in in interest

4 million from from 486.21 11 . of of with The the the the the 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se other value- Pharmaceutical distribution is Sinopharm’s principal business. It provides comprehensive distribution,logistics and 1. segment and 3) other business. Sinopharm Source: Figure 16.0%. approximately for accounted Sinopharm and 19.6% of share market a claimed CNPGC Note: Source: Figure Sinopharm has been the largest pharmaceutical distributor in distributors, retail pharmacies and primary health service institutions. equipment and supplies and other healthcare products, and also to downstream customers including hospitals, other by by average of 15.2% in the corresponding period. The outgrowth be could mainly attri amounted to RMB215,854 outperforming the industryaverage, according to consolidationacquired of assetsalso contributed above to -average growth. share gains favored by recent policies. Mergers and acquisitions and the consequent synergi e an

100% th 80% 85% 90% 95% PharmaceuticalDistribution Segment e ever the Company, the the Company, the - - las 19 17 Pharmaceutical distribution Pharmaceutical t

(%) Distribution2015 in : : page 59.0% -expanding distribution network, stable customer base, comprehensive andflexible product portfolio, and market 93.3% 2011A Revenue Breakdown Market Share Market of 2.9% 3.8%

added services to domestic and foreign manufacturer operates in three business segments: 1) pharmaceutical distribution segment, 2) retail pharmacy fo r

disclaimer Guotai Junan International. Junan Guotai MOFCOM 93.8% 2012A 3.0% 3.2% ,

Guotai Junan International. Junan Guotai m

19.6%

94.5% illio 2013A Sinopharm in 2.9% 2.7% 1.7%

Retail pharmacy Retail 6.9% n in 2015, representing a CAGR of 22.3% from 2011, which far exceeded that of 7.0% 2.3%

of Sinopharm 3.5%

94.9% 2014A 2.9% 2.2%

Pharmaceutical

94.1% 2015A Other business Other 3.8% 2.1% Others Nanjing Pharma Guangzhou Pharma Jointown Shanghai Pharma Pharma CR CNPGC

by Segment 94.2% MOFCOM 3.9% 1.9% 1H16 Source: Figure Source: Source:

Figure . 100% 95% 80% 85% 90% The revenue of the pharmaceutical distribution segment

the the Company, the the Company, the - s

18 Pharmaceutical distribution Pharmaceutical -

20 and suppliers of pharmaceutical products, medical

: PRC in terms of sales in the last in 2015 89.6% : Operating Profit Breakdown Segment (%)Segment 2011A Market Share Market of 8.5% 1.9%

MOFCOM Guotai Junan International. Junan Guotai

buted to Sinopharm's organic growth driven 88.2% 89.1% 2012A 8.0% 2.9% 2.7%

, Guotai Junan International. Junan Guotai 2.1% 1.8% 90.3% 2013A Sinopharm 6.8% 2.8% Retail pharmacy Retail 1.8% 1.8% 1.5% 91.1% 2014A 6.1% 2.8%

ing emerg es

in of Sinopharm Retail Pharmacy Pharmacy Retail Other business Other 90.9%

2015A 6.7% 2.3% fiveyears, far

the Page Page Others Laobaixing Yixintang Tongjunge Tongrentang Guoda Dashenlin from the

industry industry 88.3% 9.5% 2.2% 1H16 12 of of by by 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Notes have according to the historical data. Under the press the information of its indirect customers since 2014, but we estimate the number of other distributors to be more than 7,000 customers (including primary health service institutions and others) and 68,264 retail outlets. The Company has not disclosed (2) The ten largest distributors in 2015 are not the same as in 2012. in as same the not are 2015 in distributors largest ten The (2) CNPGC. company, of parent its revenue the to 80% over contributed (1) Sinopharm Se Source: Table all hospitalsall the in Sinopharm possess centers, 177 municipal level logistics outlets, the Company enlarged its distribution network to 242 logistics outlets downstream thein recent few years, especially the in lower widest geographical coverage in Sinopharm differentiates itself from its counterparts by embracing and operat marginthan thatofindirect sales to otherdistributors distribution channels, we believe Sinopharm is likely to enjoy higher bargaining lower will continue to strengthen the establishment of the integrated logistics platform China in well as increase as exposure in and achieved atotal coverage of more than 190 cities out of 330 prefecture cities vs position in first autonomous regions across China through acquisitions and establishments. In addition to continuously secur offset the negative impact on its indirect sales brought by the policy. years, we expect Sinopharm to take more market share on the direct sales business from small or disqualified players to hospitals, including 1,880 growth. Total Anhui Huayuan Pharmaceutical Co., Ltd China Medicine Co., Ltd. Huadong Medicine Co., Ltd. Chongqing Medicine Co., Ltd. Nanjing Guangzhou Pharmaceutical Corporation Jointown Group Co., Ltd. Shanghai Pharmaceutical Co., Ltd. China Resources Pharmaceutical Group China National Pharmaceutical Group Corporation Ten Largest Distributor of 2015 e th ： tier cities-tier e negatively impacted drug prices -2

MOFCOM las

: Market Share of the

As at 30 June 2016, the Company's direct customers included 13,841 hospitals (only referring to nationally t Medical Co., Ltd. page -tier cities, according to the latest data, the Company ha , fo , Guotai Guotai r which will still be one of its major growth drivers in the next few years. In addition, with the expansion of its disclaimer PRC or 87.2% of all class Junan International. Junan es stable and extensive ,

of the of

Ten Largest Distributor

largest

, Sinopharm has been increasing exposure direct in sales the and most highly

PRC. -threehospitals in

ure of recent policies related to healthcare reform such as drug tender

and

yet ever The Company

. theWith gradual implement of 22 retail logistics outlets, covering 31 provinces, municipal Market Share of 2015 s

ranked class

of 2015 -expanding -tier cities which have higher growth potential. As at 30 June 2016, the 46.9% 1.25% 19.6% 2.3% 7.0% 1.5% 1.7% 1.7% 3.5% 6.9% 1.4%

has been PRC. Other direct customers consist of 104,508 small

-three hospitals), accounting for approximately 49.0% of

, ,

which includes customer resources assolid support of revenue

expanded business its in second-

dedicated to expand ing

power than peers.its Market Share of 2012 .

133 in 2010. expectWe that Sinopharm

the 4 logistic 4 ingdistribution a network with 15.7% 2.2% 6.7% 1.5% 2.0% 1.9% 3.1% 6.5% 1.0% n.a. two

-invoice system in the next few

, hubs, 39 provincial logistic

which have

its deliverynetwork and third-tier Ranking in 2012

a ing

higher gross n.a. Page Page 11

5 2 8 6 7 4 3 1 its leading

ities and and ities

s, ranked -ranked 13

which cities cities - of of end the the 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 improvement of the segment inspection nonas -routine However,we expect that Sinopharm will continue to outgrow average has been decreasing as a result of a larger base of the Company and fewer acquisitions within consideration portfolio to maximize efficiency The improvement of operating margin could be attributed not o operating profit of the distribution segment of RMB4,585 The operating profit margin of Sinopharm fu compliant operations challenge for many enterprises tender twothe for GSP and execution of non-routine inspections of pharmaceutical and medical devices, which increase and Sinopharm will be to able gain more market share from other distributors healthcare reform in Sinopharm has obtained some market share from other pharmaceutical distributors resulting from the deepening of better margin Sinopharm is able to adjust its products to diminish or even eliminate the impact of different industry policies and/or to ac aesthetics distribution, according to the PRC's As only three authorized nationwide distributors of aesthetics the in pharmaceutical companies su more than 5,000 domestic and foreign suppliers, 95% deceleration is due mainly to segment revenue grew to by RMB119,779 13.6% Sinopharm has been confronted growthwith deceleration and decrement in growth in the past fiveyears. In 1H16, Se categ According to the latest data, Sinopharm distributes over 30,000 types of pharmaceutical and healthcare products in all Comprehensive product portfolio provides Sinopharm flexibilitywith to fit into Source: Figure rther penetration into low e th 100,000 120,000 20,000 40,000 60,000 80,000 e ories, including 46 out of the world's top 50 best ainlyrne hospitals ranked Nationally s the Company, the - las invoice system -invoice

21 have 0 t

: page NumberDirect of Customers 2011A s resulted in for fo and credit terms, which small r

disclaimer Guotai Junan International. Junan Guotai a larger base and fewer acquisitions of the distribution , 2012A

suchas Sinopharm the .

a s

PRC. PRC. , new GSP, andthe deceleration er

-tier cities andindustry consolidation driven by the implement will 2013A ch asch Pfizer, MSD, Bayer, IPSEN, SANKYO, Baxter, etc. Moreover, the Company is one of the Small the ,

, R

but to the integration impact from large from impact integration the to but elmtdi h uue be limited in the future. especially the small and disqualified ones, while large- igorous regulations in the industry have - overall macro economyslowdown, moderating sector growth. end customers customers end

2014A

in ,

hospital drug sales. The gap between the growth of the Companythe industry and

survive of Sinopharm - or medium

two 2015A has been gradually increasing since 2011. In . We believe, in the future, the concentration ratio of the industry is bound to -invoice system,etc. Retail outlets Retail sociation of Aesthetics. abundant its With product portfolio, we believe m illio -selling drugs. Sinopharm maintains close business cooperation with 1H16 - n, representing adeceleration fro size m

illio

from the d Source: Source: Figure

n, with a margin of 3.8% compared to that of 3.4% in FY2011. distributors are not capable of.

industry

nly to thenly adjustment Company’sof the product andclient 100% domestic suppliers and 30 of the 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% the Company, the - PRC, with amarket share of approximately 90% on 22

-average growth : -

been forged with the introduction of new regulations Distribution Business scale acquisitions conducted before FY2012. 22.24% 63.21% Customer Structure in Pharmaceutical 5.73% 8.82% 2H14 segment, we believe the operating profit margin Guotai Junan Guotai 22.84% 61.95% 5.99% 9.22% 1H15

especi

a rate

different industry environment. ation International. m 47.4%m FY2011. in The growth cale distribution enterprises with 22.59% 61.97% ally with the gradual impletion of

6.00% 9.43% 2H15 dueto marketshare gains from

of government policies such

of Sinopharm 1 Pricing pressure from drug H16, Sinopharm reported

22.15% 62.31%

6.28% 9.26% 1H16 has top 50 international

broughta huge distributors Sub Provincial and National Pharmacies Retail Institution Healthcare Other Ⅱ Hospitals (Class

the segment.

Ⅲ Page Page ) 14 hieve With of of - 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se growth of Sinopharm's existing pharmacies and especially the expansion of the the pharmaceutical retail indust years. Sinopharm were directly operated by Sinopharm and 952 were operated by franchisees. large- As at 30 June 2016, it had Sinopharm 2. Source: Figure pharmacies brought consolidation of the fragmented pharmaceutical retail market triggered by the negative impact onoperating expenses of the separation of medical treatment and drug sales in the future. We also expect to take more market share as well to as better seize the enormous opportunities brought by public hospital reform concentrate on the retail pharmacies segment, which is in line with our expectation that further M&As will drive the Company Pharmacy” increased from 1,773 to 3,080, with a CAGR of 14.8%. The management indicated that near term M&A plans will new pharmacies and M&As. During the period FY margin of the segment compared to those of other retail chain pharmacies. economiesofscale. alsoWe highlightthe potential improvement expansion of innovative business mode margin erosion large- FY2011-FY2014, operating profit margin increased from 2.3% to 3.7% as a consequence of integration impact from The retail pharmacy segment has experienced operating profit margin erosion since FY2015. During the period will facilitate the improvement of inventory management as well as the financial structure of the C development is also an important step to reach Sinopharm's goal of the integration of wholesale and retail, and the integrati e 100,000 150,000 200,000 250,000

50,000 th Retail Pharmacy e scale expansion. Howev and medium and the Company, the - las The revenue of the segment grew at a CAGR of 30.1% during the period FY2011-FY2015, which was double that of 0 23 Revenue t

PharmaceuticalDistribution Segment : RMB RMB page 96,367 2011A 33.1% 47.4% Revenue and Growth Rate of

witnessed a sharp increase in sales amount and maintained its industry leading position in the latest five manages the largest network of retail pharmacies in the mn fo was r disclaimer MOFCOM 128,975 2012A 18.5% -sized cities in 18 provinces, municipalities and autonomous regions throughout China, among which 2,128 34.2%

mainly on

Growth of Revenue of Growth by the new GSP andonrevenue caused by drug price cut 158,973 , Wind, , Wind, 2013A 16.7%

23.2% a total of 3,268 retail pharmacies under the brand name of “Guoda a result of

er, operating margin declined to 2.5%/2.3% in FY2015/1H16 , respectively Guotai Junan International. Junan Guotai ry, 15.2%, over the same period. The outperformance was 191,468 2014A 15.2% 20.4%

the increase ls. We expect margin improvement in the future with better internal control and larger 215,854 2015A 10.6% 12.5% Sinopharm's Growth of Industry of Growth 119,779 12.0% 13.6% 1H16 2011-FY2015, the number of pharmacies under the brand name of "Guoda

expenses triggered by the application of more stringent GSP and the fast

60.0% 50.0% 10.0% 20.0% 30.0% 40.0% - - - 0.0% 30.0% 20.0% 10.0%

Source: Source: Figure with 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 the Company, the - 24 0

consideration : PRC in terms of revenue, according to RMB RMB Segment Sinopharm's 2011A Operating Profit and Operating Profit Margin 3,282 3,282 3.4%

retail pharmacy networkthrough Operating Profit Operating Guotai Junan International. Junan Guotai 2012A 4,359 4,359 3.4% that

to s the Company will benefit from further

Pharmaceutical Distribution . In addit Sinopharm's 2013A 5,548 5,548 3.5%

mainly due to both the organic Pharmacy”, covering about 70 2014A 7,176 7,176 3.7% ompany. ion, we think

relatively low operating 2015A . We assume We . 3.9% 8,355 8,355

Margin

3.8% 1H16 4,585 4,585

that the Page Page , MOFCOM

especially especially

set strategic strategic

that 3.0% 3.5% 4.0% 4.5% 5.0% 2.0% 2.5% 15 - up of of of

the the of on on 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 drivers in the future. and especially the introduction of innovative business increase growth revenue laboratory supplies as well asother innovative businesses equipment, etc. Other 3. growth drivers for the Company the in future. stores has reached 22. Managem rehabilitation therapy andthe sale of medical apparatus and instruments. So far, the number of retail medical service flagsh ip Besides, the Company also actively explored retail medical service business which combines drug sale, medical services, chronic disease management and sales of specific drugsnot availablehospitals in notcovered or basicbymedical insurance. August 201 of medical treatment and drug sale. In cooperation with the Roche Group, Sinopharm established its first DTP pharmacy in and retail medical service business, in order to catch opportunities in Sinopharm has been activelyexploring new retail business models such as hospital pharmacies, DTP phar Company to achieve better development on the new capital platform through long-term synergies. asset restructur Se long The injection of Sinopharm's retail business into its subsidiary, Sinopharm Accord Source: Figure e 10,000 th 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Other Business -term advantages e the Company, the - las 0 b 25 in usiness primarily consists of production and sale of pharmaceutical products, chemical reagents Revenue reduction in FY2013 andFY2014, with operating profit margin steadily increasing from 8.0% to 10.8%. However, in t

Pharmacy Segment : RMB RMB page revenue started to rebound FY2015in and operating profit margin surged to 20.0% in 1H16. We attribute the 47.7% 77.5%

2011A 3,045 4. So far, Sinopharm has more than 60 DTP pharmacies which mainly engage in advisory services on drug usage, revenue andoperating profit marginto Revenue and Growth Rate of mn fo ing r

During the period FY2011- disclaimer MOFCOM 18.0% 2012A 4,114 35.1% is

slightly dilutive to shareholders of Sinopharm. Growth of Revenue of Growth . The asset restructur asset The 17.2% 2013A , 4,833

Guotai Junan International. Junan Guotai 17.5%

of Sinopharm 15.2% 22.1% 2014A 5,904 ent believes such new businesses, especially DTP pharmacies, are likely to become new

10.6% 47.7% 2015A 8,729 the

Growth of Industry of Growth ing FY2014, the segment had

Retail 10.1% 19.7%

1H16 4,909 was the profitability enhancement of its pharmaceutical manufacturing segment

accomplished by the the by accomplished es 70.0% 90.0% 10.0% 30.0% 50.0% - - - 50.0% 30.0% 10.0%

such agent as business and financial leas

Source: Source: Figure

such as financialsuchas leasing, agent business, medical Yet, the management expected the retail business of the 100 150 200 250 the Company, the 50 - 26 0

: RMB RMB been confronted with growth deceleration and even the 2011A Operating Profit and Operating Profit Margin of 2.3% beginning of 2017. Management indicated that the 69

the retail business brought by the separation mn

Retail Operating Profit Operating Guotai Junan International. Junan Guotai 2012A 142 3.4% Pharmacy Segment 2013A 175 3.6% ,

will provide the Companywith 2014A 3.7% 219

ing

, which we believe are 2015A 2.5% 216

of Sinopharm Margin 2.3% 1H16

115 Page Page macies 3.5% 4.0% 1.0% 1.5% 2.0% 2.5% 3.0% 16

of of and 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 devices, acc focus onfurther development of innovative business such pharmaceutical as e-commerce, finance leasing and medical in the facilitate and network retail near supply chain Se Company is expected to as In addition to further solidifying the distribution business, the Company strategically will promote the retail business Future Development continue to act as one of the developing strategies of the Company. Sinopharm launched financial leasing business through newa Source: Figure profitability. By advantage taking of the Company's ever substantial growth in agent businesses for foreign pharmaceutical firms with an expansion in agent product types and boosted models since the launch of Betaloc pilot projects in July 2014. According to management, the Company achieved Sinopharm beenpushinghas the marketingtransformation growth of the Company in the future. third 2015, Sinopharm has been focusing on e profitability. believe Sinopharm will leasi and such as circulating funds increasing, factoring and consulting to provide medical institutions and pharmaceutical manufacturers with financial leasing services Finance Leasing co., Ltd reached RMB2.2 businesses to the Internet. It launched the “Internet Interconnection” project in 2015. The transaction value of the project internal transactions using both upstream and d customers with one- financial leasing business has been growing rapidly and believe e-commerce will ramp up quickly by taking advantage of e

well as innovative business such as pharmaceutical e-commerce, finance leasing and medical devices. th 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 -partyplatforms like JD, Wechat andTaobao, andwill undertaketherole as an important factor supporting the revenue -term M&A would plans focus on the retail pharmacy segment as so to develop a nationwide pharmaceutical terminal ng business enjoys higher margins than traditional business e 500 and the Company, the - las 0 27 t

Other Business Segment :

RMB RMB page was the largest vertical e 2011A

35.8% 3,898 Revenue and Growth Rate of or s

mn into hospi into ding to the management. fo Revenue r disclaimer Guotai Junan International. Junan Guotai b 2012A 4,429 15.0% illio stop stop “medical + drug” services. The Company n as of 1H16. Moreover, its “Sinophar tals in order to maintain its leading position in the industry. The management also mentioned continue to enlarge its financial leasing business in the future to further improve the Company's continue to 2013A

., 4,496

1.8%

with invested capital of over RMB2 2014A - 4,452 tegration of wholesale and retail. In order to improve margins, Sinopharm will continue to 1.7%

- increas

Growth of Revenue of Growth

commerce service platform integrating B2B, B2C -commerce since 2014. Sinopharm Online Co., Ltd. was put into formal operation in

2015A 6.5% 4,735 Sinopharm's e

penetration into low 4.5% 1H16 2,461 ownstream resources as well as to promote the combination of traditional -expanding distribution platf 10.0% 20.0% 30.0% 40.0% - - - 0.0% 30.0% 20.0% 10.0% is

expected to achieve net profit of RMB100

m Groupm Overseas Flagship Store” went online Source: Source: Figure -tier citieswithhigh growth potential andpush extension

a b forwards es

illion in December 2014. The newcompany ly solid resources base 100 200 300 400 500 600 700

is the Company, the - to

28 0 established enterprise,

of the Company. According to the management, the also dedicat

all players in the healthcare industry. The financial : RMB RMB Sinopharm's 2011A Operating Profit and Operating Profit Margin of 8.0% 311

mn and exploringinnovative marketing service Operating Profit Operating Guotai Junan Guotai 2012A 390 8.8% orms, we believe the agency business will ed

to establish a B2B platform based on

and Other Business Segment 2013A 420 from 9.3%

International. O2O services and

GNPGCand cooperation with

Sinopharm Holding (China) 2014A 10.8%

482 and other financial services

m 2015A 13.0% 618 illio Margin n in FY2016. We We FY2016. n in

20.0% 1H16 providing

493 in 2015. We We 2015. in is is Page Page

dedicate that that 10.0% 15.0% 20.0% 25.0% 5.0% 0.0% 17 of of The end s the the

27 of of d

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 next three years. and of revenue contribution of the distribution segment, we estimate and loss next three years with forecast a 92.5% CAGR in less than 15%annually Sinopharm as plans to strategically expand retail its coverage. For the finance leas innovative business such as financial leas respectively, representing YoY growth of 12.9%, 12.8% and 12.8%. We forecast FY2016F segment. to actively more gain market share. The management indicated that recent M&A plans will on focus the retail pharmacy contributed approximately 0.1% YoY growth. However, we believe pharmacy segment in FY2015 was due mainly to acquisitions. In 1H16, the pace of M&A We f We tender 31.6bps/ FY2015, representing YoY growth of 13.0%/ estim improved gradually from 8.0% FY2012 in to 8.2% in FY2015. Mergers and acquisitions ha deceleration of hosp econom FY2012, Se G Margin Profit Gross Source: Figure Sinopharm reported total revenue of RMB191,840 Revenue FINANCIAL ross profit margin has been quite stable in the range between 8.0% and 8.2% FY2011 from . e 100,000 150,000 200,000 250,000 300,000 350,000

50,000 th will orecast the gross profit margins for FY2016 ate e s the Company, the - las 0

29 ic factors ic as well as gross profit margin erosion of retail and other business. decreas

in that that respectively t 102,225 7.8bps to 7.9%/

2011A 47.7% RMB RMB and Growth Rate : page

Sinopharm's indirect sales result M&A mn fo 136,502 2012A 33.5% e r

disclaimer Guotai Junan Guotai

and pricing pressure from policies related to healthcare reform steadily and slightly, even though retail business and innovative business have a s contributeds approximately 2.0% YoY ANALYSIS ital drug sales growth. 166,866 2013A

consideration . 22.2%

G -FY2018F total revenue of RMB256,337

Revenue

rowth deceleration was mainly due to the overall distribution industry slowdown triggered by macro Historical and Predicted Revenue 200,131

2014A 19.9% 8.1%, compared to 8.2% in FY2015. The management attributed the decrease mainly to drug

the the

International. ve ing 227,069 period FY2016F 2015A 13.5%

been one of the revenue drivers from the gradual implement to Growth 256,337

12.9% 2016F market share gain from direct sales as well as operating pressure from drug price cut

ing 289,268 12.8% 2017F

. We expect the retail business to act as a new growth engine and to grow no -FY2018F. We expectdistribution business 326,410

12.8% 2018F 13.4%/ -FY2018 m 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% - - - 30.0% 20.0% 10.0% illio

13.5% compared to 19.9%/ growth to the Company. highlightWe the high growth for the retail n/ to

Source: Source: Figure ation RMB125,888 However, 1- in

stabilize at 8.1%. that

that 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 0.0%

of the two the overall growth rate of the Company will be around 13% the Company, the - m for 30 the pace

n, RMB289,268 illion, G :

rowth will be most Sinopharm in the past fewyears. and M&A Contributions Estimated Organic Growth Rate of Revenue 2011A 22.5% 25.2%

M&A Contributions M&A m 3Q16/ -invoice system.In illion/ will not slow Guotai Junan International. Junan Guotai 2012A In the next three years, we expect 29.7% , 3.8%

1H16, gross profit margin decreased by especially the drug tender which led to

RMB227,069

22.2%/ 2013A 21.6%

ly 0.7% down

m in in the retail business as well as

s grow at 12.7% annually in the

i llion, RMB326,410 decelerated and M&As only 33.5% in FY2014/

view of the large proportion further in the future in order

2014A 18.4% m of Sinopharm 1.5%

promising outlookin the

illion in 1 Organic Growth Organic G rossprofit margin 2015A 11.5% ing 2.0% In FY2015, we

-3Q16/

business, we we business, Page Page

13.3% FY2013/ 1H16

0.1% m that

18 1H16/ illio of of

the the 27 n, s

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 FY2016-FY2018 will remain stable intensifying investment the in retail business and innovative business in the future, so we estimate operating margin for businesswith higher margins will offset the margin erosion caused by price pressure and increasing operating expense on method, integration effect from previous acquisitions of the retail pharmacy segment and further penetration into innovative viewin of significant operating leverage operating profit margin of FY2016 would be at a level similar to that of 1H16, Se Source: Figure We forecast the operating profit margin for FY2016-FY2018 conversion cycle and the economies of scale of the Company. operating profit margin mainly reflects the implementation of cost control measures such as better control of the cash O Margin Profit Operating Source: Figure pharmaceutical distribution business will margins.also We impact through adjustments of its product and client portfolio andfurther penetration into low othsystem and er policies related to healthcare reform. Yet, we believe the Company is able to offset most of the negative 8.1%, which is in li fromimpact large-scale acquisitions in previous years. Overall, we assume perating profit margin has been steadily increas ing e th e

the Company, the the Company, the - - las 32 31 t

: : page Historical and Predicted Operating Profit Margin Historical and Predicted Gross Profit Margin fo r disclaimer Guotai Junan International. Junan Guotai International. Junan Guotai expect gross profit margin of retail pharmacy will not further decrease ewt h vrg fteps ieyas ne with the average of the past five years.

10,000 12,000 14,000 16,000 10,000 15,000 20,000 25,000 30,000 2,000 4,000 6,000 8,000 5,000 0 0 at 4.1% . 2011A 2011A 3,636 RMB RMB 3.6% 8,355 RMB RMB 8.2%

that be mn mn Operating Profit Operating

2012A 10,988 2012A 4,869 the Company has

3.6% 8.0% exposed rs rfit Prof Gross 2013A 13,379 2013A 6,102 3.7% 8.0%

to intensifying pricing pressure triggered by drug tender 16,328 2014A 2014A 7,862 3.9% 8.2%

of Sinopharm from 3.6% in FY2011 to 4.1%in 1H16. The improvement in achievedthe in pastfew years. believeWe

18,618 2015A 2015A

9,169 4.0% 8.2%

of Sinopharm to to stabilizeat 4.1%. 20,712 10,484 2016F 2016F 8.1% 4.1% Operating Profit Margin Profit Operating Gross Prof it Margin it Prof Gross

23,373 11,821 2017F

2017F 8.1% 4.1% and room for further improvement would be small that

the gross profit margin will remain stable at 26,374 13,343 2018F 2018F 8.1% 4.1% The management suggested that the 10.0% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% with -tier cities with an aim to secure

consideration

that to

the cost saving the integration integration the s

, two , Page Page -invoice 19 of of 27

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 on our relatively stable operating margins and effective tax rate as well as relatively low We expect financial cost successfullyhas financial saved cost gaining more market share in tenders. By taking advantage of interest cut capital since on borrowing fell from 6.06%to profit margin will stay around Net profit is expected to grow to RMB4,64 Se Source: Figure bottom efficiency improvement caused by tight control of DSO and financial cost reduction triggered by the interest rate cut, profit Net profit margin improved to 1.7% in FY2015 from its lowest level 1.3% in FY2013 in the period FY2011- Profit Net Source: Figure During Financial Cost

FY2016in -FY2018. We assume financial cost financial assume We likely to 1H16, with interest rates only ranging from 2.5% to 3% to replace old borrowings. believeWe that e th e

margin the Company, the Company, the - - -line performance outpaced total revenue and net profit margin increased to 1.4% and 1. las 34 33 FY2011 help t

: : page Historical and Predicted Sinopharm’s

reduc DSO declined from 1.5% in FY2011 to 1.3% FY2013 as a result of fo - FY201 r disclaimer Guotai Junan Guotai International. Junan Guotai

ing d from 79.2 to climbe 107.5 from FY2011 to FY2014, resulting from higher direct sales to hospitals and

financial financial 4 , s total debt Historical and Predicted Effective Interest Rate and Total Borrowing s

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 will increase slightly in

tomoderately grow

5,000

International. 1.8%FY2016 in -FY2018. EPS is expected to increase to RMB1.678 Total Borrowing from bank/financial instituition bank/financial from Borrowing Total 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 burden

0 2011A 8,888 6.06% 4,961 5.06%, due to the surge in

rose from RMB13,849 from rose RMB RMB s RMB RMB

Net Profit 2011A 1,561 1.5% ic Y05 since FY2015.

in 2H16in and 2017 and is positive for future M&As andinvestment in new businesses. mn mn 10,766 2012A 6.07% 5,374 4 2012A 1,979 1.5%

m e rfit Prof Net

n, RMB5, illion,

of Sinopharm 16,183 for FY2016 2013A 5.34% 8,959 FY2017 and FY2018 with the expectation of interest rate rises. 2013A 2,250 1.3%

19,477 2014A 5.06% 9,979 2014A 2,875 1.4%

m -FY2018. 170 illion

2015A 12,995 2015A 3,761 15,817 1.7% 4.79% DSO m

Total Bond Total to to illio RMB5, and n .

2016F RMB2 Sin 4,644 1.8% R 16,748 2016F 3.60% 18,962 aised aised debt was mainly used to supplement working s o

pharm issuedRMB12 in in Margin 2017F 9,455 5,170 1.8% China

18,727 18,653 2017F 4.00% the tremendous rise in debt. However, with Effective Interest Rate Interest Effective

m 2018F 5,825 1.8% and active control of illion 825 19,752 22,185 2018F 4.20%

financial cost, we assum m , 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9%

while the effective interest rate n in FY2016illion in 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 0.00% 1.00% 8% in FY2014 and FY2015. , RMB1.8 , the recent bond financing is b

illio n

in DSO

corporate bonds in 6 8 -FY2018.

and RMB2.10 , the Company

FY2015. Page Page

e that 20 Based of of

Net Net net

27 5

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se Source: Figure We assume days in 1H16 from 79.2 days in FY2011. 1H16 from 115.4 days in 1H15. DSI fell slightly to 35.3 days in 1H16 from 38.4 days in FY2011 and DPO increased to 98.0 Company focused on the control of DSO through adjusting its product and client portfolio. AR days decreased to 100.6 day sales to hospital believe The cash conversion cycle reached Cash Conversion Cycle hos FY2016 increase/decrease slightly from 98.0/ conservative estimate, we the think DSO However,we believe deepening of the public hospital reform, the deferred payment of hospitals is e

p th itals while less indirect sales to sub to sales indirect less while itals e

the Company, the - las 35 that that to 101.5 in in 101.5 to t

: page Historical and Predicted the rise CCC in from FY2011 to FY2015 was mainly attributed to the increase of DSO by caused higher direct that that fo r

s disclaimer Guotai Junan International. Junan Guotai the the . The management agreed that there had been delays in payments from hospital FY2018, given the gradual implement 100.0 120.0 20.0 40.0 60.0 80.0 CCC 0.0 Sinopharm's

will stay at a level similar to that of 1H16.

Days Payable Outstanding Outstanding Payable Days Inventory of Sales Days 2011A 26.4 38.4 79.2 91.2

management will continue making every effort to decrease the DSO. So, on a very

35.5FY2016 in to 98.5 Cash Conversion Cycle

37.9 in 1H16 from 26.4 in FY2011, after reaching the peak of 46.1 in FY2015. 2012A 90.6

37.9 33.9 86.6 -distributors

will in - crease slightly to 101.5 in the next three years. DPO/ DSI 2013A 36.3 40.3 94.5 98.4 - DPO .

With ever With ation 2014A 107.5 36.7 46.1 98.2 /35.0 in FY2018.

of the two

-increasing financial pressure o of Sinopharm 2015A 105.1 37.3 42.8 99.6

invoice system -invoice DSO Cash Conversion Cycle Cycle Conversion Cash Outstanding Sales Days

is estimated to slightly increase to from 100. estimated is and 2016F 100.5 35.5 38.0 98.0 will be more prevalent thein near term. ,

this this 2017F 101.0 35.3 38.0 98.3 - - will lead to more direct sales to to sales direct more to lead will CCC DSO n hospitals resulting from the the from resulting hospitals n 2018F 101.5 35.0 38.0 98.5

DSI is estimated to estimated is DSI s . From 2H15, the the 2H15, . From

Page Page 21 of of

5 s in in s We We

27 in in

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 thein range of 12.7x and21.6x. investment rating. combination with the value result Sinopharm PER against market share andbecom healthcare reform, we believe Our gain andgain growth boom. 3) The c reform benefit from further industry consolidation triggered by the gradual implement nationwide network and is the industry leader enjoying the biggest domestic market share. 2) The Company Innovative business sector. 4) The retail pharmacy of Sinopharm is expected to achieve high growth andimprove margins thein future. 5) Se Source: Pharma Australian Pharma Sigma Ltd Co Suzuken Corp Holdings Alfresa Corp Holdings Medipal Celesio WBA Inc Cos Patterson Inc Schein Henry Corp Amerisourcebergen Inc Health Cardinal Mckesson Corp Sinopharm Pharma Australian Pharma Sigma Ltd Co Suzuken Corp Holdings Alfresa Corp Holdings Medipal Celesio WBA Inc Cos Patterson Inc Schein Henry Corp Amerisourcebergen Inc Health Cardinal Mckesson Corp Sinopharm Table Peers Comparison Investment highlight of Sinopharm includes: VALUATION e

Company Company target price is HK$39. e -3 Bloomberg, , las

: especially the two-invoice system, new version GSP and tax reform, which provides Financial t

page

has

the

Guotai Junan International. Junan Guotai

relatively r

PDCO US PDCO PDCO US PDCO typical leading pharmaceutical distributors and retailers among the world. C CLS1 GY CLS1 GY CLS1 disclaimer

HSIC US HSIC HSIC US HSIC WBA US WBA US MCK US MCK HK 1099 US MCK HK 1099 CAH US CAH US CAH Stock Stock ABC US ABC ABC US ABC Code Code 7459 JP JP 7459 JP 9987 JP 2784 JP 7459 9987 JP JP 9987 JP 2784 Current price level is equivalent to API AU SIP AU API AU SIP AU

Comparison es

such as financial leasing and e-commerce offer

Currency Currency ing high

AUD AUD EUR USD USD USD USD USD USD HKD AUD AUD EUR USD USD USD USD USD USD HKD

JPY JPY JPY JPY JPY JPY one of the , representing89, 19.0

that marg

Last price Last

of Sinopharm helps maintain stable margins in maintain helps omprehensive product portfolio Sinopharm of 3,825.00 3,825.00 2,030.00 1,855.00 190.820 190.820 102.480 104.730

171.56 171.56 150.13 of Sinopharm ing 0.088 0.088 0.051 4.050 2.260 5.780 3.660 6.370 1.678 25.70 86.38 45.45 91.51 81.37 36.55

1.91 1.91 1.15 15A n.a. n.a. Sinopharm will continue to solidify its leading position in China through picking up more

from DCF from s

HKD mil HKD Market Market 723,799 723,799 105,473 154,350 199,260 247,132 101,137 292.130 292.130 158.990 135.890

EPS leading global Cap 27,029 27,029 32,622 31,015 42,733 34,544 as well as growth potential with relatively low gearing ratio and 0.106 0.106 0.050 1.933 3.850 1.930 6.270 6.730 4.360 9.820 1.888 5,549 7,354

16F

214.655 214.655 126.000 129.508 12.662 12.662 Gross 0.125 0.125 0.063 1.850 5.009 2.302 7.249 5.837 5.421 2.156 , we apply we a, 19.0x FY17 PER with TP of HK$39.

13.1 13.1 10.7 26.0 27.1 28.3 15A 17F 9.0 9.0 9.1 6.8 7.0 2.6 5.6 6.4 8.2

margin (%) margin

1) Sinopharm - - 11.3 99.5 13.6 15.6 20.1 11.8 12.4 12.4 10.9 25.5 24.6 27.9 15A 17. - 16F n.a. n.a. n.a.

x FY17Fx PER 4.1 4.5 7.0 9.4 9.4 9.1 7.7 7.2 2.9 5.4 6.0 8.1 7.1 EPS ( YoY %)

pharmaceutical distribution

- x 20.5 53.1 55.1 29.8 19.1 54.2 12.5 14.6 12.5 12.5 25.0 23.6 28.1

- - 16F 17F n.a. n.a. n.a. 8.5 2.0 4.9 8.0 9.3 7.0 7.1 2.9 5.0 5.6 8.1

FY17F PER. FY17F

- - -

17.9 26.0 20.7 30.1 19.3 15.6 13.3 24.3 28.9 14.2 26.5 15A - - 17F Operating margin (%) margin Operating 2.0 2.0 2.4 0.7 1.2 1.1 0.9 4.2 7.8 6.9 0.3 2.1 1.7 4.0 4.7 4.3

is theis only pharmaceutical distributor in China with 24,958.0 24,958.0 38,602.0 45,120.0 12,554.0 6,095.0 6,095.0 2,612.0 3,985.0

464.3 464.3 349.1 893.1 678.2

andFY18F 16.7x PER 89.3 89.3 85.6 15A long 16F 2.2 2.2 2.3 1.3 1.8 1.4 2.9 5.1 6.5 6.7 1.0 2.0 1.9 4.0

FY2014-present forward PER band of Sinopharm is

EBITDA 40,174.0 40,174.0 56,139.0 54,742.0 12,883.6 -term growth potential. 7,719.0 7,719.0 1,917.9 3,100.0 4,430.0 109.3 109.3 732.8 430.1 941.4

90.0 90.0 16F 17F

2.3 2.3 2.4 1.0 1.2 1.3 2.5 6.0 6.6 7.3 1.3 2.2 2.0 4.1 ation

34,450.0 34,450.0 40,800.0 53,333.3 14,490.7 and 9,404.6 9,404.6 1,055.6 2,426.0 3,318.3 4,624.8 EBITDA margin margin EBITDA (%) 120.4 120.4 111.0 730.0 423.8

of multiple policies related to healthcare healthcare to related policies multiple of 15A 17F 2.6 2.6 2.7 1.3 1.6 1.6 2.1 5.9 8.9 8.4 0.5 2.5 2.2 4.5 retail giants.

- 369.3 - - - - EBITDA %) (YoY 10.6 14.2 24.6 30.2 11.4 25.6 14.7 16.2 11.8 15A - 16F n.a.

3.0 2.8 2.8 2.5 1.8 2.2 1.8 3.4 6.6 8.0 8.1 1.3 2.6 2.3 4.4 5.6

omparing with

182.8 Sinopharm with market share . 22.3 61.0 45.4 21.3 57.8 26.6 23.2 18.7 11.2 16F 17F 5.2 5.4 2.6

3.0 3.0 2.7 1.6 1.6 1.7 3.1 7.4 7.5 8.7 1.5 2.5 2.3 4.5

With theWith deepening of the

We We benchmark our target - - 10.2 23.3 27.3 21.8 12.1 26.5 12.5 14.2 15A - - - 17F n.a. n.a.

7.0 4.4 , 1.2 1.2 1.7 1.0 0.9 0.8 4.1 5.7 4.5 1.2 0.8 1.7 2.6 0.4 1.5 Net margin (%) margin Net

with the “Accumulate”

D/Y(%) stable cash flow

16F 16F 3.4 3.4 6.1 1.8 1.5 1.6 3.3 1.8 2.1 0.0 1.7 2.1 0.7 1.6 1.3 1.4 1.3 1.4 1.0 1.8 3.6 3.5 4.4 1.0 1.2 1.2 1.8

its globalits peers,

the distribution

18.0 18.0 23.0 13.1 12.8 13.7 13.3 22.4 23.5 27.4 13.6 18.7 15.3 19.4 16A

17F

1.5 1.5 1.6 1.0 1.1 1.0 1.3 4.3 3.9 4.8 0.8 1.3 1.4 1.8 continues to to continues

PER Page Page

(11.7) (31.6) (48.7) (26.2) Net Gearing Net

15.2 15.2 18.3 17.8 16.1 14.3 13.9 17.2 19.7 23.7 15.7 15.0 11.9 17.0 20.6 28.5 19.0 17.3 62.0 39.2 17A 14A n.a.

8.9 8.9 9.6 22

of of ROE ROE (34.5) (45.4) (36.9) (%) 104.0 104.0 215.1 . (5.9) 15.0 15.0 13.7 12.7 17.9 22.3 26.7 14.1 14.0 35.4 36.4 21.3 21.5 14.0 47.5 21.9

15A 16F 27 9.9 9.9 9.0 7.6 9.7 7.6

In In

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se Source: Weighted Average Simple Average Australian Pharma Sigma Pharma Suzuken Co Ltd Alfresa Holdings Corp Medipal Holdings Corp Celesio WBA Patterson Cos Inc Henry Schein Inc Amerisourcebergen Corp Cardinal Health Inc Corp Mckesson Global Pharmaceutical Distributers and retailers Weighted Average Simple Average China Meheco Yifeng Pharmacy Laobaixing Pharmacy HongxiangYN Yixintang Tasly Pharma Tongrentang Beijing Zhejiang Zhenyuan Zhejiang Huatong Sinopharm Accord Nanjing Pharma LiuzhouGX Pharma Realcan Pharma China NationalMed Jointown Pharma Huadong Medicine Shanghai Pharma China Weighted Average Simple Average Wanjia Group Kingworld Medicines Sinco Pharma Universal Health Int Charmacy Pharm China PioneerPharma GZ Baiyunshan Pharma Shanghai Pharma China ResourcesPharma Sinopharm HK Company Table e -

Listed PharmaceuticalDistributors and Retailers th - e

-4 Listed Pharmaceutical Distributors and Retailers Bloomberg, las

: Peers Group Comparison t

page

- -

A H

Guotai Junan International. Junan Guotai r

disclaimer

Stock Code Stock 600056 CH 600056 CH 603939 CH 603883 CH 002727 CH 600535 CH 600085 CH 000705 CH 002758 CH 000028 CH 600713 CH 603368 CH 002589 CH 600511 CH 600998 CH 000963 CH 601607 PDCO US PDCO CLS1 GY HSIC US WBA US 1110 HK 6833 HK 2211 HK 2289 HK 1345 HK 2607 HK 3320 HK 1099 HK MCK US CAH US CAH ABC US ABC 9987 JP 2784 JP 7459 JP 401 HK 874 HK API AU SIP AU

Currency

HKD EUR USD USD USD USD USD USD CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY HKD HKD HKD HKD HKD HKD HKD HKD HKD AUD AUD JPY JPY JPY

of Sinopharm Last price

1,855.00 3,825.00 2,030.00

171.56 150.13 36.55 25.70 86.38 45.45 91.51 81.37 22.13 29.26 45.34 20.69 38.30 30.59 13.02 29.30 70.59 78.14 35.19 32.87 19.80 78.70 21.69 22.30 20.50 8.12 0.44 1.21 0.58 0.31 7.80 2.69 8.52 1.91 1.15

Market Cap

HKD mil 101,137 723,799 105,473 154,350 199,260 247,132 31,015 42,733 34,544 26,682 11,975 13,660 12,154 46,696 47,340 32,216 12,551 25,978 17,759 36,798 43,164 62,767 47,356 62,766 53,544 27,029 32,622

4,909 4,629 8,223 3,587 5,549 7,354 285 753 937 744 842

118.4 46.4 42.2 80.0 30.7 46.8 31.1 20.3 18.0 17.8 20.7 16.0 19.6 16.8 17.9 15.5 13.7 21.8 22.3 21.9 21.6 22.5 20.0 19.8 17.7 21.3 20.1 29.7 22.2 23.6 39.3 48.0 36.5 51.0 46.3 31.1 27.8 47.4 77.9 33.6 15A n.a. n.a. n.a. n.a. PE (fiscal year) (fiscal PE

38.8 38.6 38.1 27.4 18.0 18.0 15.9 13.2 10.5 15.9 20.3 15.0 17.2 19.4 19.6 17.9 18.0 23.0 13.1 12.8 13.7 13.3 22.4 23.5 27.4 13.6 18.7 15.3 31.6 34.0 25.7 46.8 40.8 30.5 27.8 42.4 33.4 16F n.a. n.a. n.a. n.a. n.a. n.a. n.a.

30.3 26.1 30.8 22.1 16.0 16.2 14.5 13.2 14.1 19.7 13.5 15.4 17.0 16.3 16.6 15.2 18.3 17.8 16.1 14.3 13.9 17.2 19.7 23.7 15.7 15.0 11.9 25.7 26.9 20.6 35.0 33.6 20.7 23.9 36.5 26.8 17F n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8.8

11.5 30.7 15A n.a. 3.2 6.6 6.1 5.2 3.8 1.9 2.3 1.8 1.0 1.1 0.2 1.7 3.0 2.9 1.5 1.8 2.8 6.0 5.0 1.8 2.2 0.9 1.3 1.1 2.1 3.1 3.1 4.9 4.3 4.4 5.4 5.4 4.1 6.6 5.5 4.7 5.5 5.9 3.4 7.7 4.7 PB (fiscal year) (fiscal PB

16F n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.6 3.3 5.9 1.8 2.0 1.6 1.3 0.6 1.7 2.1 1.5 1.2 2.6 3.9 3.1 1.7 2.1 1.0 1.2 1.0 1.9 3.1 3.1 4.9 9.5 4.0 3.8 4.1 4.4 3.4 7.1 5.0 4.3 4.9 5.4 3.5

17F n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.2 3.1 5.2 1.6 1.8 1.4 0.5 1.2 2.0 1.4 1.2 2.3 3.6 2.8 1.7 2.2 0.9 1.2 1.0 1.4 3.1 3.0 4.1 7.8 3.7 3.5 3.7 4.0 3.0 6.6 4.5 4.2 5.0 3.2

ROE(%)

104.0 (5.6) 10.2 24.3 10.0 11.8 10.0 11.6 20.0 12.3 10.0 14.1 25.4 21.3 15.0 13.7 12.7 17.9 22.3 26.7 14.1 14.0 13.5 15.4 12.7 14.8 17.8 13.5 13.1 16F n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8.9 9.0 8.5 9.9 9.0 7.6 9.7 7.6

ROA(%)

(2.1) 10.4 10.9 16F n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.1 2.4 4.3 4.4 5.1 5.0 8.1 7.8 4.0 3.8 3.1 5.2 4.4 3.7 4.7 2.6 2.8 2.1 5.0 5.9 5.8 7.7 4.6 4.4 4.1 6.3 6.4 8.4 7.2 6.9 9.4 6.4 5.9

Page Page

EV/EBITDA

23 15.4 16.5 10.3 17.5 10.0 10.3 11.9 11.5 12.9 14.4 14.4 14.9 16.6 15.7 17F n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 9.9 9.5 5.4 6.6 8.1 9.4 7.7 6.3 7.4 7.0 8.4 8.5 8.6 8.4 of of

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017

Se Source: Share Perpetual growth rate WACC E/(E+D) After tax cost of debt Effective tax rate Cost of debt Cost of equity Beta Marketrisk premium Risk WACC Our DCF model suggests a ValuationDCF Source: Figure Table      model assumptions are as follows.

10.0 12.0 14 16 18 20 22.0 24.0 th -

free rate RMB Exchange Rate = 0.89 Terminal growth rate = 3.0% Beta = two = Beta Market risk premium = average of HSI capital gain during recent 15 years + current dividend yield, 9 Risk free rate = yield of current 10-year HK Government bond, 1.50% . . . . e -5 0 0 0 0

the Company, Bloomberg, International. Junan Guotai Bloomberg, o

- las Calculation 3 : DCF Valuation utstanding(mn) 6 t

: page Historical Forward PER of Sinopharm

Forward PE fo Guotai Junan International. Junan Guotai -yearadjusted betaBloomberg from r

disclaimer

of Sinopharm

4 22.85% 11.01% 2,767.1 3.00% 7.05 3.09 4.00 9.89% 1.50% 9.97 per share value 0.96

% % % %

Average Forward PE Average Forward

(HKD) share NAV per NAV (Minority ( Net PV of PV of mn) (HKD Calculation DCF WACC of HK of

d ebt)/ t f erminal ree

41.22, representing 19.6 i

nterest) c c 5.3% 8.3% 7.8% 7.3% 7.0 6.3% 5.8% ash ash

% v

alue f

low to the

Average x SD +Forward 1 PE

25.53 28.71 32.53 37.20 43.06 50.62 60.74 2.6% SensitivityAnalysis on Valuation f

irm (FY1 irm

x FY1 x 29.94 34.05 39.12 45.54 53.94 65.40 26.55 2.8% 7 -

FY20) Perpetual growth rate growth Perpetual

7 F PER or

31.27 35.70 41.22 48.30 57.70 70.79 27.64 3.0%

17.4 Average Forward PE PE Average Forward

8 x FY1

32.71 37.51 43.55 51.39 61.99 77.10 28.81 3.2% . 8

F PER.

1 x SD 1

Page Page

Our DCF DCF Our (14, (11, 1 11 34.27 39.49 46.13 54.88 66.93 84.59 30.07 3.4% 14 20, 24 41 9

474 152 , , of of 071 042 65 . 22

27 5 ) )

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se on PRC Government is making every effort to advance healthcare reform Further drug price pressure will be triggered by recent government policies related to the healthcare reform. The S RISK have control of the proportion of drug sales to total revenue of hospital threat to traditional pharmaceutical distributors their professional managementof logistic S.F. Express responsibleis for the delivery of all the pharmaceutical products that cooperation with S.F. Express announcedthe set are entries New needed to fund increasing working capital. payment from hospital will result in additional pressure hospitals zero mark result of the implementation of ze mark ro hospitals to more than 40 pharmaceutical distributors has been in arrear since the beginning of 2016 in Hunan province as a Possibilities its marginswill industry combinational effect. Even though it believedis etc. theWith gradual implementation of these policies, further drug price cut enterprises expectedis to deliver atotal of RMB400 has been focusing on third-party logistics and pharmaceutical cold chain since 2014.The pharmaceutical cold chain business pharmaceutical industry e

patients by cutting down drug prices th e tried to transfer those loss las

forwards, if Sinopharm cannot seize more market share to offset the negative impact of drug price cut , t

especially public hospitals, the Company may be subject to further deferred payment from hospitals. page -up and two-invoice system in ,

especially large logistics companies logistics large especially that fo be hit r disclaimer

coming in from the logistics industry. DSO DSO .

, going back will

further devastate, raising financial burden es

to pharmaceutical manufacturers or distributors. In consideration to

from . The government has launched aset of polices including

s ass well as nationwide distribution networks, we think logistics companies will be as early as in 2014 with the establishment of its pharmaceutical logistics division. It

-up policies. Those hospitals suffered from profit loss owing to these moreprovinces in

m illio ,

which cannot be ignored. ,

-up of its third pharmaceutical logistics center program. Acc will enter into the pharmaceutical distribution industry in the future. In view of n in 2016n in by S.F. Express. It is expected logistics that more third-party that that the government also is pushing consolidation of the pharmaceutical

on the Company's operating cash flow and more borrowings will be

the the In November 2016, global pharmaceutical giant, Sanofi s , zero, mark next few years and the Company's further exposure to ,

of which one of the final goals is to reduce the burden

-up policy, essential drug list, provincial tender s s .

will be un It is reported that payment from 20 public

Sanofi. S.F. Express enter avoidable with the

the implementation of

consideration two invoice system, system, -invoice o s rding to Sanofi,

on its revenue,

The delay of polic Page Page s

into into ies 25 to of of

and , the the

27 s in in a ,

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se Source: BVPS (RMB) Total Liabi Equity Total Minority Interest Equity to Shareholders C Other current liabilities Trade payables Short N Other non Long Total Assets Current Assets Other current assets Trade receivables Inventories Cash and cash equivalents Non Other non PP&E Year end Dec (RMB mn) (RMB) DPS Dividend EPS (RMB) Profit Net Minority Interest Tax After Profit Taxation Profit before tax Share of profit of associates Net finance costs Other gain Profit Opt. Administrative expenses Distribution expenses Other income Profit Gross Cost of sales Revenue Year end Dec (RMB mn) Financial Statements and Ratios

urrent on

e - -

current current Assets - - th term debts

term debts e L

iabilities the Company, the - - las

lity and Equity and lity - current liabilities current current assets

net

t iabilities

page

disclaimer Guotai Junan International. Junan Guotai

Income Income

Balance Sheet -

128,656 128,656 110,272 183,803 200,131

36,290 27,382 86,020 54,724 25,233 66,098 20,309 15,232 18,383 11,281 16,328 2014A 2014A - - - -

0.332 1.112 8,908 6,063 6,346 2,124 4,223 8,633 7,102 2,875 1,677 4,552 1,383 5,935 2,129 7,862 3,547 5,123

10.6 858 163 204

39 Statement

- 138,267 138,267 116,752 208,452 227,069

40,656 10,604 30,052 94,682 59,038 28,204 64,624 22,349 19,919 21,515 13,874 18,618 2015A 2015A - - - - 0.410 1.359 7,440 2,929 2,321 9,861 7,641 1,135 3,761 1,936 5,696 1,713 7,410 1,987 9,169 3,695 5,998 10.9

608 165 244 62

- 160,144 105,804 160,144 136,957 235,625 256,337

46,443 12,882 33,561 67,490 30,353 11,149 76,538 23,485 25,785 23,188 15,127 10,484 20,712 2016F 2016F - - - - 0.503 1.678 7,961 7,897 2,541 5,356 8,060 1,393 4,644 2,236 6,880 2,038 8,917 1,801 4,101 6,408 12.1 227 282 7

177,654 116,402 177,654 152,278 265,895 289,268 52,836 15,498 37,338 75,729 31,773 12,518 83,550 27,945 28,264 25,377 16,799 11,821 23,373 2017F 2017F - - - -

0.560 1.868 8,899 8,417 2,810 5,607 8,578 1,551 5,170 2,489 7,659 2,268 9,927 2,166 4,628 7,232 13.5 263 308 9

- 300,036 326,410 201,066 131,812 201,066 172,978

59,852 18,241 41,611 86,208 35,646 14,342 97,987 29,596 31,052 28,088 18,983 11,185 13,343 26,374 2018F - - - - 2018F 0.631 2.105 9,105 1,747 5,825 2,804 8,629 2,556 2,463 5,223 8,160 9,958 9,401 3,111 6,291 15.0 295 352 10

Operating Margin (%) (%) Margin EBITDA Gross Margin (%) Cash at end of Yr FX Cash at bgn of Yr Net increase in cash Financing Cash Flow Others Dividends paid Debt paid/raised Issues of shares Investing Cash Flow Others Capex Operating Cash Flow Income Changes in WC Other D&A PBT Year end Dec (RMB mn) Interest Coverage (x) Current Ratio (x) (%) Liabilities/Assets Net Debt/Equity (%) ROIC (%) (%) ROA (%) ROE Profit Net Operating Profit EBITDA Revenue Payable Days Receivable Days Inventory Days Dividend Payout Ratio (%) Net Profit Margin (%)

djustments a

djustments t

ax ax

p aid

Growthand Profitability(%)

Margin and Efficiency and Margin Cash Flow Statement Flow Cash

Financial Ratios Financial

15,232 14,002 2014A 2014A 2014A 2014A ------71.8% 36.8% 13.7% 11.7% 27.8% 28.8% 27.9% 19.9% 29.8% 107.5 1,225 2,518 1,183 4,391 4,358 1,180 3,177 5,561 1,393 2,033 2,217 5,935 3.9% 4.4% 8.2% 2.5% 1.4% - 98.2 36.7 3.6x 1.3x 668 835 22 5

19,919 15,232 13,560 2015A 2015A 2015A 2015A ------70.6% 14.8% 16.1% 13.1% 30.8% 16.6% 16.9% 13.5% 30.2% 105.1 4,636 7,328 2,596 3,874 1,596 1,646 1,771 4,992 1,925 1,005 7,410 9.0% 4.6% 8.2% 2.8% 1.7% - 99.6 37.3 4.5x 1.2x 858

51 49 0

25,785 19,919 2016F ------2016F 71.0% 15.8% 2016F 16.0% 14.6% 23.5% 14.3% 13.0% 12.9% 2016F 30.0%

100.5 5,866 3,466 2,182 1,135 6,782 1,191 1,742 3,591 2,122 5,808 1,567 1,037 8,917 4.1% 4.6% 8.1% 3.1% 1.8% 98.0 35.5 5.5x 1.3x 551 0 0

28,264 25,785 Page Page 2017F ------2017F 70.3% 10.5% 2017F 16.4% 14.6% 11.3% 12.7% 12.3% 12.8% 2017F 30.0%

101.0 2,480 2,614 2,656 1,393 1,435 2,645 1,997 7,738 2,363 2,824 1,893 1,105 9,927 4.1% 4.6% 8.1% 3.1% 1.8% - 98.3 35.3 5.2x 1.3x 648 0 0

31,052 28,264 11,185 70.2% 12.0% 2018F 16.2% 14.8% 12.7% 12.9% 12.4% 12.8% 2018F 30.0% 2018F ------2018F of of 101.5 2,788 3,081 1,551 4,430 2,492 2,141 5,482 2,662 6,384 2,159 1,184 3.1% 1.8% 4.1% 4.5% 8.1% - - 98.5 35.0 5.1x 1.3x 202 351 27 0 0

Company Report Sinopharm 国药控股 (01099 HK) 2 March 2017 Se INTERESTS OF DISCLOSURE Horizon: 6to 18 Time months Hong Hang Kong Benchmark: The Seng Index Definition Rating Sector Horizon: 6to 18 Time months Hong Hang Kong Benchmark: The Seng Index Company Rating Definition (1) (4) (2) (6) (5) (3) research reports, including investment banking, investment services investment banking, investment including reports, research Limited (" (Hong Kong) by or Guotai nan Securities purchase does not to or Ju offer Report acquire, for aninvitation Research securities subscribe This constitute DISCLAIMER © 2017 such within jurisdiction. requirement or Guotai and any group registration Junan licensing to its companies subject would or which applicable law to or or regulation would becontrary use ility availab publication, where distribution, such any jurisdiction in or or resident by,of or entity to located any a or who use person is distribution citizen not Research is or directedfor intended at, Report This decision. to prior any investment advisers their own consult financial and where necessary r and its objectives investment the and comprehend understand should Investors contain. may uncertainty so situation, mutable unpredictable and with inherently andeconomic derived assumptions ofconditions and the the political from future forecasts estimates forward some - contain Report Research may This and herein. data information of the and accuracy completeness the guarantee not anddat of has the ensure been information the to accuracy effort made best Though of Guotai and by groups banking made Junan. decisions asset investment or investment the tomanagement opinions be contrary Any companies. ofJunan Guotai group of executives professional and other dealers persons, w or in orally expressed strategies or investment opinions to or becontrary report differ this in may expressed opinions Any or inves Tel.: (852) 2509- 27/F., Low 181 Queen’s Plaza, Millennium Grand Block, Hong Road Central, Kong. Website: www.gtja.com.hk e Underperform Neutral Outperform Rating Sell Reduce Neutral Accumulate Buy Rating th The The andtheirassociates Analysts Report. JunanGuotai andits group companies have of 1% of than more capitalization the market (02886 Limited Company The andtheirassociates Analysts Report. There is no is There Report. and groupJunan Guotai as have its an not companies employed serving an individual officer making not are group andits companies Junan Guotai 12 preceding the months. within for Except e

las t proprietarily). Junan Guotai

t page

9118 Fax: (852) 2509- fo SMI Holdings Group Limited (00198 HK) Group Holdings Limited SMI r disclaimer Securities (Hong Kong) Limited. (Hong Limited. Kong) Securities Reserved. Rights All

Guotai Junan"). GuotaiGuotai Junan Junan"). and its group companies domay business relates to that coveredcompanies in is Research Report associated with Guotai with Guotai group ReportJunan andits Research associated is companies. officer th of in the issuer mentioned

or the fundamental outlook of the unfavorable. is or outlook fundamental or the company sector < Performance Relative of the unfavorable. is or outlook fundamental or the company sector is Performance Relative of the neutral. is or outlook fundamental or the company sector is Performance Relative of the is or outlook fundamental favorable. or the company sector 5%is to Performance 15%; Relative of the or outlook fundamental or the company Performance Relative Definition or the fundamental outlook of the unfavorable is . outlook fundamental or the sector Performance Relative th or Performance Relative of the is . outlook fundamental favorable or the sector Performance Relative Definition )

and Link Holdings Limited (08237 HK) Limited Holdings and Link e fundamental outlook of the neutral is outlook e fundamental sector

do not do not financial interests in relation to the relation issuer in interests have any financial do not

7793 serve

not the issuer

as an officer of the had

is is >15%; < >5%; - - 15%; 5%; - - -

5% to to 5% 5% to 5%; 5% to 5%; investment banking relationships with banking theinvestment relationships issuer

, Guotai JunanGuotai , in mentioned

a market in the the in a market - 15%; ,

etc. (for example, the placing agent, lead manager, sponsor, underwriter sponsor, lead manager, agent, placing the example, (for etc.

issuer this Research Report. Research this

, International Holdings Limited (01788 Holdings International al to or to equal hold donot group companies andits Junan Guotai

securities in respect of the issuer mentioned in this Research Research this in issuer mentioned of respect the in securities sector is favorable. is sector mentioned in this Research Report. Research in this mentioned .

a contained in this Research Report, Guotai Guotai does Report, inJunan this a Research contained

opinions expressed in this report may differ or differ or report may this in expressed opinions