China Healthcare Sector - DBS Bank

www.dbsvickers.com

ed- JS / sa- PY

Revolution of Chinese herbal medicine Concentrated Chinese medicine granule (CCMG) is

replacing herbal medicine for its convenience. More provincial medical insurance reimbursable drug lists are including CCMG and hospitals have stronger incentive to promote it. Hence, we expect a strong 30% CAGR for the CCMG market in 2014-19

Due to the strong market growth, we initiate coverage with a BUY on two major CCMG makers: China Traditional Chinese Medicines (“CTCM”, 570 HK) and China Resources Sanjiu (“CR Sanjiu”, 000999 CH)

Expect 30% CAGR for CCMG market in 2014-19. Derived from herbs, CCMG dissolves instantly in water as a drink, unlike herbal medicines which require a long decoction process. This advantage enabled the CCMG market to grow at a 41% CAGR in 2010-14. China’s CCMG market only equalled to 4% of the herbal medicine market in 2014 (HK: 11%). Hence, there is ample room to grow. The number of provinces that include CCMG in their medical insurance reimbursable drug lists has been increasing (at least 15 in Dec 2014). We believe the increase will continue. Also, we believe public hospitals have stronger incentive to promote CCMG. Because they are facing financial difficulties and CCMG can compensate them. In the past, they were allowed to mark up by 15% over procurement costs when selling drugs. That generated >50% of their net income. But since 2014, the China government has been removing the mark-up. By 2017, all public hospitals will not be allowed to mark up and thus, their net income will be impacted. CCMG is still allowed to be marked up to generate net income. So, we believe they will sell more CCMG to compensate. Due to the above factors, we project the CCMG market CAGR in 2014-19 to be 30%.

BUY CTCM and CR Sanjiu. There are only five licensed CCMG makers. CTCM, CR Sanjiu, Chase Sun (300026 CH) are the major players, with a collective 86% market share in 2014 (individual market shares : 53%, 11%, 22% respectively). We recommend to BUY CTCM (TP: HK$11.3) and CR Sanjiu (TP: Rmb36.2). Besides benefitting from CCMG’s market growth, with the support from their parent companies (state-owned enterprises under the Central government), these two companies should be able to accelerate earnings growth through M&As. Although Chase Sun can benefit from the expansion in the CCMG industry, its current share price largely reflected its positives. Thus, we initiate coverage on Chase Sun (TP: Rmb21.4) with a HOLD rating.

HSI: 25,056

ANALYST Mark KONG CFA, +852 2820 4619 [email protected]

Recommendation & valuation

Company PriceT arget

Price RecomMktCap

15FPE

16FPE

F Y14-17FEPS

Local$ Local$ US$m x x %

China TraditionalChinese Medicine(570 HK)

5.76 11.3 Buy 3,185 24.4 14.1 35.6

CR Sanjiu 'A'(000999 CH)

26.24 36.2 Buy 4,137 21.5 19.2 13.0

Tianjin Chase Sun'A' (300026 CH)

20.11 21.4 Hold 2,953 33.0 26.7 21.0

Source: Thomson Reuters, DBS Vickers

DBS Group Research . Equity 17 July 2015

China / Hong Kong Industry Focus

China Healthcare Sector (Concentrated Chinese medicine granule)

Refer to important disclosures at the end of this report

Industry Focus

China Healthcare Sector

Table of Contents

What is concentrated Chinese medicine granule (CCMG)? 3

Growth drivers of CCMG in China 5

All licensed players will benefit from the growth of CCMG market. 7

BUY CTCM (570 HK) and CR Sanjiu (000999 CH) 8

Will China allow more players into the CCMG industry? 10

Stock Profiles 14

China Traditional Chinese Medicine (570 HK) - BUY 14

CR Sanjiu 'A' (000999 CH) - BUY 36

Tianjin Chase Sun 'A' (300026 CH) - HOLD 50

Industry Focus


What is concentrated Chinese medicine granule (CCMG)?

There are three forms of Chinese medicines: finished Chinese medicines, herbal Chinese medicines and concentrated Chinese medicine granule (CCMG).

Finished Chinese medicines: These are medicines of herbal/animal/mineral origins, customarily used by the Chinese, formulated into dosage form, with fixed combination of ingredients and efficacy. Market size of these medicines was Rmb766.6bn in 2014. CAGR in 2010-14 was 24% (see table below).

Chinese herbal medicines: These are basically herbs, which are cleaned and cut into pieces for sale. Radix Paeoniae Alba (白芍) and Radix Astragali (黃芪) are two examples. Unlike finished

Chinese medicines with fixed combination of ingredients, the doctor can prescribe different combination of herbal medicines according to the different ailments of the patients. It provides more flexibility. Doctors/patients need to decoct the herbs into soup for use. Market size of these medicines was Rmb196.8bn in 2014. CAGR in 2010-14 was 35% (see table below).

Concentrated Chinese medicine granules: This is an advanced form of Chinese herbal medicines. Manufacturers convert the processed herbs into granules, which can dissolve instantly in hot water for drinking. The doctor is able to prescribe different combinations of CCMG according to the different ailments of the patients as well. Market size of these medicines was Rmb7.8bn in 2014. CAGR in 2010-14 was 41% (see table below).

Three forms of Chinese medicines - Retail sales value* Finished Chinese medicines

Re ta i l sa le s va lue(Rmb bn) 2010 2011 2012 2013 2014 CAGRFinished Chinesemedcinies

321.5 430.1 524.0 637.2 766.6 24%

Herbal Chinesemedcinies

58.9 90.9 115.9 156.4 196.8 35%

Concentrated Chinesemedcinie granules

2.0 3.1 4.6 6.3 7.8 41%

Sources: Euromonitor

*“Retail sales” are sales from medical institutes to patients

Sources: www.chinapress.com.my

Industry Focus


Radix Paeoniae Alba (白芍) in traditional Chinese herbal

medicine form

Radix Paeoniae Alba (白芍) in CCMG form

Sources: www.hangtiandanshen.com Sources: www.hnminda.com

Radix Astragali (黃芪) in traditional Chinese herbal

medicine form

Radix Astragali (黃芪) in CCMG form

www.hangtiandanshen.com Sources: www.hnminda.com

Industry Focus


Growth drivers of CCMG in China

In 2001, the Central government issued “Provisional Regulations on Management of Concentrated Chinese Medicine Granules”, and since then, CCMG has been undergoing a trial production and user testing phase. CCMG can only be sold though hospitals (class 2 and above). It is not included in the national medical insurance reimbursable drugs list. On average, its price is 20-30% higher than herbal Chinese medicines.

Even with the above limitations, CAGR of the CCMG market in 2010-2014 was still very strong at 41%, 6ppts and 17ppts above the CAGR of Chinese herbal medicines and finished Chinese medicines respectively. We believe the momentum will continue with projected CAGR of 30% in 2014-19 (see the following chart), premised on:

1) Gradual replacement of herbal Chinese medicines. Relative to Chinese herbal medicines, CCMG is more convenient for both patients and the selling agency (medical institutes).

For patients: Chinese herbal medicines require a complicated and time-consuming decoction process, while CCMG can be instantly dissolved in hot water for drinking.

For medical institutes: Storage of CCMG is easier. In terms of size per unit, it is smaller. Radix Paeoniae Alba (白芍) and Radix Astragali (黃芪) are good examples as shown above. Thus, the area for storage is smaller (see the following pictures). On the other hand, Chinese herbal medicines, when stored for a long period of time, are easier to become mildewed, damp and/or damaged by worms. CCMG does not face this problem.

Also, as a planted herb, Chinese herbal medicines may contain heavy metal and pesticide residues which are harmful for patients. CCMG does not have this problem as the useful ingredients are already extracted from the herbs, heavy metal and pesticide residues are removed during the extraction process.

In Hong Kong, the market size of CCMG in 2010 equaled to 7.3% of herbal Chinese medicine. In 2014, this grew to 11.1%, benefitting from its convenience. In Mainland China, this ratio was 4% in 2014 (2010: 3.4%). Based on the Hong Kong experience, there is plenty of room for the CCMG market to grow in the Mainland.

2) More and more provincial medical insurance reimbursable drugs lists include CCMG. Beijing included it in 2009, Anhui in 2010, Shenzhen of Guangdong in 2011, Chongqing in 2012, and Fujian in 2013. As of end-2014, at least 15 provinces / municipalities and autonomous regions have accepted CCMG in their medical insurance drug catalogues. Due to its convenience, we believe more and more provinces will include CCMG in their reimbursable drugs lists which will drive growth.

3) Public hospitals have stronger incentive to push CCMG sales compared to the past. We estimate that over 50% of public hospitals’ net income is from drug sales. In the past, drugs for sale were allowed to be marked up by 15% relative to their procurement costs. Starting from 2014, the central government has been gradually removing the mark-up. By 2017, all public hospitals at city and county levels will not be allowed to mark up drugs for sale. Without the mark-up, net income of public hospitals will be negatively impacted and they would need to look for other sources to compensate. Chinese herbal medicines and CCMG are still allowed to be marked up for sale. This means that public hospitals can still generate net income by selling Chinese herbal medicines and CCMG. In view of declining net income, we believe public hospitals will have a stronger incentive (than before) to boost sales of Chinese herbal medicines and CCMG to compensate for the shortfall.

4) Increase in use of Chinese medicines in hospitals. According to “National healthcare service system planning (2015-2020)” (“The Planning”) issued by National Health & Family Planning Commission (NHFPC), we believe the number of medical institutes able to offer Chinese medicines will increase:

a) The government is targeting the number of Chinese medicine hospitals to be the same as general hospitals in rural area by 2020. At county level (rural area), there were 7,497 general hospitals and 2,058 Chinese medicine hospitals in 2012. Thus, we believe the number of Chinese medicine hospitals should increase from 2,058 in 2012 to 7,497 in 2020 at least, implying CAGR of 17.5%.

b) Based on the latest data we have, in 2012, only 47.1% of community health service centres and 27.6% of health clinics in villages had Chinese medicine departments. The Planning targets to raise this ratio to 100% by 2020.

Industry Focus


The medical institutes mentioned above are estimated to account for c.17% of the total revenue of all medical institutes in China currently. Their demand for Chinese medicines should increase. Legally, although CCMG can only be sold in hospitals currently (class two and above), we are convinced that the government will gradually allow the above medical institutes to sell CCMG as well. Not only due to its convenience compared to Chinese herbal medicine but also its flexibility relative to finished Chinese medicine. That will drive the overall demand for CCMG.

Mainland China's CCMG market (retail sales value) – Rmb m

1,995 3,105

4,623 6,271

7,829 10,178

13,231

17,201

22,361

29,069

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

2018

F

2019

F

CAGR (2010-14): 41%

RMB m

Projected CAGR (2014-19): 30%

Sources: Euromonitor, DBS Vickers

Storage of traditional Chinese herbal medicines Storage of CCMG

Sources: news.takungpao.com Sources: www.bjfsyy.com.cn

Industry Focus


All licensed players will benefit from the growth of CCMG market.

CCMG is a restricted industry in China. There are only five licensed players (see the chart and table below). We believe all of them will benefit from CCMG’s market growth, particularly CTCM because:

1) It has the largest market share (53% in 2014) implying that it also has the largest sales network to capture the growing demand;

2) In terms of CCMG’s contribution to earnings, CTCM is the largest. In 2015F/16F/17F, CCMG’s contribution to CTCM’s earnings is projected to be 34/64/66%. For CR Sanjiu (000999 CH), CCMG’s contribution is 9/11/13%. For Chase Sun (300026 CH), it is 56/55/58%.

CCMG market share in Mainland China (2014)

Tiangjiang Pharm (acquired by

China Traditional Chinese Medicine

"CTCM" 570 HK)53%

Chase Sun Pharm

(300026 CH)22%

Company P3%

Neo Green11%

China Resources Sanjiu

(000999 CH)11%

2014 industry sales*: Rmb5.5bn

Sources: companies, DBS Vickers

*“industry sales” are sales from the producers to distributor(s)(distributors then sell the CCMG to medical institutes)

Peers comparison

CT CM (570 HK )

(T iang jiang Pharm &G uangdong Y if ang )

Chase Sun Pharm(300026 CH)

Ch inaRec ourc es San jiu

(000999 CH) Neo G reenCCMG sales in China (2014), Rmb m 3,129 1,219 600 600*

CCMG gross margin in China (2014) 53% 78% 60% n/a

CCMG net margin in China (2014) 21% 21.8% 12.5%* n/a

CCMG net profit in China (2014), Rmb m 652 265 75* n/a

F ocus of sales network cov erage Eastern China Northern China Southern China Mid-Western China

Major CCMG production base(s) J iangy in(J iangsu prov ince)

Foshan(Guangdong prov ince)

Beijing

Tianjin(Targets tocommence

production in 2017)

Shenzhen(Guangdong prov ince)

- finished products

Huaibei(Anhui prov ince)

- extraction

Chengdu(Sichuan prov ince)

Total asset size, Rmb m (2014) 5,332 3,043 10,667 n/a

Net debt to equity (Dec 2014) 22% Net cash Net cash n/a

Number of products c.700 530 570 n/a


* Estimated by DBS Vickers

Industry Focus


BUY CTCM (570 HK) and CR Sanjiu (000999 CH)

We initiate coverage on CTCM and CR Sanjiu with BUY recommendations.

For CTCM, our BUY recommendation is based on:

1) Expect strong EPS CAGR of 36% in 2014-17 driven by its CCMG business (estimated to make up 34/64/66% of FY15F/16F/17F earnings) and exclusive Chinese medicines portfolio (seven exclusive Chinese medicines in five therapeutic areas with unique efficacy);

2) M&As to accelerate earnings growth. CTCM’s parent co, China National Pharmaceutical Group Corp (36% stake), a state-owned enterprise held by the Central government, has an extensive network in the industry. Leveraging on this, in last three years, CTCM identified and completed two acquisitions: Tianjiang Pharm in 2015 & Tongjitang in 2013 (an exclusive drug maker). These acquired companies became important revenue contributors to CTCM in the following year of the acquisition (>30% of revenue). M&As riding on parent company’s support is still a major future growth driver to accelerate its earnings growth.

On average, in terms of 12-month forward PE, the Chinese medicines makers (listed in Hong Kong and Mainland China) are trading at an average of 27x. We believe CTCM should trade at a 30% premium over peer’s average which is 35x, because:

1) CCMG is one of the few sub-sectors in the pharmaceutical industry that is enjoying strong growth (30% projected CAGR in 2014-19) and CTCM is the largest licensed player in this field;

2) It is able to accelerate earnings growth through M&As by leveraging on the support from parent co.

Based on 35x 12-month forward PE, we derive a TP of HK$11.3 for CTCM.

For CR Sanjiu, our BUY recommendation is based on:

1) Expect solid EPS CAGR of 13% in 2014-17 driven by its CCMG business, over-the-counter drugs (drugs sold through drug stores) and prescription drugs;

2) Potential M&As to accelerate earnings growth. M&A has always been a major strategy since China Resources Group became the largest shareholder of CR Sanjiu in 2008 (see the following table). However, there was no significant M&A in 2014. We believe this is because of the changes at top management in major subsidiaries of China Resources Group (including CR Sanjiu), following the arrest of the group Chairman Mr. Song Lin in 2014 on corruption charges. The top management changes have been completed and we believe M&As will resume. Sitting on net cash of Rmb1.1bn (Mar 2015), CR Sanjiu has ample financial resources for M&As. Also, it has a database of 2,000 potential M&A targets. It has been contacting 10 of them each year to see if there is any opportunity. This can also facilitate its M&A strategy.

Industry Focus


Major acquisitions of CR Sanjiu

Dat e T arget (Eng) T arget (Ch i) St ak eConsiderat ion

(Rmb m) M ajor produc t s

Cont ribut ionin 2014rev enue

Apr-09 Huangshi Sanjiu 黃石三九 100% 35 Ganmao Qingre Granules 感冒清熱顆粒 1.4%Aug-09 Anhui J inchan Bio-chem 金蟾生化 84% 166 Huachansu Injection 華蟾素注射液 2.1%Oct-09 Shanghai Baian 上海百安 100% 18

Oct-11 Double-crane high tech 雙鶴高科 100% 88 Shuxuening Injection 舒血寧注射液 1.6%Oct-11 Benxi Sanyao 本溪三藥 100% 172 Qizhi Weitong Granules 氣滯胃痛顆粒 2.1%Oct-11 Hefei Shenlu 合肥神鹿 100% 144 Wenweishu 溫胃舒 , Yangweishu 養胃舒 2.7%Mar-12 Shunfeng Pharm 順峰藥業 100% 600 Shufeng Kangwang 順峰康王 , 2.7%Feb-13 Guilin Tianhe Pharm 天和藥業 97% 583 Tianhe Gutongtiegao 天和牌骨通貼膏 ,

Tianhe Zhuifenggao 天和牌追風膏

3.0%

Aug-13 Linqing Huawei 臨清華威 100% 81

T ot al 15.7%


Relative to CTCM, the expected EPS CAGR (2014-17F) of CR Sanjiu is lower (13% vs 36%) and the size of its CCMG business is smaller (market share in 2014: 11% vs 53%). Thus, CR Sanjiu should trade at a discount to CTCM. CTCM’s TP is based on 35x 12-month forward PE. Assuming a 20% discount to 35x PE, we derive a target PE of 28x and TP of Rmb36.2 for CR Sanjiu.

Chase Sun should also trade at a discount to CTCM due to slower expected EPS CAGR in 2014-17 (21% vs 36%) and smaller scale of its CCMG business (market share in 2014: 22% vs 53%). However, as its EPS CAGR is projected to be faster than CR Sanjiu and its CCMG business size is larger, we would attach a smaller discount. Assuming a 10% discount to CTCM’s target PE of 35x, we derive a TP of Rmb21.4 for Chase Sun, based on 31.5x PE. As Chase Sun’s current share price is very close to our TP, we initiate coverage with HOLD on Chase Sun.

Industry Focus


Will China allow more players into the CCMG industry?

In the last few years, there has been speculation that the Central government will allow more players to enter this industry. On 17 Mar 2015, in an investor meeting, the management of CTCM openly commented that in order to promote Chinese medicine, the Central government will allow more players to participate in the CCMG market. They estimated that the government would open up the market in June 2016. Right now, it is still uncertain whether the government will open up the market and if so, the timing.

Our view: In order to cater to the increasing demand for CCMG ahead, we believe the government will allow more drug makers to participate in this market, but only at a very gradual and slow pace because:

1) New players must be able to supply a sizeable range of CCMG products (our view is at least 400). This is because Chinese medicine physicians in medical institutes need to be able to prescribe different combinations of CCMG for the treatment of various diseases. Without a sizeable range of CCMG products, the limited range may not be wide enough for them to effectively prescribe effective medication. But, provision of a sizeable range of CCMG products is not easy for drug makers, as it takes time to build up a product range;

2) We believe if the Central government decides to open up the CCMG market, there will be basic quality standards in place. Drug makers who intend to enter this market will have to ensure that their CCMG products meet the standards. For new applicants, it would take 3 to 6 months for testing, data-collection (to prove that the product meets the standard) and document filing for one CCMG product. For 400 CCMG products, the document preparation process will be time consuming;

3) Even if there are players able to provide 400 CCMG products and the related documents, it will not be easy for them to gain approval from China Food & Drug Administration (CFDA). It is common knowledge that the CFDA is understaffed in the evaluation and approval of new medical products. As at Dec-14, there were 18,597 applications pending approval but only 115 staffs assigned to the CFDA's drug evaluation centre. Without sufficient manpower, the applications will take longer to be approved.

Right now, we identified at least six unlicensed players interested in this sector (see following table). Even if CFDA issues new CCMG licenses in Jun 2016 based on expectations by CTCM’s management, negative impact on current players’ earnings should be very minimal in next three years because:

1) The CCMG market in China is growing rapidly (expected CAGR in 2014-19: 30%). We believe the overall demand increase can absorb supply from new players;

2) Assuming there is a policy change in Jun-16, government departments other than CFDA (e.g. National Health & Family Planning Commission) may take 6 months to issue facilitating policies and measures. When all policies are ready, the new CCMG players may take another 18 months to apply for the approval for 400 CCMG products. Assuming all the necessary approvals are obtained within 18 months, it would already be 2H2018. Only then can they start competing with current CCMG players. Even so, it will be an uphill task to persuade customers to switch from the established original CCMG suppliers.

Industry Focus


Pharmaceutical players interested in CCMG industry

Co mpany St oc k

c odeInd ic at ion o f in t erest in CCM G bus iness F in anc ial st at u s

as o f M ar 2015Tasly 600535 CH According to a news from Xinhuanet released in J un 2013, the company is interested in CCMG

industry .Net debt toequity : 48%(Pushing the ratioto 100% can raiseRmb3.6bn)

(Source: http://www.he.xinhuanet.com/zfwq/anguo/anguo/2013-06/05/c_116047282.htm)

Conba 600572 CH P12 of 2014 annual report states the company will strengthen the R&D of CCMG. Net debt toequity : 29%(Pushing the ratioto 100% can raiseRmb2.5bn)

Kangmei 600518 CH In Dec 2014, the company got subsidy from Guangdong prov incial gov ernment for R&D ofCCMG.

Net cash ofRmb4.9bn

(Source: http://www.kangmei.com.cn/cn/news/news_content.jsp?id=995&ty pe=company )

J ilinAodong

000623 CH P23 of 2014 annual report states the company will strengthen the R&D of CCMG. Net cash ofRmb1.8bn

Xiangxue 300147 CH Based on a record of inv estors activ ities released by the company dated 4 Dec 2014, thecompany is looking for opportunity in CCMG industry .

Net debt toequity : 52%(Pushing the ratioto 100% can raiseRmb900m)

Shineway 2877 HK In J an 2015, Shineway has signed a framework aggreement with Hebei univ ersity of Chinesemedicine (河北中醫學院 ) to co-dev elop CCMG.

Net cash ofRmb2.5bn (Dec2014)

(Source: http://www.hebtcm.edu.cn/col/1339642538734/2015/01/14/1421203224849.html)

Sources: DBS Vickers

Industry Focus


Peers valuation

Mk t PE PE Y ield Y ield P/Bk P/Bk EV /EBITDA ROE ROE

Currency Price Cap 15F 16F 15F 16F 15F 16F 15F 16F 15F 16FCode Local$ US$m x x % % x x x x % %

CCMG producers

CR Sanjiu Med.& Pharm.'A'* 000999 CH CNY 26.24 4,137 21.5 19.2 1.6 1.8 3.4 3.0 14.2 12.5 16.7 16.7China Traditional Chinese Medicine * 570 HK HKD 5.76 3,185 24.4 14.1 0.0 0.0 1.9 1.6 19.6 10.3 10.0 12.3

Tianjin Chase Sun Pharm. 'A'* 300026 CH CNY 20.11 2,953 33.0 26.7 0.4 0.5 3.9 3.5 24.4 19.9 15.2 13.8

Major Chinese Medic ines mak ersHengkang Medical Gp.'A' 002219 CH CNY 37.24 4,538 62.2 44.9 0.1 0.2 7.0 6.1 39.2 29.7 18.2 14.6

J iangzhong Pharm.'A' 600750 CH CNY 39.72 1,919 35.5 28.4 1.0 1.1 4.8 4.3 24.2 18.8 14.2 16.4Kunming Pharmaceutical 'A' 600422 CH CNY 33.98 1,867 30.8 24.6 1.0 1.3 5.1 4.4 n.a. n.a. 17.4 18.5

Tianjin Zhongxin Pharm. 'A' 600329 CH CNY 19.87 2,366 31.7 28.1 1.0 0.9 4.6 4.1 n.a. n.a. 13.1 13.6Shanghai Kaibao Pharm. 'A' 300039 CH CNY 16.05 2,155 27.3 23.7 1.3 0.8 5.5 4.6 n.a. n.a. 19.8 19.7

Sunflower Pharms.Gp.'A' 002737 CH CNY 48.89 2,299 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Shijiazhuang Yiling Pharm.'A' 002603 CH CNY 17.86 3,241 42.6 34.3 0.5 0.5 4.1 3.6 50.4 42.3 9.8 11.0

Guizhou Bailing Group Pharm.'A' 002424 CH CNY 71.1 5,387 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Renhe Pharmacy 'A' 000650 CH CNY 17.17 3,425 38.1 n.a. 0.9 n.a. 7.9 n.a. n.a. n.a. n.a. n.a.

Shan Dong Dong-E E-J iao 'A' 000423 CH CNY 47.2 4,972 18.9 15.9 1.7 2.1 4.2 3.4 13.9 11.7 22.8 22.4Yunnan Baiyao Group 'A' 000538 CH CNY 70.6 11,842 23.3 20.0 0.8 0.7 4.4 4.0 22.2 18.3 21.9 21.7

J ilin Aodong Pharm.Gp. 'A' 000623 CH CNY 29.92 4,311 21.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Guilin Sanjin Pharm.'A' 002275 CH CNY 21.43 2,037 24.7 21.6 2.3 2.8 5.1 4.7 n.a. n.a. 19.0 20.2

Guangxi Wuzhou Zhongheng 'A' 600252 CH CNY 20.63 3,849 16.1 15.8 1.2 1.9 3.6 2.7 n.a. n.a. 22.0 17.7Beijing Tongrentang 'A' 600085 CH CNY 26.64 5,885 40.2 34.0 0.9 1.1 5.9 5.3 25.5 20.4 14.6 16.1

Guangzhou Baiyunshan Pharm. 'A' 600332 CH CNY 30.16 6,272 27.0 23.1 0.9 0.9 3.9 3.3 24.9 22.2 16.2 15.5Zhangzhou Pientzehuang Pharm.'A' 600436 CH CNY 63.46 4,111 44.5 38.5 0.8 0.8 7.9 6.7 34.5 28.6 16.2 17.0

Kangmei Pharm.'A' 600518 CH CNY 18.15 12,856 26.8 21.3 1.3 1.7 3.8 3.2 18.3 14.3 16.7 18.3Tasly Pharmaceutical 'A' 600535 CH CNY 47.53 8,272 29.3 23.4 1.3 1.6 7.6 6.1 20.2 16.5 28.4 27.6

J iangsu Kanion Pharms. 'A' 600557 CH CNY 24.91 2,061 29.0 23.8 0.6 0.5 4.6 3.8 24.8 21.2 15.7 16.2Hubei Jumpcan Pharm.'A' 600566 CH CNY 20.45 2,574 26.6 21.5 n.a. n.a. 5.2 4.2 n.a. n.a. 25.1 25.2

Zhejiang Conba Pharm. 'A' 600572 CH CNY 14.2 2,252 32.7 26.6 0.6 1.0 5.9 4.8 n.a. n.a. 19.0 19.5

Guizhou Yibai Pharm. 'A' 600594 CH CNY 26.96 1,719 16.8 14.0 0.8 0.8 2.8 2.3 23.8 20.4 16.7 16.2Heilongjiang Zbd Pharm. 'A' 603567 CH CNY 46.22 3,161 36.3 30.3 n.a. n.a. 7.0 5.7 n.a. n.a. 19.5 18.2

Tong Ren Tang Techs.'H' 1666 HK HKD 11.76 1,943 22.9 20.2 1.7 1.9 3.1 2.9 11.9 10.6 14.2 14.7China Shineway Pharm.Gp.* 2877 HK HKD 10.08 1,075 9.3 9.1 4.3 4.4 1.3 1.2 3.6 3.0 14.1 13.3

A v erage 29.8 24.7 1.1 1.3 4.8 4.0 23.3 18.9 17.5 17.5

Source: Thomson Reuters, *DBS Vickers

Industry Focus


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www.dbsvickers.com

ed- TH / sa- PY

BUY (Initiate coverage)

Last Traded Price: HK$5.76 (HSI : 25,056) Price Target: HK$ 11.3 (96% upside)

Potential Catalyst: M&A Where we differ: Earnings are more bullish than consensus as we are more confident about concentrated Chinese medicine granule industry growth Analyst Mark KONG CFA, +852 2820 4619 [email protected]

Price Relative

78

128

178

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Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Relative IndexHK$

China Traditional Chinese Medicine (LHS)

Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 2,690 4,437 8,808 10,943 EBITDA 663 1,047 2,229 2,666 Pre-tax Profit 481 877 1,865 2,329 Net Profit 413 719 1,464 1,822 Net Pft (Pre Ex) 413 719 1,464 1,822 EPS (RMB) 0.16 0.19 0.33 0.41 EPS (HK$) 0.20 0.24 0.41 0.51 EPS Gth (%) 68.4 16.0 72.7 24.4 Diluted EPS (HK$) 0.20 0.24 0.41 0.51 DPS (HK$) 0.00 0.00 0.00 0.00 BV Per Share (HK$) 1.57 3.10 3.51 4.02 PE (X) 28.3 24.4 14.1 11.4 P/Cash Flow (X) 35.8 32.3 12.7 10.6 P/Free CF (X) 49.6 38.9 13.4 11.1 EV/EBITDA (X) 18.9 19.6 10.3 8.2 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 3.7 1.9 1.6 1.4 Net Debt/Equity (X) 0.2 0.1 0.0 CASH ROAE (%) 13.9 10.0 12.3 13.5

Earnings Rev (%): New New New Consensus EPS (RMB) 0.214 0.288 0.327 Other Broker Recs: B: 7 S: 0 H: 0

ICB Industry: Health Care ICB Sector: Pharmaceuticals & Biotechnology Principal Business: Healthcare

Source of all data: Company, DBSV, Thomson Reuters, HKEX

RISING WITH CCMG'S INCREASING POPULARITY

The largest concentrated Chinese medicine granule (CCMG) maker with 53% market share in China. We expect CCMG to contribute 34/64/66% of the company’s earnings in 2015/16/17. Derived from herbs, it dissolves instantly in water as a drink, unlike herbal medicines which require a long decoction process. This advantage enables CCMG market to grow at a 41% CAGR (2010-14). The CAGR should remain strong at 30% (2014-19). China’s CCMG market only equaled to 4% of the herbal medicine market in 2014 (HK: 11%). Hence, there is ample room to grow.

Seven exclusive Chinese medicines to support EPS growth. Other than CCMG, the company also produces seven exclusive Chinese medicines in five therapeutic areas with unique efficacy (orthopedic, immunology, otolaryngology, sleeping pills, blood circulation). They collectively contributed 68% of the company’s 2014 sales. We expect their sales to grow at 12-32% CAGR (2014-17) on sales network expansion. Along with CCMG’s contribution,we expect the CAGR of the company's EPS to be 36% in 2014-17.

M&A strategy riding on parent co’s support can accelerate earnings growth. The company’s parent co, China National Pharmaceutical Group Corp (36% stake), a state-owned enterprise held by the central government, has extensive network in the industry. Leveraging on this, in last three years, the company identified and completed two acquisitions: Tianjiang Pharm in 2015 & Tongjitang in 2013 (exclusive drug maker). They collectively contribute >30% of sales following the acquisition. M&A riding on parent co’s support is still a major future growth driver which can accelerate the company's earnings growth.

Valuation: In view of its strong EPS growth, we initiate coverage with a BUY recommendation. The Chinese medicine makers’ 1-yr forward PE is 27x on average. It should trade at a 30% premium (35x) for its leading position in the CCMG market (one of the few medical sub-segments with 30% growth), and support from parent co in M&A. With that, we derive a TP of HK$11.3.

Key Risks to Our View: It is possible that the PRC government may allow more players to enter the CCMG industry, although the timing is still uncertain.

At A Glance

Issued Capital (m shrs) 4,286 Mkt. Cap (HK$m/US$m) 24,690 / 3,185 Major Shareholders

CNPGC (%) 36 Top management of the company (%) 16.8

Free Float (%) 47.2 3m Avg. Daily Val. (US$m) 12.2


China / Hong Kong Company Focus

China Traditional Chinese Medicine Bloomberg: 570 HK Equity | Reuters: 0570.HK Refer to important disclosures at the end of this report



INVESTMENT THESIS

Profile Rationale

China Traditional Chinese Medicine (CTCM) is one of the leaders in the Chinese medicine industry. It is the largest concentrated Chinese medicine granule (CCMG) maker with 53% market share in 2014 (there are only five licensed players in the CCMG industry). CCMG is a processed form of traditional Chinese herbal medicine. Herbal medicines require a time-consuming decoction process, while CCMG can be instantly dissolved in hot water for consumption. Doctors can prescribe different combinations of CCMG for different ailments. CTCM also owns a portfolio of exclusive Chinese medicines (contributing 68% of CTCM’s revenue in 2014).

CTCM's parent company is a state-owned enterprise held by the Central government: China National Pharmaceutical Group Corp (which owns a 36% stake in CTCM).

CCMG market in the PRC projected to grow at 30% CAGR (2014-19), premised on the following:

Gradual replacement of traditional Chinese herbal medicine as CCMG is more convenient. Herbal medicines require a time-consuming decoction process while CCMG can be instantly dissolved in hot water for consumption.

More provinces (15 at least currently) are including CCMG on their medical insurance coverage list due to its convenience.

The number of Chinese medicine hospitals in rural areas is expected to grow at a 17.5% CAGR over 2012-20.

The proportion of community health centers and health clinics in villages that can offer Chinese medicine services are expected to increase from 47% and 28% respectively in 2012, to 100% for both by 2020.

CTCM is the CCMG market leader with 53% market share.

As a leader in this industry, it is well poised to enjoy the industry growth.

Expanding market share through M&A by leveraging on parent company's support

Leveraging on the extensive network of its parent company in the industry, CTCM has identified and completed two acquisitions in last three years: Tianjiang Pharm in 2015 (largest CCMG maker in China), Tongjitang in 2013 (exclusive Chinese medicine maker). They contributed or are expected to contribute a significant portion of revenue in the following year of M&A (>35%).

We believe CTCM will continue to leverage on the support from parent company to look for quality M&A targets.

Valuation Risks

In view of its strong EPS growth, we initiate coverage with a BUY recommendation. The Chinese medicine makers’ 1-yr forward PE is 27x on average. It should trade at a 30% premium (35x) for its leading position in the CCMG market (one of the few medical sub-segments with 30% growth), and support from parent co in M&A. With that, we derive a TP of HK$11.3.

Volatility of raw material costs

Volatility of raw material prices (over 600 kinds of herbs) along with a sales arrangement that prohibits the timely adjustment of product ASPs could affect its gross margin.

Possibly more competitors to emerge in future

It is possible that the PRC government may allow more players to enter the CCMG industry.

Source: DBS Vickers



SWOT Analysis

Strengths Weakness

Largest concentrated Chinese medicine granule (CCMG)maker in China with 53% market share in 2014

Strong support from parent company China NationalPharmaceutical Group Corp in M&A strategy

Lower price-cutting risk relative to other drug makers as68% of finished drugs’ revenue in 2014 was contributed byexclusive drugs with low daily dosage cost (below Rmb12)

Volatility of raw materials’ cost (over 600 kinds of herb)

Goodwill accounts for around 50% of total assets. Anynegative effect on goodwill could impact earnings.

It is harder for Chinese medicine makers to gainapproval from the Central government to launch a newproduct relative to chemical drug makers. Because thechemical structure of Chinese medicine is morecomplex than chemical drugs, it is harder to identify itsactive ingredient which is necessary for obtaining theapproval.

Opportunities Threats

CCMG market's CAGR in 2014-19 is projected to be 30%,driven by gradual replacement of herbal Chinese medicines,and increasing number of provinces adopting CCMG in theirreimbursable drug list of medical insurance programmes

Market share gain in the Chinese medicine industry throughM&A supported by the parent company China NationalPharmaceutical Group Corp

The PRC government may allow more players into theCCMG industry.

Source: DBS Vickers



Valuation

On average, Chinese medicine makers (Hong Kong and Mainland China) are trading at 27x 12-months rolling forward PE. We believe CTCM should trade at a 30% premium to its peers' average (35x) because:

1) Among all sub-segments in healthcare universe, CCMG isone of the few which can deliver strong growth ahead(projected CAGR in 2014-19: 30%). After the acquisition ofTianjiang Pharm in 2015, CTCM becomes the largest CCMGproducer with over 50% market share. It is well poised toenjoy the strong growth which is higher than the healthcareuniverse’s average;

Since 2011, the trading range of CTCM has been between 13x to 28x (1 year forward PE). We believe the acquisition of CCMG business in 2015 will trigger a re-rate of CTCM to trade above the historical range.

2) With the support from parent company “China NationalPharmaceutical Group Corp”, CTCM has completed twolarge acquisitions in last three years in the Chinese medicineindustry: Tongjitang in 2013 and Tiangjiang Pharm in 2015

which became or are expected to become important revenue contributors in the year following the M&A. We believe the parent company will continue to support CTCM to look for quality M&A targets. That provides earnings estimates upgrade potential in future. Not many other Chinese medicine manufacturers have this advantage;

3) Price-cutting risk has always been a risk for drug makers. Butwe believe the price-cutting risk for CTCM is lower thanmany other drug makers for two reasons: a) Generallyspeaking, price-cutting risk for exclusive drugs is lower thangeneric drugs. In 2014, exclusive drugs contributed 68% ofCTCM’s revenue which is higher relative to many other drugmakers; b) In 2014, 69% of CTCM’s revenue wascontributed by drugs with daily dosage cost of below Rmb12,which is already very cheap (generally, daily dosage cost ofabove Rmb100 is considered expensive). We believe thegovernment is unlikely to cut the prices of drugs with lowdaily dosage costs.

Based on 35x 12-month rolling forward PE, we derive our target price of HK$11.3 for CTCM.

PE band chart PB band chart

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Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers



Peers valuation

Mk t PE PE Y ield Y ield P/Bk P/Bk EV /EBIT DA ROE ROE

Currency Price Cap 15F 16F 15F 16F 15F 16F 15F 16F 15F 16FCode Local$ US$m x x % % x x x x % %

CCMG producersCR Sanjiu Med.& Pharm.'A'* 000999 CH CNY 26.24 4,137 21.5 19.2 1.6 1.8 3.4 3.0 14.2 12.5 16.7 16.7

China Traditional Chinese Medicine * 570 HK HKD 5.76 3,185 24.4 14.1 0.0 0.0 1.9 1.6 19.6 10.3 10.0 12.3


Major Chinese Medic ines makersHengkang Medical Gp.'A' 002219 CH CNY 37.24 4,538 62.2 44.9 0.1 0.2 7.0 6.1 39.2 29.7 18.2 14.6

J iangzhong Pharm.'A' 600750 CH CNY 39.72 1,919 35.5 28.4 1.0 1.1 4.8 4.3 24.2 18.8 14.2 16.4Kunming Pharmaceutical 'A' 600422 CH CNY 33.98 1,867 30.8 24.6 1.0 1.3 5.1 4.4 n.a. n.a. 17.4 18.5

Tianjin Zhongxin Pharm. 'A' 600329 CH CNY 19.87 2,366 31.7 28.1 1.0 0.9 4.6 4.1 n.a. n.a. 13.1 13.6

Shanghai Kaibao Pharm. 'A' 300039 CH CNY 16.05 2,155 27.3 23.7 1.3 0.8 5.5 4.6 n.a. n.a. 19.8 19.7Sunflower Pharms.Gp.'A' 002737 CH CNY 48.89 2,299 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Shijiazhuang Yiling Pharm.'A' 002603 CH CNY 17.86 3,241 42.6 34.3 0.5 0.5 4.1 3.6 50.4 42.3 9.8 11.0Guizhou Bailing Group Pharm.'A' 002424 CH CNY 71.1 5,387 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Renhe Pharmacy 'A' 000650 CH CNY 17.17 3,425 38.1 n.a. 0.9 n.a. 7.9 n.a. n.a. n.a. n.a. n.a.Shan Dong Dong-E E-J iao 'A' 000423 CH CNY 47.2 4,972 18.9 15.9 1.7 2.1 4.2 3.4 13.9 11.7 22.8 22.4

Yunnan Baiyao Group 'A' 000538 CH CNY 70.6 11,842 23.3 20.0 0.8 0.7 4.4 4.0 22.2 18.3 21.9 21.7J ilin Aodong Pharm.Gp. 'A' 000623 CH CNY 29.92 4,311 21.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Guilin Sanjin Pharm.'A' 002275 CH CNY 21.43 2,037 24.7 21.6 2.3 2.8 5.1 4.7 n.a. n.a. 19.0 20.2Guangxi Wuzhou Zhongheng 'A' 600252 CH CNY 20.63 3,849 16.1 15.8 1.2 1.9 3.6 2.7 n.a. n.a. 22.0 17.7

Beijing Tongrentang 'A' 600085 CH CNY 26.64 5,885 40.2 34.0 0.9 1.1 5.9 5.3 25.5 20.4 14.6 16.1

Guangzhou Baiyunshan Pharm. 'A' 600332 CH CNY 30.16 6,272 27.0 23.1 0.9 0.9 3.9 3.3 24.9 22.2 16.2 15.5Zhangzhou Pientzehuang Pharm.'A' 600436 CH CNY 63.46 4,111 44.5 38.5 0.8 0.8 7.9 6.7 34.5 28.6 16.2 17.0

Kangmei Pharm.'A' 600518 CH CNY 18.15 12,856 26.8 21.3 1.3 1.7 3.8 3.2 18.3 14.3 16.7 18.3Tasly Pharmaceutical 'A' 600535 CH CNY 47.53 8,272 29.3 23.4 1.3 1.6 7.6 6.1 20.2 16.5 28.4 27.6

J iangsu Kanion Pharms. 'A' 600557 CH CNY 24.91 2,061 29.0 23.8 0.6 0.5 4.6 3.8 24.8 21.2 15.7 16.2Hubei Jumpcan Pharm.'A' 600566 CH CNY 20.45 2,574 26.6 21.5 n.a. n.a. 5.2 4.2 n.a. n.a. 25.1 25.2

Zhejiang Conba Pharm. 'A' 600572 CH CNY 14.2 2,252 32.7 26.6 0.6 1.0 5.9 4.8 n.a. n.a. 19.0 19.5Guizhou Yibai Pharm. 'A' 600594 CH CNY 26.96 1,719 16.8 14.0 0.8 0.8 2.8 2.3 23.8 20.4 16.7 16.2

Heilongjiang Zbd Pharm. 'A' 603567 CH CNY 46.22 3,161 36.3 30.3 n.a. n.a. 7.0 5.7 n.a. n.a. 19.5 18.2Tong Ren Tang Techs.'H' 1666 HK HKD 11.76 1,943 22.9 20.2 1.7 1.9 3.1 2.9 11.9 10.6 14.2 14.7

China Shineway Pharm.Gp.* 2877 HK HKD 10.08 1,075 9.3 9.1 4.3 4.4 1.3 1.2 3.6 3.0 14.1 13.3

A v erage 29.8 24.7 1.1 1.3 4.8 4.0 23.3 18.9 17.5 17.5




Competitive edges

Largest concentrated Chinese medicine granule (CCMG) maker in China with 53% market share in 2014 . CCMG is in fact an advanced form of herbal Chinese medicine. Herbal Chinese medicines are basically processed herbs which must be decocted into soup for use. Unlike herbal Chinese medicines, CCMG is more convenient as it does not require a time consuming decoction process because it can instantly dissolve in hot water for use. Doctors will prescribe different combinations of CCMG based on the condition of the patient. Due to its convenience, CCMG’s market size in China has expanded by 41% CAGR in 2010-14 (total retail value in 2014: Rmb7.8bn, “Retail value” refers to the sales from medical institutes to patients). In 2015, CTCM acquired an 87.3% stake in the largest CCMG producer in China (total consideration: Rmb8.7bn), Tianjiang Pharm (江陰

天江), to get a strong foothold into the CCMG market. There are only five licensed CCMG players in China. CTCM/Tiangjiang Pharm’s market share in the CCMG industry was 53% in 2014 (see the following chart), and as the largest player in CCMG industry, it is poised for strong growth ahead.

Market share of CCMG industry in China



"CTCM" 570 HK)53%

Chase Sun Pharm

(300026 CH)22%

Company P3%

Neo Green11%


(000999 CH)11%


Source: Companies, DBS Vickers

* “Industry sales” refers to the ex-factory sales from CCMG producers to distributors / medical institutes.

Peers comparison

CT CM (570 HK )(T iang jiang Pharm &G uangdong Y if ang )


Ch inaRec ourc es San jiu

(000999 CH) Neo G reenCCMG sales in China (2014), Rmb m 3129 1,219 600 600*

CCMG gross margin in China (2014) 53% 78% 60% n/a


CCMG net profit in China (2014), Rmb m 652 265 75* n/a

F ocus of sales network cov erage Eastern China Northern China Southern China Mid-Western China


Foshan(Guangdong prov ince)

Beijing


production in 2017)


- finished products


- extraction









Strong support from parent company China National Pharmaceutical Group Corp. CTCM’s parent company is a major state-owned enterprise held by the Central government, and has c. 36% stake in CTCM. Leveraging on its parent’s extensive network in the industry, it would be easier for CTCM to identify quality M&A targets, and with the support of its parent, it would also be easier for CTCM to finance M&As through equity financing. There are two examples. In 2015, CTCM acquired 87.3% in Tianjiang Pharm for a total consideration of Rmb8.7bn and in 2013, it acquired 100% in Tongjitang (同濟堂) for total consideration of Rmb2.6bn. A significant portion of the deals (>35%) was paid by capital raised through equity financing. These companies are expected to contribute at least 40% of revenue in the following year. With the support from its parent company, we believe CTCM can continue to grow the company through M&As.

Lower price cutting risk relative to other drugs makers. There are two reasons why we believe risk of price cuts for CTCM is lower than many other drug makers:

1) Generally speaking, price cutting risk for exclusive drugs is lower than generic drugs. In 2014, exclusive drugs contributed 68% of CTCM’s revenue which is higher relative to many other drug makers;

2) In 2014, 69% of CTCM’s revenue was contributed by drugs with daily dosage cost of below Rmb12, which is already very cheap (generally, daily dosage cost of above Rmb100 is considered to be expensive). We believe the government is unlikely to cut the prices of drugs with low daily dosage cost.



Growth drivers

Revenue breakdown

Rmb m 2014 2015F 2016F 2017FConcentrated Chinese Medicine Granule (CCMG)* - 1,343 5,239 6,811

F inished drugs 2,690 3,093 3,569 4,132

Xianlin Gubao (仙靈骨葆) 850 952 1,067 1,195

Yu Ping Feng Granule (玉屏風顆粒) 250 305 372 454

Bi Yan Kang Tablet (鼻炎康片) 256 294 338 389

J ingshu Granule (頸舒顆粒) 201 235 275 321

Moisturising & Anti-itching Capsule (潤燥止癢膠囊) 158 201 256 325

Sheng Tong Ping or Nifedipine (聖通平) 87 87 87 87

Gao De or Cefodizime (高德) 87 87 87 87

Zaoren Anshen Capsule (棗仁安神膠囊) 58 76 101 133

Feng Liao Xing Medicinal Wine (馮了性藥酒) 82 86 90 94

Fengshi Gutong Capsule (風濕骨痛膠囊) 53 70 92 121

Others 608 699 804 925

T ot al 2,690 4,437 8,808 10,943

Grow t h % 2014 2015F 2016F 2017F

Concentrated Chinese Medicine Granule (CCMG)* 290% 30%

Finished drugs 15% 15% 16%

Xianlin Gubao (仙靈骨葆) 12% 12% 12%

Yu Ping Feng Granule (玉屏風顆粒) 22% 22% 22%

Bi Yan Kang Tablet (鼻炎康片) 15% 15% 15%

J ingshu Granule (頸舒顆粒) 17% 17% 17%

Moisturising & Anti-itching Capsule (潤燥止癢膠囊) 27% 27% 27%

Sheng Tong Ping or Nifedipine (聖通平) 0% 0% 0%

Gao De or Cefodizime (高德) 0% 0% 0%

Zaoren Anshen Capsule (棗仁安神膠囊) 32% 32% 32%

Feng Liao Xing Medicinal Wine (馮了性藥酒) 5% 5% 5%

Fengshi Gutong Capsule (風濕骨痛膠囊) 32% 32% 32%

Others 15% 15% 15%

T ot al 65% 99% 24%

Break dow n % 2014 2015F 2016F 2017F

Concentrated Chinese Medicine Granule (CCMG)* - 30% 59% 62%

Finished drugs 100% 70% 41% 38%

Xianlin Gubao (仙靈骨葆) 32% 21% 12% 11%

Yu Ping Feng Granule (玉屏風顆粒) 9% 7% 4% 4%

Bi Yan Kang Tablet (鼻炎康片) 10% 7% 4% 4%

J ingshu Granule (頸舒顆粒) 7% 5% 3% 3%

Moisturising & Anti-itching Capsule (潤燥止癢膠囊) 6% 5% 3% 3%

Sheng Tong Ping or Nifedipine (聖通平) 3% 2% 1% 1%

Gao De or Cefodizime (高德) 3% 2% 1% 1%

Zaoren Anshen Capsule (棗仁安神膠囊) 2% 2% 1% 1%

Feng Liao Xing Medicinal Wine (馮了性藥酒) 3% 2% 1% 1%

Fengshi Gutong Capsule (風濕骨痛膠囊) 2% 2% 1% 1%

Others 23% 16% 9% 8%

T ot al 100% 100% 100% 100%

Source: Company, DBS Vickers

*Acquired in 2015, earnings contribution estimated to start in Sep 2015.



We have identified four growth drivers:

1) The newly acquired concentrated Chinese medicine granule (CCMG) business;

2) Finished drugs;

3) Acquisitions;

4) Launch of new drug;.

Newly acquired CCMG business. As mentioned above, CTCM acquired the largest CCMG maker Tianjiang Pharm in 2015. It is poised to enjoy the strong growth potential of the CCMG industry; we project this market to expand by 30% CAGR in 2014-19 underpinned by gradual replacement of herbal Chinese medicines, inclusion of CCMG in more reimbursable drug lists of provincial insurance program, and increase of

Chinese medicines hospitals in rural areas. The CCMG business of CTCM will benefit from these trends. We assume that Tianjiang Pharm will start to contribute from Sep 2015. CTCM plans to double CCMG’s capacity gradually over the next 2-3 years to capture the growth.

Finished drugs business. Before the acquisition of Tianjiang Pharm, CTCM’s earnings were mainly contributed by its finished drugs portfolio. The majority of the drugs are exclusive traditional Chinese medicines. The following tables highlight the drugs therapeutic areas, status, sales network coverage, sales breakdown among different channels and most importantly, expected growth rate and the reasons supporting growth. Xianlin Gubao (仙靈骨葆), Yu Ping Feng Granule (玉屏風顆粒) and Bi Yan Kang Tablet (鼻炎康片) are the largest contributors to the growth of this segment.



Finished drugs portfolio: functions & status

T herapeut icA rea

F unc t ionExc lusiv e

or G eneric

Presc rip t ionor

O T C

Chemicalo r

T CM

Dailyexpenses

(Rmb)

Nat ionalEDL*

Nat ionalRDL*

Xianlin Gubao(仙靈骨葆 )

Orthopaedic Treatment of osteoporosisthrough adjusting the

patient's metabolism to 1)produce more androgenor estrogen; 2) curb theabsorption activ ities of

osteoclasts.

E Both TCM 6

Yu Ping Feng Granule(玉屏風顆粒 )

Immunomodulator Treatment ofotolaryngologic diseases

and skin diseases resultingfrom immune sy stem

disorders.

E Both TCM 5

Bi Yan Kang Tablet(鼻炎康片 )

Otolaryngology Treatment of rhinitis E Both TCM 2.5

J ingshu Granule(頸舒顆粒 )

Orthopaedic Treatment of cerv icalspondy losis

E Both TCM 7.8

Moisturising & Anti-itching Capsule(潤燥止癢膠囊 )

Diseases related todisharmony ofblood

Treatment of itchy skin,acne, constipation caused

by disharmony of blood

E Both TCM 11.8

Sheng Tong Ping orNifedipine (聖通平 )

Cardiovascular Treatment of angina G Prescription Chemical 1

Gao De or Cefodizime(高德 )

Antimicrobialagents

Lower respiratory tractinfection, urinary tract

inflection, gonorrheainduced by sensitized

bacterin

G Prescription Chemical n/a

Zaoren Anshen Capsule(棗仁安神膠囊 )

Sleeping pill Treatment of insomnia E Both TCM n/a

Feng Liao Xing MedicinalWine (馮了性藥酒 )

Orthopaedic Promotion of bloodcirculation

G OTC TCM n/a

Fengshi Gutong Capsule(風濕骨痛膠囊 )

Orthopaedic Relieve joint pain E Both TCM 6.7

Source: Companies, DBS Vickers *EDL: Essential Drug List, RDL: Reimbursement Drug List



Finished drugs portfolio: sales network coverage

Class 3hospitals(top t ier)cov erage

cov eragerat io

Class 2hospitals(2nd t ier)cov erage

cov eragerat io

Class 1hospit alscov erage

cov eragerat io

Drugsstores

cov eragerat io

Xianlin Gubao (仙靈骨葆 ) 1,140 73% 6,654 74% 26,289 66% <60%

Yu Ping Feng Granule (玉屏風顆粒 ) 843 54% 4,198 46% 19,324 48% <40%

Bi Yan Kang Tablet (鼻炎康片 ) 165 10% 1,938 21% 19,698 50% c.90%

J ingshu Granule (頸舒顆粒 ) 493 31% 3,542 39% 20,051 50% <10%


680 43% 2,379 26% 8,796 22% <20%

Sheng Tong Ping or Nifedipine (聖通平 ) n/a n/a n/a n/a n/a n/a n/a

Gao De or Cefodizime (高德 ) n/a n/a n/a n/a n/a n/a n/a

Zaoren Anshen Capsule (棗仁安神膠囊 ) 329 21% 1,707 19% 8,067 20% <10%

Feng Liao Xing Medicinal Wine (馮了性藥酒 ) n/a n/a n/a n/a n/a n/a n/a

Fengshi Gutong Capsule (風濕骨痛膠囊 ) 256 16% 1,573 17% 8,141 20% <10%

Others n/a n/a n/a n/a n/a n/a n/a


Finished drugs portfolio: revenue contribution from different channels

Rev enue cont ribut ion %T op t ier & 2nd

t ier hospit als

3rd t ier hospit als &medical inst it ut es at

g lassroot lev elDrug st ores T ot al

Xianlin Gubao (仙靈骨葆 ) 46% 35% 19% 100%

Yu Ping Feng Granule (玉屏風顆粒 ) 50% 30% 21% 100%

Bi Yan Kang Tablet (鼻炎康片 ) 2% 14% 84% 100%

J ingshu Granule (頸舒顆粒 ) 45% 49% 6% 100%

Moisturising & Anti-itching Capsule (潤燥止癢膠囊 ) 72% 11% 17% 100%

Sheng Tong Ping or Nifedipine (聖通平 ) n/a n/a n/a n/a

Gao De or Cefodizime (高德 ) n/a n/a n/a n/a

Zaoren Anshen Capsule (棗仁安神膠囊 ) 47% 30% 20% 98%

Feng Liao Xing Medicinal Wine (馮了性藥酒 ) n/a n/a n/a n/a

Fengshi Gutong Capsule (風濕骨痛膠囊 ) 28% 36% 36% 100%

Others n/a n/a n/a n/a




Finished drugs portfolio: expected growth rate & growth drivers

2014Rev enue(Rmb m)

G M%

Expec t edRev enue

CA G R(2014- 17F )

G row t h d riv ers

Xianlin Gubao(仙靈骨葆 )

850 65 12%

1. Advantage relativ e to chemical medicines: chemical medicines tend to inject thesubstance which the patients need. Xianlin Gubao adjusts the patient's metabolism toproduce the necessary substance which is a more thorough treatment.2. Advantage relativ e to other Chinese medicines: it is the only Chinese medicine withsimiliar efficacy included in National Essential Drug List. Relativ e to other comparablessuch as Qiang Gu capsule (強骨膠囊 ), J in Tian Ge artificial tiger bones powder (金天

閣人工虎骨粉 ), the price of Xianlin Gubao is 35% and 73% lower in terms of dailydosage cost.3. Indication expansion: other than treatment of osteoporosis, in 2H14, the companyhad proved that Xianlin Gubao can also be used to prevent bone necrosis due tooveruseage of hormone (e.g. steroid hormone).4. As the medicine is for treatment of a chronic disease, we believe the demand growthis steady .5. Sales network expansion.

Yu Ping FengGranule(玉屏風顆粒 )

250 >60 22%

1. A major adv antage of this drug relativ e to other medicines with similar efficacy : noadberse reaction is found. (This explains why the revenue CAGR of this drug in 2011-14 is 24%);2. The drug was approved for sales long ago. The standard then and now is different.Some doctors (particularly those trained in Western way ) may suspect its efficacy .Thus, the company is doing another round of medical trial (ov er 300 cases) looking formore ev idence to prove its efficacy . It should complete in 2H15. The data can helppromoting this drug;3. Indication expansion: the company is doing medical trial to prove this drug can alsobe used for treatment of pediatric respiratory infections, asthma, and chronicobstructiv e pulmonary disease (300 cases for each disease). It targets to complete thetrial within 2015. The data will help promoting this drug.4. Sales network expansion.

Bi Yan Kang Tablet(鼻炎康片 )

256 >40 15%

1. Price increase. This drug is included in the Low Price Drug List. The daily dosage costlimit for Low Price Drug (Chinese medicines) is Rmb5. The daily dosage cost of this drugis just Rmb2.5, much below the limit even after the 13% price surge in Dec 2014. Thecompany is planning for another round of price surge in 2H15.2. Sales network expansion.

J ingshu Granule(頸舒顆粒 )

201 >60 17%

1. The drug was approved for sales long ago. The standard then and now is different.Some doctors (particularly those trained in Western way ) may suspect its efficacy .Thus, the company is doing another round of medical trial looking for more ev idenceto prove its efficacy . It takes 8 weeks to complete and it should complete in 2H15.The data can help promoting this drug;2. Sales network expansion.


158 ~60 27%

1. The drug was approved for sales long ago. The standard then and now is different.Some doctors (particularly those trained in Western way ) may suspect its efficacy .Thus, the company is doing another round of medical trial looking for more ev idenceto prove its efficacy . It takes 8 weeks to complete and it should complete in 2H15.The data can help promoting this drug;2. Sales network expansion.

Sheng Tong Ping orNifedipine (聖通平 )

87 ~60 0%

Gao De orCefodizime (高德 )

87 ~60 0%




Finished drugs portfolio: expected growth rate (continued)

2014Rev enue(Rmb m)

GM%

Expect edRev enue

CA GR(2014-17F )

Grow th driv ers

Zaoren AnshenCapsule(棗仁安神膠囊 )

58 >60 32%

1. Advantage comparing to other sleeping pills: patient will not be addictive anddependent on that drug;2. There are several Chinese medicines for treatment of insomnia are included in theNational Reimbursement Drug List (including Zaoren Anshen Capsule) but only ZaorenAnshen Capsule is included in the National Essential Drug List. In terms ofreimbursement ratio, the later one is 100%, around 30ppt higher than the former one;3. Sales network expansion.

Feng Liao XingMedicinal Wine(馮了性藥酒 )

82 ~50 5% Phamaceutical industry sales growth

Fengshi GutongCapsule(風濕骨痛膠囊 )

53 ~60 32% Sales network expansion

其他 608 15%

Total 2,690 15 - 16%


Potential acquisitions. M&As have always been a major growth driver for CTCM. In 2015, it acquired 87.3% in Tianjiang Pharm, the largest CCMG maker in China, for a total consideration of Rmb8.7bn. We expect Tianjiang Pharm will contribute 30%/59%/62% to CTCM’s total revenue in FY15/16/17F. In 2013, it acquired a 100% stake in Tongjitang (同濟堂) for total consideration of Rmb2.6bn. Three major products of Tongjitang, namely, Xianlin Gubao (仙靈骨葆), Moisturising & Anti-itching Capsule (潤燥止癢膠囊), Zaoren Anshen Capsule (棗仁安神膠

囊), contributed 40% to CTCM’s revenue in 2014.

Leveraging on its strong balance sheet (net debt to equity ratio as of Dec 2015 is estimated to be 14.7%) and strong support from its parent company, China National Pharmaceutical Group Corp (36% stake), we believe CTCM should be able to continually target and acquire companies to fuel its growth ahead. In this stage, we have not factored in any contribution from potential future M&A in our financial estimates.

Launch of new drugs. There are two new products in the pipeline for possible launch within the next two years:

1) Fexofenadine/Pseudophedrine Sustained release capsule. This drug is to treat allergy and rhinitis. Although this drug is used overseas, there are no imports and no domestic manufacturers producing this drug in China. CTCM will be the first to introduce this drug in China. CTCM has already gained the new drug certificate and approval for production of this drug for launch this year.

2) Wuwei Huoxiang tablet (五味藿香片). This will be the first Chinese medicine for treatment of depression. CTCM has completed all clinical trials and the drug pending final approval from China Food & Drug Administration (CFDA).

As both drugs are still in very initial stages of development, we do not expect contribution to be material in 2014-17.



Risks & concerns

Volatility of raw material costs. We believe CTCM uses over 600 types of raw Chinese herbs. We estimate that they account for over 50% of CTCM’s COGS. Their prices can be volatile which may impact future gross margins.

Possible increase of CCMG competitors in future. On 17 Mar 2015, in an investor meeting, the management of CTCM openly commented that, in order to promote Chinese medicine, the Central government will allow more players to participate in the CCMG market and it would open up the market in Jun 2016.

Potential increase in the number of CCMG competitors is an uncertainty for CTCM.

Potential change of goodwill value. After the acquisition of Tianjiang Pharm, we estimate that the goodwill of CTCM will increase to Rmb8.4m by Dec 2015 (as the total valuation of Tianjiang Pharm is much higher than its net asset value). We expect that to account for 50% of CTCM’s total assets as of Dec 2015. The company will evaluate the value of goodwill annually based on the performance of Tianjiang Pharm. Any negative changes to the goodwill value could impact CTCM's financials.



Key company information


2015F Earningsbreakdown

c.35% - Concentrated Chinese medicine granulesc.65% - F inished drugs

2015F Rev enuebreakdown

30% - Concentrated Chinese medicine granules70% - F inished drugs

COGS structure

19% - Staff cost11% - Depreciation & amortisationc.55% - Raw materials15% - Others

Major shareholders

36% - China National Pharmaceutical Group Corp8.4% - Mr. Yang Bin (Managing director of CTCM)8.4% - Mr. Wang Xiaochun (Executiv e director of CTCM)47.2% - Public

Headquater F oshan (Guangdong prov ince)

Production bases

1. F oshan 佛山 (Guangdong prov ince) A - Extraction2. F oshun 佛山 (Guangdong prov ince) B - F eng Liao Xing Medicinal Wine (馮了性藥酒 )3. F oshan 佛山 (Guangdong prov ince) C - Bi Yan Kang Tablet (鼻炎康片 )4. F oshan 佛山 (Guangdong prov ince) D - Yu Ping F eng Granule (玉屏風顆粒 ) / Nifedipine5. F oshan 佛山 (Guangdong prov ince) E - Concentrated Chinese medicine granule6. F oshan 佛山 (Guangdong prov ince) F - Concentrated Chinese medicine granule7. J iangy in 江陰 (J iangsu prov ince) - Concentrated Chinese medicine granule8. Haozhou 毫州 (Anhui prov ince) - Extraction9. Longxi 隴西 (Gansu prov ince) - Concentrated Chinese medicine granule10. Guiy ang 貴陽 (Guizhou prov ince) - Moisturising & Anti-itching Capsule (潤燥止癢膠囊 ) / Xianlin Gubao (仙靈

骨葆 ) / Zaoren Anshen Capsule (棗仁安神膠囊 )11. Xuancheng 宣城 (Anhui prov ince) - F engshi Gutong Capsule (風濕骨痛膠囊 ) / J ingshu Granule (頸舒顆粒 )12. J ining 濟寧 (Shandong prov ince) - Cefodizime13. Xining 西寧 (Qinghai prov ince) - Tibetan medicine & others

Auditor KPMG


Corporate milestones

1993 Wing Shan International was listed in HKEX. Major business was electric power related products & serv ices.

2006 Wing Shan started to transform its main business from eletric power related products & serv ices to pharmaceuticals through M&A.

2009 The company was renamed "Winteam Pharmaceutical"

2013China National Pharmaceutical Group Corp acquired 56.97% stake in this company . The company was renamed China TraditionalChinese Medicine (CTCM).Completed acquisition of 100% stake in Tongjitang which contributed 40% revenue of CTCM in 2014.

2015 Acquisition of Tianjiang Pharm. We estimate it will contribute 30%/59%/62% to CTCM's total revenue in FY15/16/17F




Management profile

M anager A ge Curren tappo in t men t

Prev iou s ex perienc e

Mr. WU Xian 54 Chairman > Ov er 28 y ears of production and financial management experience in pharmaceutical andhealthcare products industry .

> 1997-2005: head of the planning & dev elopment department / deputy plant manager of HarbinPharmaceutical Group Co., Ltd.

Mr. YANGBin

47 Managingdirector

> Ov er 20 y ears of experience in registration of medicines and drugs, research and dev elopmentand sale of medical products.

> Prev ious management of 佛山市醫藥總公司 (F oshan City Medical Corporation), 佛山市醫藥

銷售有限公司 (F oshan City Medical Sale Co., Ltd.), 佛山市生物化學製藥廠 (F oshan CityBiochemical Pharmaceutical F actory ), 佛山市華衛醫藥有限公司 (F oshan City Huawei Medical

Co., Ltd).Mr. WANGXiaochun

47 Executiv edirector

> Chairman and CEO of Tongjitang Chinese Medicines Company , which was listed on the NewYork Stock Exchange in 2007 and subsequently priv atised in 2011.

Mr. LIUCunzhou

70 Non-Executiv edirector

> Ov er 35 y ears of management experience in pharmaceutical equipment, pharmaceutical andhealthcare products industry .

> Chief expert of China National Pharmaceutical Group Corp> 1976-2004: Management of Harbin Pharmaceutical Group Co

> 2005-11: Director of China National Pharmaceutical Group Corp> Director of J ihua Group Corporation Limited and Shanghai Shy ndec Pharmaceutical Co., Ltd.,

both of which are listed on the Shanghai Stock Exchange ("SSE").Mr. ZHANGJ ianhui


> 40 y ears of experience in management of pharmaceutical manufacturing> Director of China National Pharmaceutical Group Corporation since December 2011.

> Deputy Director of the 中國化學制藥工業協會專家委員會 (Specialist Committee of ChinaPharmaceutical Industry Association)

> Prev ious Chairman of Shandong Lukang Pharmaceutical Group and Chairman of ShandongLukang Pharmaceutical Co., Ltd. (listed on Shanghai Stock Exchange, stock code: 600789).

Mr. DONGZenghe


> Ov er 24 y ears of experience in the pharmaceutical production and management industry .> Prev ious chairman of Northeast Pharmaceutical Group Co.(東北製藥集團股份有限公司 , a

company listed on the Shenzhen Stock Exchange, stock code: 000597)Mr. ZHAODongji


> Ov er 15 y ears of management experience in pharmaceutical and health products industry .> 2000-11: management of Harbin Pharmaceutical Group Co., Ltd.

Mr. ZHOUBajun

66 IndependentNon-Executiv e

director

> Ov er 12 y ears working experiences in China's securities market.> 1990-98: Head of China Business in Sun Hung Kai F inancial Group

> 2000-14: Director of China Ev erbright Research Limited> 2005-12: A member of the Commission on Strategic Dev elopment of the Hong Kong Special

Administrativ e Region> 2009-14: Independent non-executiv e director of Sinopharm Group Co., Ltd. (a company listed

on the Stock Exchange)




Management profile (continued)

M anager A ge Curren tappo in t men t

Prev iou s ex perienc e

Mr. XIE Rong 63 IndependentNon-Executiv e

director

> 1997-2002: Partner of KPMG China (Shanghai)> Since 2003: Director of SA IC Motor Corporation Limited (a company listed on the SSE)

Independent non-executiv e director of:> Since 2010: Shanghai Baosight Software Co. Ltd. (a company listed on the SSE)

> Since 2013: China Ev erbright Bank Company Limited (a company listed on the SSE)> Since 2015: Shenwan Hongy uan Group Co., Ltd. (a company listed on the Shenzhen Stock

Exchange)> 2003-09: China Shipping Dev elopment Company Limited (a company listed on the Stock

Exchange and the SSE)> 2003-10: China Eastern A irlines Corporation Limited (a company listed on the Stock Exchange

and the SSE)> 2007-12: China CITIC Bank Corporation Limited (a company listed on the Stock Exchange and

the SSE)> 2008-14: Tianjin Capital Env ironmental Protection Group Company Limited (a company listed on

the Stock Exchange and the SSE)> 2007-14: Sinopharm Group Co., Ltd. (a company listed on Hong Kong Stock Exchange)

Mr. YU TzeShan Hailson


director

> Ov er 35 y ears in engineering industry> Independent non-executiv e director of Sinopharm Group Co., Ltd. (a company listed on the

Stock Exchange) since September 2014.Mr. LO WingYat


director

> Executiv e V ice Chairman and CEO of CIAM Group Limited (Stock Code: 378 HK)> Executiv e director of F DG Electric V ehicles Limited (Stock Code: 729 HK)

> Executiv e Officer of CITIC International Assets Management Limited> Managing Director of CITIC International F inancial Holdings Limited.

> Admitted as a solicitor of the Supreme Court of Hong Kong in 1984 and a solicitor of theSupreme Court of England and Wales in 1989.

> In-house counsel of Bank of China Hong Kong-Macau Regional Office




Key Assumptions Sensitivity Analysis

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

Finished drugs - revenue growth %

1.6 35.2 92.9 15.0 15.4 15.8 2015F

Concentrated Chinese medicine granule - revenue growth %

N/A N/A N/A N/A 290.0 30.0 Gross margin +/- 1ppt

Net Profit +/- 5%

Finished drugs - gross margin %

54.7 59.2 61.5 61.5 61.5 61.5

Operating cost (selling & admin) % in sales +/- 1ppt

Net Profit +/- 5%

Concentrated Chinese Medicine Granule - gross margin %

N/A N/A N/A 51.0 51.0 51.0

Segmental Breakdown (RMB m)

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Finished drugs 1,032 1,395 2,690 3,093 3,569 4,132 Concentrated Chinese Medicine Granules 0 0 0 1,343 5,239 6,811

Total 1,032 1,395 2,690 4,437 8,808 10,943 Gross profit (RMB m) Total 564 826 1,654 2,587 4,867 6,015 Gross margin (%) Total 54.7 59.2 61.5 58.3 55.3 55.0 Source: Company, DBS Vickers

In 2H13, CTCM completed the acquisition of Tongjitang (同济堂), whose contribution boosted the revenue of finished drugs by 93% in 2014.

CTCM should complete the acquisition of Tiangjiang Pharm in 2H15. We expect the acquiree's revenue contribution to start in Sep 2015. In 2016, Tiangjiang Pharm will contribute for the full year. Therefore, the revenue of concentrated Chinese medicine granule in 2016 is expected to increase by 290%.

Thanks to the contribution from Tongjitang, CTCM's gross margin increased in 2013 and 2014. However, Tiangjiang Pharm's gross margin is lower than CTCM itself. Hence, the overall gross margin is expected to trend down from 2014 onwards with increasing contribution from Tiangjiang Pharm.



Income Statement (RMB m) Margins Trend

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

2013A 2014A 2015F 2016F 2017F

Operating Margin % Net Income Margin %

Revenue 1,032 1,395 2,690 4,437 8,808 10,943 Cost of Goods Sold (468) (569) (1,036) (1,849) (3,941) (4,928) Gross Profit 564 826 1,654 2,587 4,867 6,015 Other Opng (Exp)/Inc (354) (577) (1,144) (1,664) (2,907) (3,611) Operating Profit 210 249 510 924 1,960 2,403 Other Non Opg (Exp)/Inc 5 16 33 15 23 23 Associates & JV Inc 0 0 0 0 0 0 Net Interest (Exp)/Inc 1 (27) (63) (61) (118) (97) Dividend Income 0 0 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 216 238 481 877 1,865 2,329 Tax (43) (38) (70) (123) (261) (326) Minority Interest (4) (1) 2 (36) (140) (181) Preference Dividend 0 0 0 0 0 0 Net Profit 169 198 413 719 1,464 1,822 Net Profit before Except. 169 198 413 719 1,464 1,822 EBITDA 251 333 663 1,047 2,229 2,666 Growth Revenue Gth (%) N/A 35.2 92.9 64.9 98.5 24.2 EBITDA Gth (%) N/A 32.6 98.9 58.0 112.8 19.6 Opg Profit Gth (%) N/A 18.2 105.1 80.9 112.2 22.6 Net Profit Gth (%) N/A 17.8 108.1 74.0 103.7 24.4 Margins & Ratio Gross Margins (%) 54.7 59.2 61.5 58.3 55.3 55.0 Opg Profit Margin (%) 20.4 17.8 19.0 20.8 22.3 22.0 Net Profit Margin (%) 16.3 14.2 15.4 16.2 16.6 16.6 ROAE (%) 21.1 11.1 13.9 10.0 12.3 13.5 ROA (%) 11.7 6.0 7.9 6.5 7.9 8.4 ROCE (%) 13.9 7.3 9.6 8.1 10.5 11.3 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM 9.1 8.2 15.2 16.6 24.7 Source: Company, DBS Vickers

Total debt of CTCM increased after the Tongjitang acquisition in 2013 and the Tianjiang Pharm acquisition in 2015, resulting in higher interest cost.

The increase of other income in 2014 was mainly due to higher unconditional government grants in 2H14.

CTCM acquired a 87.3% stake in Tianjiang Pharm in 2015. The earnings share for the remaining stake will be treated as a minority interest.

Tianjiang Pharm's net margin is at least 5ppts above CTCM’s itself. With increasing contribution from Tianjiang Pharm, we project the group's net margin to increase.



Interim Income Statement (RMB m) Margins Trend

FY Dec 1H2013 2H2013 1H2014 2H2014

0%

5%

10%

15%

20%

25%

1H

13

2H

13

1H

14

2H

14


Revenue 517 878 1,263 1,427 Cost of Goods Sold (218) (351) (494) (542) Gross Profit 299 527 769 885 Other Oper. (Exp)/Inc (216) (361) (520) (624) Operating Profit 83 166 249 262 Other Non Opg (Exp)/Inc 4 12 10 24 Associates & JV Inc 0 0 0 0

Net Interest (Exp)/Inc (10) (17) (34) (29) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 76 161 225 256 Tax (17) (21) (36) (34) Minority Interest 4 (5) 0 2 Net Profit 63 135 189 224 Net profit bef Except. 63 135 189 224

Growth Revenue Gth (%) N/A N/A 144.3 62.6 Opg Profit Gth (%) N/A N/A 200.3 57.6 Net Profit Gth (%) N/A N/A 199.5 65.6

Margins Gross Margins (%) 57.8 60.0 60.9 62.0 Opg Profit Margins (%) 16.0 18.9 19.7 18.3 Net Profit Margins (%) 12.2 15.4 14.9 15.7




Balance Sheet (RMB m) Asset Breakdown

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Net Fixed Assets -43.6%

Assocs'/JVs -0.0%

Bank, Cash and Liquid

Assets -11.7%

Inventory -21.2%

Debtors -23.5%Net Fixed Assets 419 796 960 2,469 2,346 2,235

Invts in Associates & JVs 0 0 0 0 0 0 Other LT Assets 320 2,493 2,277 9,428 9,397 9,361 Cash & ST Invts 134 350 440 663 1,984 3,647 Inventory 161 406 418 1,198 2,290 2,845 Debtors 162 399 544 1,331 1,938 2,407 Other Current Assets 358 624 693 1,572 2,250 2,775

Total Assets 1,554 5,066 5,332 16,661 20,205 23,270

ST Debt 414 584 502 1,112 1,067 1,022 Creditors 206 596 540 1,553 2,995 3,721 Other Current Liab 29 85 92 92 92 92 LT Debt 0 668 671 1,360 1,305 1,250 Other LT Liabilities 59 299 270 270 270 270 Shareholder’s Equity 828 2,760 3,184 11,135 12,599 14,421 Minority Interests 17 75 73 1,139 1,877 2,495 Total Cap. & Liab. 1,554 5,066 5,332 16,661 20,205 23,270

Non-Cash Wkg. Capital 446 748 1,023 2,456 3,391 4,215 Net Cash/(Debt) (281) (902) (732) (1,809) (388) 1,375 Debtors Turn (avg days) 60.8 73.4 64.0 77.1 67.7 72.5 Creditors Turn (avg days) 169.7 292.3 226.1 219.5 224.6 261.4 Inventory Turn (avg days) 148.1 206.6 163.9 169.4 172.2 199.9 Asset Turnover (x) 0.7 0.4 0.5 0.4 0.5 0.5 Current Ratio (x) 1.3 1.4 1.8 1.7 2.0 2.4 Quick Ratio (x) 0.5 0.6 0.9 0.7 0.9 1.3 Net Debt/Equity (X) 0.3 0.3 0.2 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.3 0.3 0.2 0.2 0.0 (0.1) Capex to Debt (%) 23.2 7.5 7.8 3.7 3.9 4.0 Z-Score (X) NA NA NA NA NA NA


Total assets increase in 2013 and 2015 were due to the acquisition of Tongjitang in 2013 and the acquisition of Tianjiang Pharm in 2015.

To finance the acquisition of Tongjitang, total debts (ST + LT) increased by 202% in 2013. To finance the acquisition of Tianjiang Pharm, total debts is expected to increase by 111% in 2015.

The substantial increases in shareholder’s equity in 2013 and 2015 were due to the issuances of new shares to finance the acquisitions of Tongjitang and Tianjiang Pharm respectively.

CTCM acquired a 87.3% stake in Tianjiang Pharm in 2015. The remaining stake will be treated as a minority interest.



Cash Flow Statement (RMB m) Capital Expenditure

FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

90.0

90.5

91.0

91.5

92.0

92.5

93.0

93.5

94.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

RM

Pre-Tax Profit 216 238 481 877 1,865 2,329 Dep. & Amort. 36 69 121 111 249 243 Tax Paid (33) (51) (93) (123) (261) (326) Assoc. & JV Inc/(loss) 0 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. (39) (189) (252) (554) (257) (299) Other Operating CF 1 19 70 231 38 8 Net Operating CF 181 86 327 543 1,634 1,956

Capital Exp.(net) (96) (93) (91) (92) (92) (92) Other Invts.(net) (84) 78 (1) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 2 (1,417) 11 (8,690) 8 24 Net Investing CF (178) (1,432) (81) (8,782) (84) (68) Div Paid (109) 0 0 0 0 0 Chg in Gross Debt 142 670 (72) 1,300 (100) (100) Capital Issues 0 1,016 0 7,232 0 0 Other Financing CF (25) (38) (77) (67) (126) (121) Net Financing CF 9 1,649 (150) 8,465 (226) (221) Currency Adjustments 0 (3) 0 0 0 0 Chg in Cash 12 300 96 226 1,324 1,667 Opg CFPS (RMB) 0.12 0.13 0.23 0.29 0.42 0.50 Free CFPS (RMB) 0.05 0.00 0.09 0.12 0.34 0.42


The substantial increases in net investing cash outflows in 2013 and 2015 were mainly due to the acquisitions of Tongjitang and Tianjiang Pharm respectively.

The substantial increases in gross debts in 2013 and 2015 were mainly due to acquisitions of Tongjitang and Tianjiang Pharm respectively.

In 2015, to finance the acquisition of Tianjiang Pharm, CTCM issued 1.95bn new shares to raise capital of c.Rmb7.3bn (1.5bn new shares at HK$4.68ps in Mar, 214m new shares at HK$4.68ps in Apr, 198m new shares at HK$4.212ps in 2H15). Total number of shares is expected to increase from 2.5bn to 4.5bn.

In 2013, CTCM acquired a 100% stake of Tongjitang for Rmb2.6bn, of which Rmb724m was paid by 334m of new shares issued at HK$2.8ps. In addition, CTCM issued 416m new shares at HK$3.1ps to raise Rmb1.02bn in the equity market to finance the acquisition. Following these activities, total number of shares had increased from 1.8bn to 2.5bn in 2013.

www.dbsvickers.com

ed-JS / sa- PY

BUY (initiate coverage)

Last Traded Price: RMB26.24 (HSI : 25,056) Price Target: RMB 36.2 (38% upside)

Potential Catalyst: M&A, lowering of operating cost Where we differ: Earnings are more bullish than consensus with differential likely from lower selling & admin cost % in sales

Analyst Mark KONG CFA, +852 2820 4619 [email protected]

Price Relative

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C R S a n jiu M e d ic a l & P h a rm a c e u t ic a l ( L H S )

R e la t iv e H S I IN D E X ( R H S )

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 7,277 8,037 8,838 9,729 EBITDA 1,503 1,705 1,871 2,056 Pre-tax Profit 1,260 1,453 1,624 1,822 Net Profit 1,036 1,193 1,334 1,496 Net Pft (Pre Ex) 1,036 1,193 1,334 1,496 EPS (RMB) 1.06 1.22 1.37 1.53 EPS Gth (%) (6.2) 15.2 11.8 12.2 Diluted EPS (RMB) 1.06 1.22 1.37 1.53 DPS (RMB) 0.41 0.43 0.48 0.54 BV Per Share (RMB) 6.92 7.73 8.67 9.72 PE (X) 24.8 21.5 19.2 17.1 P/Cash Flow (X) 21.6 18.5 16.7 15.3 P/Free CF (X) 30.3 23.6 20.8 18.6 EV/EBITDA (X) 16.5 14.2 12.5 10.9 Net Div Yield (%) 1.6 1.6 1.8 2.0 P/Book Value (X) 3.8 3.4 3.0 2.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 16.3 16.7 16.7 16.7


ICB Industry: Health Care ICB Sector: Pharmaceuticals & Biotechnology

Principal Business: Healthcare


SOLID GROWTH AHEADThird largest concentrated Chinese medicine granule (CCMG) maker with 11% market share in China. Among all segments of China Resources Sanjiu (CR Sanjiu), the sales CAGR of CCMG (2014-17F) is the strongest (36% vs 0-15%). Derived from herbs, CCMG dissolves instantly in water as a drink, unlike traditional herbal medicines which require a long decoction process. This enabled the CCMG market to grow at a 41% CAGR during 2010-14. Growth should remain strong at 30% CAGR over 2014-19. China’s CCMG market equaled to only 4% of the herbalmedicine market in 2014 (HK: 11%). Hence, there is ample room to grow. Before 2014, the operation of CR Sanjiu’s CCMG business were assigned to many different units, no single unit was responsible for the overall performance of CCMG. CR Sanjiu subsequently re-organised this segment and assigned all CCMG operations to one unit. We believe this can effectively motivate the unit. We expect CCMG to contribute 9/11/13% of earnings in FY15/16/17F. Well recognised in drug store market. Manufacturing of over-the-counter drugs (OTC drugs, drugs sold through drug stores) is still the largest sales contributor (56% in 2014). CR Sanjiu is well recognised in this market. China Association of Traditional Chinese Medicine ranked “999” (the brand of CR Sanjiu) as No.1 in terms of Chinese medicine brand reputation among 30 brands in 2014. We project the sales CAGR of OTC drugs in 2014-17F to be 8%. Along with the growth of CCMG, the expected EPS CAGR of CR Sanjiu in 2014-17F is 13%.

M&As to accelerate earnings growth. M&A has always been a growth strategy for CR Sanjiu. With net cash of Rmb1.1bn (Mar-15) and the support from parent China Resources group, it is ableto accelerate EPS growth through M&As in the future.

Valuation: Our TP of Rmb36.2 is based on 28x 12-month forward PE, representing 20% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects CR Sanjiu’s smaller CCMG business scale (2014 market share: 11% vs 53% for CTCM) and slower EPS CAGR in 2014-17F (13% vs 36%). Key Risks to Our View:

1. China may allow more players to enter the CCMG industrywhich will increase competition (only five licensed CCMG players now); 2. ASP pressure for generic drugs.

At A Glance

Issued Capital (m shrs) 979 Mkt. Cap (RMBm/US$m) 25,686 / 4,137 Major Shareholders

China Resources Holdings Co Ltd (%) 63.6 Free Float (%) 36.4 3m Avg. Daily Val. (US$m) 86.0



CR Sanjiu Medical & Pharmaceutical Bloomberg: 000999 CH Equity | Reuters: 000999.SZ Refer to important disclosures at the end of this report


CR Sanjiu Medical & Pharmaceutical

INVESTMENT THESIS

Profile Rationale

CR Sanjiu is the 3rd largest concentrated Chinese medicine granule (CCMG) maker with 11% market share in 2014. Besides the CCMG business, it is well recognised in the over-the-counter drugs market (drugs sold through drug stores). In 2014, its brand “999” was ranked no.1 in terms of Chinese medicine brand reputation by China Association of Traditional Chinese Medicine.



More provinces (15 currently) are including CCMG on their medical insurance coverage list due to its convenience.

The number of Chinese medicine hospitals in rural areas is expected to grow at a 17.5% CAGR over 2012-20.

The proportion of community health centres and health clinics in villages that can offer Chinese medicine services are expected to increase from 47% and 28% respectively in 2012, to 100% for both by 2020.

New growth driver through M&A by leveraging on its strong balance sheet

With net cash at Rmb1.1bn as at end Mar-15 and support from parent company China Resources Group, CR Sanjiu has ample financial resources for M&A in the future.

Valuation Risks

Our TP of Rmb36.2 is based on 28x 12-month forward PE, representing 20% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects CR Sanjiu’s smaller CCMG business scale (2014 market share: 11% vs 53% for CTCM) and slower EPS CAGR in 2014-17F (13% vs 36%).

Volatility of raw material costs

Volatility of raw material prices (over 600 kinds of herbs) along with a sales arrangement that prohibits the timely adjustment of product ASPs could affect its gross margin.

Possibly more competitors to emerge in future

It is possible that the PRC government may allow more players to enter the CCMG industry.

Source: DBS Vickers



SWOT Analysis

Strengths Weakness

One of the five licensed concentrated Chinese medicinegranule producers with third largest market share (11% in2014)

A well-recognised brand in drug store markets / OTC drugsmarket

Extensive sales network coverage on drug stores

Strong support from the parent company China Resourcesgroup

Strong balance sheet

Volatility of raw material costs (over 600 kinds of herbs)

New drug pipeline is relatively small. We expect no newdrugs to be launched in the next two years


CCMG market's CAGR in 2014-19 is projected to be 30%,driven by gradual replacement of Chinese herbal medicines,and an increase in the number of provinces including CCMGin the list of reimbursable drugs of medical insuranceprogrammes

Adding new growth driver through M&A by leveraging onits support from parent company and strong balance sheet

The PRC government may allow more players into theCCMG industry

ASP risk for its generic drugs (accounting for 28% ofrevenue in 2014)

Source: DBS Vickers



Valuation

Our TP of Rmb36.2 for CR Sanjiu is based on 28x 12-month forward PE, representing 20% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects CR Sanjiu’s smaller CCMG business scale (2014 market share: 11% vs 53% for CTCM) and slower EPS CAGR in 2014-17F (13% vs 36%).

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Peers valuation

Mk t PE PE Y ield Y ield P/Bk P/Bk EV /EBIT DA ROE ROE

Currency Price Cap 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

Code Local$ US$m x x % % x x x x % %

CCMG producers

CR Sanjiu Med.& Pharm.'A'* 000999 CH CNY 26.24 4,137 21.5 19.2 1.6 1.8 3.4 3.0 14.2 12.5 16.7 16.7



Major Chinese Medic ines mak ers

Hengkang Medical Gp.'A' 002219 CH CNY 37.24 4,538 62.2 44.9 0.1 0.2 7.0 6.1 39.2 29.7 18.2 14.6

J iangzhong Pharm.'A' 600750 CH CNY 39.72 1,919 35.5 28.4 1.0 1.1 4.8 4.3 24.2 18.8 14.2 16.4

Kunming Pharmaceutical 'A' 600422 CH CNY 33.98 1,867 30.8 24.6 1.0 1.3 5.1 4.4 n.a. n.a. 17.4 18.5


Shanghai Kaibao Pharm. 'A' 300039 CH CNY 16.05 2,155 27.3 23.7 1.3 0.8 5.5 4.6 n.a. n.a. 19.8 19.7

Sunflower Pharms.Gp.'A' 002737 CH CNY 48.89 2,299 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Shijiazhuang Yiling Pharm.'A' 002603 CH CNY 17.86 3,241 42.6 34.3 0.5 0.5 4.1 3.6 50.4 42.3 9.8 11.0

Guizhou Bailing Group Pharm.'A' 002424 CH CNY 71.1 5,387 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Renhe Pharmacy 'A' 000650 CH CNY 17.17 3,425 38.1 n.a. 0.9 n.a. 7.9 n.a. n.a. n.a. n.a. n.a.

Shan Dong Dong-E E-J iao 'A' 000423 CH CNY 47.2 4,972 18.9 15.9 1.7 2.1 4.2 3.4 13.9 11.7 22.8 22.4

Yunnan Baiyao Group 'A' 000538 CH CNY 70.6 11,842 23.3 20.0 0.8 0.7 4.4 4.0 22.2 18.3 21.9 21.7

J ilin Aodong Pharm.Gp. 'A' 000623 CH CNY 29.92 4,311 21.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Guilin Sanjin Pharm.'A' 002275 CH CNY 21.43 2,037 24.7 21.6 2.3 2.8 5.1 4.7 n.a. n.a. 19.0 20.2

Guangxi Wuzhou Zhongheng 'A' 600252 CH CNY 20.63 3,849 16.1 15.8 1.2 1.9 3.6 2.7 n.a. n.a. 22.0 17.7


Guangzhou Baiyunshan Pharm. 'A' 600332 CH CNY 30.16 6,272 27.0 23.1 0.9 0.9 3.9 3.3 24.9 22.2 16.2 15.5

Zhangzhou Pientzehuang Pharm.'A' 600436 CH CNY 63.46 4,111 44.5 38.5 0.8 0.8 7.9 6.7 34.5 28.6 16.2 17.0

Kangmei Pharm.'A' 600518 CH CNY 18.15 12,856 26.8 21.3 1.3 1.7 3.8 3.2 18.3 14.3 16.7 18.3

Tasly Pharmaceutical 'A' 600535 CH CNY 47.53 8,272 29.3 23.4 1.3 1.6 7.6 6.1 20.2 16.5 28.4 27.6

J iangsu Kanion Pharms. 'A' 600557 CH CNY 24.91 2,061 29.0 23.8 0.6 0.5 4.6 3.8 24.8 21.2 15.7 16.2

Hubei Jumpcan Pharm.'A' 600566 CH CNY 20.45 2,574 26.6 21.5 n.a. n.a. 5.2 4.2 n.a. n.a. 25.1 25.2


Guizhou Yibai Pharm. 'A' 600594 CH CNY 26.96 1,719 16.8 14.0 0.8 0.8 2.8 2.3 23.8 20.4 16.7 16.2

Heilongjiang Zbd Pharm. 'A' 603567 CH CNY 46.22 3,161 36.3 30.3 n.a. n.a. 7.0 5.7 n.a. n.a. 19.5 18.2

Tong Ren Tang Techs.'H' 1666 HK HKD 11.76 1,943 22.9 20.2 1.7 1.9 3.1 2.9 11.9 10.6 14.2 14.7


A v erage 29.8 24.7 1.1 1.3 4.8 4.0 23.3 18.9 17.5 17.5




Competitive edges

One of the five licensed concentrated Chinese medicine granule (CCMG) producers in China. CCMG is an advanced form of Chinese herbal medicine. Chinese herbal medicines are basically processed herbs which must be decocted into soup for consumption. Unlike Chinese herbal medicines, CCMG is more convenient as it does not require a time consuming decoction process, as it can instantly be dissolved in hot water for use. Doctors are able to prescribe different combinations of CCMG based on the patient's condition. Due to its convenience, CCMG’s market size in China has expanded by 41% CAGR in 2010-14 (total retail value in 2014: Rmb7.8bn.“Retail value” refers to the sales from medical institutes to patients). We project the CAGR (2014-19) to be at least 30%. There are only five licensed CCMG players in China which are riding on the industry's growth. CR Sangjiu is one them. Its market share was around 11% in 2014 (see chart and table below).




"CTCM" 570 HK)53%

Chase Sun Pharm

(300026 CH)22%

Company P3%

Neo Green11%


(000999 CH)11%



*“industry sales” are sales from the producers to distributor(s)(distributors then sell the CCMG to medical institutes)

A well-recognized brand in drug stores market. OTC drugs (or drugs sold through drug stores) is the largest revenue contributor for CR Sanjiu (56% in 2014). In China drug stores market, CR Sanjiu is a well-recognised brand evidenced by: 1) In 2014, China Association of Traditional Chinese Medicine ranked “999” (the brand of China Resources Sanjiu) as No.1 in terms of Chinese medicine brand reputation among 30 brands; 2) “999” is included in “China top 100 brands with the highest market value in 2014” issued by WPP (a global advertising & PR firm with 179k employees and 3,000 offices in 111 countries). There are only four pharmaceutical brands included in the list. The other three are Tongrentang (同仁堂), Baiyunshan (白雲山), Yunan Baoyao (雲南白葯). The market recognition is of great help for future sales growth.

Extensive sales network coverage on drug stores. There are around 430k drugs stores in China. CR Sanjiu sales network covers 47% of them (half of them are serviced by CR Sanjiu directly, while the other half are covered by CR Sanjiu’s distributors). Those are chain stores or larger-sized stores. Thanks to stronger financial resources, they are able to gain market share from smaller players amid industry consolidation. CR Sanjiu can grow with their market share expansion.

Strong support from the parent co China Resources group. China Resources group became CR Sanjiu's largest shareholder in 2008 (current stake: 63.59%). With the help of parent co, CR Sanjiu has identified and completed many M&A since then (see the following table). They have become important revenue contributors for the company. The support from parent co will help CR Sanjiu in future acquisitions.

Strong balance sheet. As of Mar 2015, CR Sanjiu had net cash of Rmb1.1bn. The strong balance sheet allows CR Sanjiu to pursue M&A and development of new products in the future.



Major acquisitions

Dat e T arget (Eng) T arget (Ch i) St ak eConsiderat ion

(Rmb m) M ajor produc t s

Cont ribut ionin 2014rev enue

Apr-09 Huangshi Sanjiu 黃石三九 100% 35 Ganmao Qingre Granules 感冒清熱顆粒 1.4%Aug-09 Anhui J inchan Bio-chem 金蟾生化 84% 166 Huachansu Injection 華蟾素注射液 2.1%Oct-09 Shanghai Baian 上海百安 100% 18

Oct-11 Double-crane high tech 雙鶴高科 100% 88 Shuxuening Injection 舒血寧注射液 1.6%Oct-11 Benxi Sanyao 本溪三藥 100% 172 Qizhi Weitong Granules 氣滯胃痛顆粒 2.1%Oct-11 Hefei Shenlu 合肥神鹿 100% 144 Wenweishu 溫胃舒 , Yangweishu 養胃舒 2.7%Mar-12 Shunfeng Pharm 順峰藥業 100% 600 Shufeng Kangwang 順峰康王 , 2.7%Feb-13 Guilin Tianhe Pharm 天和藥業 97% 583 Tianhe Gutongtiegao 天和牌骨通貼膏 , 3.0%Aug-13 Linqing Huawei 臨清華威 100% 81

T ot al 15.7%




Growth drivers

Current products. They are CR Sanjiu's largest growth drivers. The following tables are their revenue breakdown and their growth drivers.

Revenue breakdown and growth drivers

2014A 2015F 2016F 2017FCA G R

(2014 - 17F ) G row t h d riv ers

Pharmac eu t ic al 6,786 7,546 8,347 9,239 11%O T C d rugs 4,081 4,406 4,754 5,139 8%

Common cold 2,140 2,291 2,445 2,612 7% Sales network expansion

Dermotology 720 756 794 833 5% Sales network expansionDigestion sy stem 750 843 948 1,068 13% ASP surge of 999 Weitai Granules 三九胃泰 and

Qizhi Weitong Granules 氣滯胃痛顆粒 . Salesnetwork expansion.

Headaches & insomnia 150 158 165 174 5% Sales network expansion

Others 321 359 402 452 12%Increase of TV adv ertisement to promote products like

"Tianhe Gutongtiegao 天和牌骨通貼膏 " and"Tianhe Zhuifenggao 天和牌追風膏 ".

Presc rip t ion d rugs 2,705 3,140 3,593 4,100 15%Concentrated Chinesemedicine granule(CCMG)

600 900 1,170 1,521 36%

> Before 2014, the production, sales, R&D and otheradministration of CCMG were assigned to differetunits of CR Sanjiu. Within the group, no one wasresponsible for the ov erall performance of CCMG

business. CR Sanjiu re-organized this segment in 2014.A ll operations of CCMG was assigned to one unit. Thisis to motiv ate the unit responsible for CCMG business.

> Capacity increase will also support the growth.

Oncology 180 204 231 253 12%> The exclusiv e product "Huachansu injection 華蟾素

注射液 " should be able to enter new regions throughprov incial tenders.

Cardiav ascular 920 986 1,094 1,179 9% Sales network expansion

Others 1,005 1,050 1,097 1,147 5% Sales network expansion

Prin t ing 403 403 403 403 0%O v erseas t rad ing 34 34 34 34 0%O t hers 54 54 54 54 0%T O T A L 7,277 8,037 8,838 9,729 10%

Source: company, DBS Vickers

Lowering of operating cost % in sales. We expect the operating cost (selling & admin & others) % in sales to drop from 45% in 2014 to 44% in 2015 because: 1) total number of staffs for production and administration was reduced by 6% in 2014; 2) the sales growth is mainly driven by products for common cold, digestion system, cardiovascular. The sales network and platform of those products are well established which implies that even if there is sales increase, the related distribution cost increase will not be too much. This helps to lower operating cost % in sales.

Potential resumption of M&As to accelerate earnings growth. As mentioned above, M&A has been a major strategy since China Resources group became the largest shareholder of CR Sanjiu in 2008. However, there was no significant M&A in 2014. We believe this was due to top management changes in the major subsidiaries of China Resources group (including CR Sanjiu) after the group Chairman Mr. Song Lin was arrested in 2014 on corruption charges. The changes have been completed. We believe M&As will resume. Sitting on net cash of Rmb1.1bn (Mar 2015), CR Sanjiu has ample financial resources for M&A. Also, it has a database of 2,000 potential M&A targets. It has been contacting 10 of them each year for opportunities. This can also facilitate its M&A strategy in the future.



Risks & concerns

Volatility of raw material costs. We believe CR Sanjiu uses over 600 types of raw Chinese herbs. We believe they account for over 50% of its COGS. Prices can be volatile which may impact gross margins.

More competition in the CCMG market. During an investor meeting on 17-Mar-15, the management of China Traditional Chinese Medicine (570 HK) openly commented that in order to promote Chinese medicine, the Central government may allow

more players to participate in the CCMG market. They estimated that the government may open up the market in Jun-16. We should not rule out this possibility. A potential increasein the number of players in the CCMG market adds to the uncertainty.

ASP risk for generic products. We estimate that generic drugs made up 28% of CR Sanjiu’s revenue in 2014. These drugs are produced by many other players too. The competition and ASP risk for them is higher than exclusive products.



c.11% - Concentrated Chinese medicine granulesc.28% - Prescription drugs (excluding CCMG)c.55% - OTC drugsc.6% - Others

COGS structure 3.6% - Staff cost85.7% - Raw materials10.7% - Others

Major shareholders 63.6% - China Resources GroupHeadquater ShenzhenAuditor DeloitteCorporate milestones 1980s - Establishment

2000 - Listed in Shenzhen stock market2008 - China Resources Group became the largest shareholder of this company .





FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

OTC drugs - sales growth %

18.1 9.8 (0.9) 8.0 7.9 8.1 2015F

Prescription - sales growth %

50.5 15.4 2.1 16.1 14.4 14.1 Operating cost (selling & admin) % in sales +/- 1ppt

Net Profit +/- 5.5%

Operating costs (Selling & Admin & Others) % in sales

42.9 44.7 45.0 44.0 44.0 44.0 Gross margin +/- 1ppt

Net Profit +/- 5.4%


FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) OTC drugs 3,751 4,117 4,081 4,406 4,754 5,139 Prescription drugs 2,295 2,650 2,705 3,140 3,593 4,100 Others 897 527 491 491 491 491 Total 6,943 7,293 7,277 8,037 8,838 9,729 Gross profit (RMB m) OTC drugs 2,464 2,582 2,519 2,720 2,935 3,172 Prescription drugs 1,525 1,849 1,828 2,123 2,429 2,772 Others 249 162 117 117 117 117 Total 4,237 4,593 4,464 4,952 5,465 6,036 Gross margin Margins (%) OTC drugs 65.7 62.7 61.7 61.7 61.7 61.7 Prescription drugs 66.4 69.8 67.6 67.6 67.6 67.6 Others 27.7 30.8 23.8 23.8 23.8 23.8 Total 61.0 63.0 61.4 61.6 61.8 62.0 Source: Company, DBS Vickers

We believe the slowdown of sales growth is largely due to the sales growth slowdown of pharmaceutical industry (from 20% in 2013 to 13% in 2014.)




FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

2013A 2014A 2015F 2016F 2017F


Revenue 6,943 7,293 7,277 8,037 8,838 9,729 Cost of Goods Sold (2,706) (2,700) (2,812) (3,085) (3,373) (3,693) Gross Profit 4,237 4,593 4,464 4,952 5,465 6,036 Other Opng (Exp)/Inc (2,981) (3,256) (3,229) (3,534) (3,887) (4,279) Operating Profit 1,256 1,337 1,235 1,417 1,578 1,756 Other Non Opg (Exp)/Inc 21 22 32 33 33 33 Associates & JV Inc 0 0 0 0 0 0 Net Interest (Exp)/Inc 13 2 (7) 3 14 33 Dividend Income 0 0 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 1,290 1,361 1,260 1,453 1,624 1,822 Tax (202) (218) (187) (218) (244) (273) Minority Interest (67) (34) (36) (42) (47) (52) Preference Dividend 0 0 0 0 0 0 Net Profit 1,021 1,109 1,036 1,193 1,334 1,496 Net Profit before Except. 1,021 1,109 1,036 1,193 1,334 1,496 EBITDA 1,503 1,572 1,503 1,705 1,871 2,056 Growth Revenue Gth (%) 26.0 5.0 (0.2) 10.4 10.0 10.1 EBITDA Gth (%) 42.6 4.6 (4.4) 13.5 9.7 9.9 Opg Profit Gth (%) 38.7 6.4 (7.6) 14.7 11.3 11.3 Net Profit Gth (%) 34.3 8.6 (6.6) 15.2 11.8 12.2 Margins & Ratio Gross Margins (%) 61.0 63.0 61.4 61.6 61.8 62.0 Opg Profit Margin (%) 18.1 18.3 17.0 17.6 17.9 18.1 Net Profit Margin (%) 14.7 15.2 14.2 14.8 15.1 15.4 ROAE (%) 32.4 19.6 16.3 16.7 16.7 16.7 ROA (%) 20.3 11.9 10.0 10.7 11.1 11.4 ROCE (%) 29.5 17.1 13.9 14.3 14.3 14.4 Div Payout Ratio (%) 24.9 23.0 38.6 35.0 35.0 35.0 Net Interest Cover (x) NM NM 168.5 NM NM NM Source: Company, DBS Vickers

The company has abundant cash (net cash of Rmb1.1bn as of Dec 2014). So, it increased the payout.

We believe the net margin improvement is due to 1) reduction of production & administration staffsby 6% in 2014; 2) ASP increase in several OTC products.



Quarterly Income Statement (RMB m) Margins Trend

FY Dec 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015

0%

5%

10%

15%

20%

25%

1Q2013

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015


Revenue 2,199 1,747 1,904 1,758 1,700 1,883 Cost of Goods Sold (907) (644) (813) (756) (483) (708) Gross Profit 1,292 1,103 1,091 1,002 1,217 1,175 Other Oper. (Exp)/Inc (939) (762) (761) (782) (962) (777) Operating Profit 354 341 330 220 255 398 Other Non Opg (Exp)/Inc 16 12 25 10 32 13 Associates & JV Inc 0 0 0 0 0 0

Net Interest (Exp)/Inc 1 0 2 (1) (8) 0 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 369 353 358 230 281 413 Tax (67) (52) (57) (46) (33) (63) Minority Interest 2 (12) (14) (11) 0 (8) Net Profit 306 289 287 172 247 339 Net profit bef Except. 305 289 287 173 249 342 EBITDA N/A N/A N/A N/A N/A N/A

Growth (QoQ) Revenue Gth (%) 24.1 (20.5) 9.0 (7.7) (3.3) 10.8 EBITDA Gth (%) N/A N/A N/A N/A N/A N/A Opg Profit Gth (%) 13.1 (3.4) (3.2) (33.5) 16.3 55.7 Net Profit Gth (%) 11.7 (5.5) (0.9) (39.9) 43.5 37.3

Growth (YoY) Revenue Gth (%) N/A (4.6) (3.3) (0.8) (22.7) 7.8 EBITDA Gth (%) N/A N/A N/A N/A N/A N/A Opg Profit Gth (%) N/A (15.6) 0.6 (29.8) (27.8) 16.5 Net Profit Gth (%) N/A (14.5) 10.7 (37.2) (19.3) 17.2

Margins Gross Margins (%) 58.8 63.1 57.3 57.0 71.6 62.4 Opg Profit Margins (%) 16.1 19.5 17.4 12.5 15.0 21.1 Net Profit Margins (%) 13.9 16.6 15.0 9.8 14.5 18.0


The earnings growth is much faster than sales growth, thanks to reduction of cost. Distribution cost % in sales and admin cost % in sales have both decreased by 1ppt y-o-y.





Assocs'/JVs -0.0%


Assets -29.2%

Inventory -15.2%

Debtors -9.6%

Net Fixed Assets 2,448 2,564 2,808 2,884 2,955 3,019 Invts in Associates & JVs 0 0 0 0 0 0 Other LT Assets 2,054 2,464 2,736 2,704 2,673 2,641 Cash & ST Invts 1,355 1,183 1,140 1,834 2,654 3,587 Inventory 832 978 858 956 1,052 1,158 Debtors 480 551 542 603 663 730 Other Current Assets 1,505 2,236 2,583 2,583 2,583 2,583

Total Assets 8,674 9,976 10,667 11,564 12,578 13,718

ST Debt 79 23 32 32 28 25 Creditors 603 703 505 563 619 681 Other Current Liab 2,039 2,151 2,135 2,135 2,135 2,135 LT Debt 26 3 10 14 12 11 Other LT Liabilities 320 900 991 991 991 991 Shareholder’s Equity 5,340 5,984 6,760 7,554 8,470 9,500 Minority Interests 266 212 236 277 324 376 Total Cap. & Liab. 8,674 9,976 10,667 11,564 12,578 13,718

Non-Cash Wkg. Capital 176 911 1,344 1,445 1,544 1,654 Net Cash/(Debt) 1,250 1,157 1,098 1,789 2,614 3,552 Debtors Turn (avg days) 16.9 25.8 27.4 26.0 26.1 26.1 Creditors Turn (avg days) 48.8 95.8 85.5 68.8 69.3 69.2 Inventory Turn (avg days) 68.3 132.8 130.1 117.0 117.8 117.7 Asset Turnover (x) 1.4 0.8 0.7 0.7 0.7 0.7 Current Ratio (x) 1.5 1.7 1.9 2.2 2.5 2.8 Quick Ratio (x) 0.7 0.6 0.6 0.9 1.2 1.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) (0.2) (0.2) (0.2) (0.2) (0.3) (0.4) Capex to Debt (%) 477.0 1,113.8 816.2 666.7 750.0 857.1 Z-Score (X) NA NA NA NA NA NA





FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

250.0

260.0

270.0

280.0

290.0

300.0

310.0

320.0

330.0

340.0

350.0

2013A 2014A 2015F 2016F 2017F


RM

Pre-Tax Profit 1,290 1,361 1,260 1,453 1,624 1,822 Dep. & Amort. 225 214 238 257 264 271 Tax Paid (184) (226) (191) (218) (244) (273) Assoc. & JV Inc/(loss) 0 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. (186) (55) (145) (101) (99) (111) Other Operating CF 70 52 24 (3) (14) (33) Net Operating CF 1,215 1,346 1,186 1,389 1,531 1,676

Capital Exp.(net) (503) (285) (339) (300) (300) (300) Other Invts.(net) 0 (741) (470) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF (1,040) (462) (111) 24 37 53 Net Investing CF (1,543) (1,488) (920) (276) (263) (247) Div Paid (256) (277) (290) (399) (418) (467) Chg in Gross Debt (97) 382 (23) 3 (5) (5) Capital Issues 0 0 0 0 0 0 Other Financing CF 13 (133) 6 (21) (23) (20) Net Financing CF (340) (28) (307) (417) (445) (492) Currency Adjustments 0 (1) 0 0 0 0 Chg in Cash (668) (171) (41) 696 823 937 Opg CFPS (RMB) 1.44 1.43 1.36 1.52 1.67 1.83 Free CFPS (RMB) 0.73 1.08 0.87 1.11 1.26 1.41


Purchase of wealth management products

www.dbsvickers.com

ed- JS / sa- PY

HOLD (Initiate coverage)

Last Traded Price: RMB20.11 (HSI : 25,056) Price Target : Rmb21.4 (6% upside)

Potential Catalyst: M&A Where we differ: more conservative earnings than consensus due to lower sales growth assumptions for segments other than CCMG. Analyst Mark KONG CFA, +852 2820 4619 [email protected]

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R e la t iv e H S I IN D E X ( R H S )

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 2,864 3,654 5,030 6,083 EBITDA 568 707 915 1,113 Pre-tax Profit 519 665 882 1,081 Net Profit 447 569 756 926 Net Pft (Pre Ex) 447 569 756 926 EPS (RMB) 0.52 0.61 0.75 0.92 EPS Gth (%) 28.9 17.1 23.5 22.6 Diluted EPS (RMB) 0.52 0.61 0.75 0.92 DPS (RMB) 0.07 0.07 0.10 0.12 BV Per Share (RMB) 2.73 5.11 5.79 6.61 PE (X) 38.7 33.0 26.7 21.8 P/Cash Flow (X) 113.8 45.9 31.3 31.6 P/Free CF (X) nm 78.4 42.5 34.3 EV/EBITDA (X) 29.7 24.4 19.9 15.9 Net Div Yield (%) 0.4 0.4 0.5 0.6 P/Book Value (X) 7.4 3.9 3.5 3.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 22.1 15.2 13.8 14.9


ICB Industry: Health Care ICB Sector: Pharmaceuticals & BiotechnologyPrincipal Business: Healthcare


POSITIVE FACTORS LARGELY PRICED IN

Second largest concentrated Chinese medicine granule (CCMG) maker with 22% market share in China. We expect CCMG to contribute 56/55/58% of the company’s earnings in FY15/16/17F. Derived from herbs, CCMG dissolves instantly in water as a drink, unlike herbal medicines which require a long decoction process. This advantage enabled the CCMG market to grow at 41% CAGR during 2010-14. Growth should remain strong at 30% CAGR over 2014-19. The CCMG market in China equaled to just 4% of the herbal medicine market in 2014 (HK: 11%) and hence, there is ample room to grow. To capture this potential, Chase Sun will increase its CCMG capacity by 133%. The construction of new capacity should be completed by Dec-16. Exclusive medicine “Xuebijin injection” to fuel growth. Chase Sun produces the exclusive Chinese medicine, “Xuebijin”, which is used as an injection. It is one of the very few medicines available for the treatment of sepsis. Each year, there are c.3m cases of patients with sepsis in China with a death rate of c.17%, which supports demand for Xuebijin. Led by sales network expansion, we project earnings CAGR of this product to be 10% (FY14-17F), and to contribute 36/29/26% of earnings in FY15/16/17F. Along with the growth of CCMG, we expect Chase Sun’s EPS CAGR to be 21% in FY14-17F. Valuation:

Our TP of Rmb21.4 is based on 31.5x 12-month forward PE, representing 10% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects Chase Sun’s smaller CCMG business scale (2014 market share: 22% vs 53% for CTCM) and slower EPS CAGR in 2014-17F (21% vs 36%). As the current share price is very close to our TP, we initiate coverage with HOLD.

Key Risks to Our View:

It is possible that the PRC government may allow more players to enter the CCMG industry, although the timing is still uncertain.

At A Glance

Issued Capital (m shrs) 912 Mkt. Cap (RMBm/US$m) 18,331 / 2,953 Major Shareholders

Tianjin Datong Investment Group (%) 23.3 Xiaoqing Yao (%) 20.1

Free Float (%) 56.6 3m Avg. Daily Val. (US$m) 83.7



Tianjin Chase Sun Pharmaceutical Bloomberg: 300026 CH Equity | Reuters: 300026.SZ Refer to important disclosures at the end of this report


Tianjin Chase Sun Pharmaceutical

INVESTMENT THESIS

Profile Rationale

Chase Sun is the second largest concentrated Chinese medicine granule (CCMG) maker with 22% market share in 2014; there are only five licensed players in the CCMG industry. CCMG is a processed form of traditional Chinese herbal medicine. Herbal medicines require a time-consuming decoction process, while CCMG can be instantly dissolved in hot water for consumption. Doctors are able to prescribe different combinations of CCMG to treat different ailments. Chase Sun also produces an exclusive Chinese medicine called “Xuebijing injection” which is one of the very few drugs for treatment of sepsis.



More provinces (15 currently) are including CCMG on their medical insurance coverage list due to its convenience.

The number of Chinese medicine hospitals in rural areas is expected to grow at 17.5% CAGR over 2012-20.

The proportion of community health centers and health clinics in villages that can offer Chinese medicine services are expected to increase from 47% and 28% respectively in 2012, to 100% for both by 2020.

New growth driver through M&As by leveraging on its strong balance sheet

With net cash at Rmb1.365bn by end Mar-15, Chase Sun has ample financial resources for future development.

Valuation Risks

Our TP of Rmb21.4 is based on 31.5x 12-month forward PE, representing 10% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects Chase Sun’s smaller CCMG business scale (2014 market share: 22% vs 53% for CTCM) and slower EPS CAGR in 2014-17F (21% vs 36%). As the current share price is very close to our TP, we initiate coverage with HOLD.

Volatility of raw material costs Volatility of raw material prices (over 600 kinds of herbs) along with a sales arrangement that prohibits the timely adjustment of product ASPs could affect its gross margin. Possibly more competitors to emerge in future It is possible that the PRC government may allow more players to enter the CCMG industry.

Source: DBS Vickers



SWOT Analysis

Strengths Weakness

One of the five licensed concentrated Chinese medicine granule producers with second largest market share (22%) and strong presence in Northern China

Chase Sun’s exclusive drug “Xuebijing injection” is one of the very few drugs for treatment of sepsis

Strong balance sheet

Volatility of raw materials’ cost (over 600 kinds of herbs)

Xuebijing injection accounted for 45% of revenue and 41% of earnings in 2014. Cut in ASP and slowing sales of this product would impact Chase Sun’s earnings.


CCMG market's CAGR in 2014-19 is projected to be 30%, driven by gradual replacement of herbal Chinese medicines, and an increase in the number of provinces including CCMG in the list of reimbursable drugs of medical insurance programmes.

The PRC government may allow more players into the CCMG industry.

ASP risk for its generic products (generic finished drugs, bulk drugs, pharmaceutical excipients), which are estimated to make up 14% of revenue in FY15.

Source: DBS Vickers



Valuation

Our TP of Rmb21.4 is based on 31.5x 12-month forward PE, representing 10% discount to our target PE of CCMG industry leader China Traditional Chinese Medicine (CTCM, 570 HK). The discount reflects Chase Sun’s smaller CCMG business scale (2014 market size: 22% vs 53% for CTCM ) and slower EPS CAGR in 2014-17F (21% vs 36%). As the current share price is very close to our TP, we initiate coverage with HOLD.

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Peers valuation

Mk t PE PE Y ield Y ield P/Bk P/Bk EV /EBITDA ROE ROE

Currency Price Cap 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

Code Local$ US$m x x % % x x x x % %

CCMG producers

CR Sanjiu Med.& Pharm.'A'* 000999 CH CNY 26.24 4,137 21.5 19.2 1.6 1.8 3.4 3.0 14.2 12.5 16.7 16.7



Major Chinese Medic ines mak ers

Hengkang Medical Gp.'A' 002219 CH CNY 37.24 4,538 62.2 44.9 0.1 0.2 7.0 6.1 39.2 29.7 18.2 14.6

J iangzhong Pharm.'A' 600750 CH CNY 39.72 1,919 35.5 28.4 1.0 1.1 4.8 4.3 24.2 18.8 14.2 16.4

Kunming Pharmaceutical 'A' 600422 CH CNY 33.98 1,867 30.8 24.6 1.0 1.3 5.1 4.4 n.a. n.a. 17.4 18.5


Shanghai Kaibao Pharm. 'A' 300039 CH CNY 16.05 2,155 27.3 23.7 1.3 0.8 5.5 4.6 n.a. n.a. 19.8 19.7

Sunflower Pharms.Gp.'A' 002737 CH CNY 48.89 2,299 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Shijiazhuang Yiling Pharm.'A' 002603 CH CNY 17.86 3,241 42.6 34.3 0.5 0.5 4.1 3.6 50.4 42.3 9.8 11.0

Guizhou Bailing Group Pharm.'A' 002424 CH CNY 71.1 5,387 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Renhe Pharmacy 'A' 000650 CH CNY 17.17 3,425 38.1 n.a. 0.9 n.a. 7.9 n.a. n.a. n.a. n.a. n.a.

Shan Dong Dong-E E-J iao 'A' 000423 CH CNY 47.2 4,972 18.9 15.9 1.7 2.1 4.2 3.4 13.9 11.7 22.8 22.4

Yunnan Baiyao Group 'A' 000538 CH CNY 70.6 11,842 23.3 20.0 0.8 0.7 4.4 4.0 22.2 18.3 21.9 21.7

J ilin Aodong Pharm.Gp. 'A' 000623 CH CNY 29.92 4,311 21.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Guilin Sanjin Pharm.'A' 002275 CH CNY 21.43 2,037 24.7 21.6 2.3 2.8 5.1 4.7 n.a. n.a. 19.0 20.2

Guangxi Wuzhou Zhongheng 'A' 600252 CH CNY 20.63 3,849 16.1 15.8 1.2 1.9 3.6 2.7 n.a. n.a. 22.0 17.7


Guangzhou Baiyunshan Pharm. 'A' 600332 CH CNY 30.16 6,272 27.0 23.1 0.9 0.9 3.9 3.3 24.9 22.2 16.2 15.5

Zhangzhou Pientzehuang Pharm.'A' 600436 CH CNY 63.46 4,111 44.5 38.5 0.8 0.8 7.9 6.7 34.5 28.6 16.2 17.0

Kangmei Pharm.'A' 600518 CH CNY 18.15 12,856 26.8 21.3 1.3 1.7 3.8 3.2 18.3 14.3 16.7 18.3

Tasly Pharmaceutical 'A' 600535 CH CNY 47.53 8,272 29.3 23.4 1.3 1.6 7.6 6.1 20.2 16.5 28.4 27.6

J iangsu Kanion Pharms. 'A' 600557 CH CNY 24.91 2,061 29.0 23.8 0.6 0.5 4.6 3.8 24.8 21.2 15.7 16.2

Hubei Jumpcan Pharm.'A' 600566 CH CNY 20.45 2,574 26.6 21.5 n.a. n.a. 5.2 4.2 n.a. n.a. 25.1 25.2


Guizhou Yibai Pharm. 'A' 600594 CH CNY 26.96 1,719 16.8 14.0 0.8 0.8 2.8 2.3 23.8 20.4 16.7 16.2

Heilongjiang Zbd Pharm. 'A' 603567 CH CNY 46.22 3,161 36.3 30.3 n.a. n.a. 7.0 5.7 n.a. n.a. 19.5 18.2

Tong Ren Tang Techs.'H' 1666 HK HKD 11.76 1,943 22.9 20.2 1.7 1.9 3.1 2.9 11.9 10.6 14.2 14.7


A v erage 29.8 24.7 1.1 1.3 4.8 4.0 23.3 18.9 17.5 17.5




Competitive edge

One of the five licensed concentrated Chinese medicines granule (CCMG) makers with strong presence in Northern China. CCMG is an advanced form of herbal Chinese medicine. Herbal Chinese medicines are basically processed herbs which must be decocted into soup for consumption. Unlike herbal Chinese medicines, CCMG is more convenient as it does not require a time consuming decoction process and it can instantly dissolve in hot water for use. Doctors are able to prescribe different combinations of CCMG based on the condition of the patient. Due to its convenience, CCMG’s market size in China has expanded by 41% CAGR in 2010-14 (Total retail value in 2014: Rmb7.8bn. “Retail value” refers to the sales from medical institutes to patients). There are only five licensed CCMG players in China. Chase Sun’s market share in the CCMG industry was 22% in 2014 (see chart and table below), and as the second largest player in CCMG industry with strong presence in Northern China, the company is poised for strong growth ahead.




"CTCM" 570 HK)53%

Chase Sun Pharm

(300026 CH)22%

Company P3%

Neo Green11%


(000999 CH)11%



* “Industry sales” refers to the ex-factory sales from CCMG producersto distributors / medical institutes.

Peer comparison

CT CM (570 HK )(T iang jiang Pharm &G uangdong Y if ang )


Ch inaRec ou rc es San jiu

(000999 CH) Neo G reenCCMG sales in China (2014), Rmb m 3129 1,219 600 600*CCMG gross margin in China (2014) 53% 78% 60% n/a


CCMG net profit in China (2014), Rmb m 652 265 75* n/aF ocus of sales network cov erage Eastern China Northern China Southern China Mid-Western China


F oshan(Guangdong prov ince)

Beijing


production in 2017)


- finished products


- extraction







Xuebijing (血必净) injection: one of the very few drugs to treat sepsis. There are very few drugs to treat sepsis. Xuebijing is one of them and is an exclusive drug owned by Chase Sun. It is modern Chinese medicine in injection form. Demand for Xuebijing is strong in China because there are around 3m cases

of patients affected by sepsis each year, with death rate of around 17%.Strong balance sheet. Chase Sun has net cash of Rmb1.365bn (Mar-15). This provides ample financial resources for future development.



Growth drivers

Revenue breakdown

Rmb m 2014 2015F 2016F 2017FConcentrated Chinese Medicine Granule 1,219 1,584 2,060 2,678

Xuebijing injection 1,278 1,406 1,546 1,701Pulse Oximeter (Expect contribution to start in Sep 15) 109 374 429Pharmaceutical excipients (Expect contribution to start in Sep 15) 152 606 788

Others 367 404 444 488T ot al 2 ,864 3 ,654 5 ,030 6 ,083

G row t h % 2014 2015F 2016F 2017FConcentrated Chinese Medicine Granule 30% 30% 30%Xuebijing injection 10% 10% 10%

Pulse Oximeter (Expect contribution to start in Sep 15) 244% 15%Pharmaceutical excipients (Expect contribution to start in Sep 15) 300% 30%

Others 10% 10% 10%T ot al 28% 38% 21%

Break dow n % 2014 2015F 2016F 2017FConcentrated Chinese Medicine Granule 43% 43% 41% 44%

Xuebijing injection 45% 38% 31% 28%Pulse Oximeter (Expect contribution to start in Sep 15) 0% 3% 7% 7%

Pharmaceutical excipients (Expect contribution to start in Sep 15) 0% 4% 12% 13%Others 13% 11% 9% 8%

Total 100% 100% 100% 100% Source: company, DBS Vickers

Earnings breakdown

Rmb m 2014E 2015F 2016F 2017FConcentrated Chinese Medicine Granule 244 318 413 537

Xuebijing injection 183 202 222 245Pulse Oximeter (Expect contribution to start in Sep 15) 16 55 63

Pharmaceutical excipients (Expect contribution to start in Sep 15) 10 40 52

Others 20 23 25 28Total 447 569 755 925

G row t h %

Concentrated Chinese Medicine Granule 30% 30% 30%Xuebijing injection 10% 10% 10%Pulse Oximeter (Expect contribution to start in Sep 15) 244% 15%Pharmaceutical excipients (Expect contribution to start in Sep 15) 300% 30%Others 15% 9% 12%Total 27% 33% 23%

Break dow n %

Concentrated Chinese Medicine Granule 55% 56% 55% 58%Xuebijing injection 41% 36% 29% 26%Pulse Oximeter (Expect contribution to start in Sep 15) 3% 7% 7%Pharmaceutical excipients (Expect contribution to start in Sep 15) 2% 5% 6%Others 4% 4% 3% 3%Total 100% 100% 100% 100%




CCMG has strong growth potential. CCMG is the largest earnings contributor for Chase Sun. As the second largest CCMG producer in China with strong presence in Northern China, it is poised to benefit from the growth in the CCMG industry. We project CAGR of CCMG market to be 30% (2014-19) underpinned by gradual replacement of herbal Chinese medicines, inclusion of CCMG in more reimbursable drug lists of provincial insurance programs, and increasing usage of Chinese medicines in hospitals in rural areas. CCMG market equaled to just 4% of the herbal medicine market in 2014 in China (HK: 11%). Hence, there is ample room to grow. To capture this opportunity, Chase Sun will increase its CCMG capacity from 1000 tons p.a. to 3500 tons. The construction of the new capacity should be completed by end-2016.

Xuebijing injection. As mentioned above, Xuebijing is exclusive to Chase Sun and it is also one the very few medicines for treatment of sepsis. Demand for this product will be driven by sales network expansion and penetration into various departments of its current base of hospital customers (e.g. department of oncology, as it helps to lower fever caused by cancer).

Pulse oximeter. In 2Q15, Chase Sun announced the acquisition of a 100% stake of ChoiceMMed for Rmb969m (31x FY14A PE, 20x FY15F PE), a pulse oximeter producer with 20 years of history. In 1Q15, in terms of revenue contribution to ChoiceMMed, North America made up 66% and Europe made up 11%. In terms of products, fingertip pulse oximeter was the largest at 82%.

ChoiceMMed delivered earnings of Rmb27m in FY13 and Rmb31m in FY14. The vendor of the acquisition has given a guarantee that earnings should hit Rmb48m in FY15 (contribution to Chase Sun should be Rmb16m as we expect the contributions to start in Sep-15) and Rmb55m in FY16. In FY17, we expect ChoiceMMed’s earnings to rise 15% to Rmb63m. Growth drivers are discussed below:

1) Although the company has been focusing on exports for the past 20 years, the majority of its products have been approved by China Food & Drug Administration (CFDA), which means these products can be sold in China. The penetration of pulse oximeters in China is still very low currently, implying there is ample room to grow.

2) Chase Sun’s sales network covers over 2000 hospitals in China. Leveraging on this network, ChoiceMMed can speed up the growth of this business.

3) ChoiceMMed will launch 18 new products (mobile monitors for different health indexes) in next 12 months.

Pharmaceutical excipients. In 2Q15, Chase Sun announced the acquisition of a 100% stake in Zhanwang Pharm for Rmb600m (39x FY14A PE; 19x FY15F PE), a producer of 19 types of pharmaceutical excipients and 8 bulk drugs, with over 80% of revenue contributed by the China market.

Zhanwang Pharm recorded earnings of Rmb17.6m in FY13 and Rmb15.2m in FY14. The vendor of the acquisition has given a guarantee for earnings to be Rmb31m in FY15 (contribution to Chase Sun in FY15 should be Rmb10m as we expect contribution to start in Sep-15) and Rmb40m in FY16. In FY17, we expect Zhanwang Pharm’s earnings to be 29% higher at Rmb52m. We believe growth drivers for this segment include capacity growth and market share expansion amid industry consolidation.

New drugs. Chase Sun has completed clinical trials for eight drugs, pending approval from CFDA (see table below). Upon approval, Chase Sun can start selling the drugs. As it takes time for new products to penetrate into the market, we do not expect any meaningful contribution during FY15-17.

New drugs

Drug Ind ic at ionEx c lu s iv e/

G enericPara Toluene SulfonaMide(injection)

Anti-cancer Exclusiv e

F lupirtine Maleate Acute pain (mild,moderate, sev ere)

Generic

F ondaparinux Sodium V ascular Generic

Thy malfasin Immunomodulators Generic

Tirofiban Hy drochloride Cardiov ascular Generic

Rocuronium Bromide Anesthesia Generic

Clopidogrel Hy drogen Sulfate Cardiov ascular Generic

Aripirazole Neurological Generic




Risks & concerns

Volatility of raw material costs. We believe Chase Sun uses over 600 types of raw Chinese herbs, which account for over 50% of Chase Sun’s COGS. Prices can be volatile which may impact gross margins.

More competition in the CCMG market. During an investor meeting on 17-Mar-15, the management of China Traditional Chinese Medicines (570 HK) openly commented that in order to promote Chinese medicine, the Central government may allow more players to participate in the CCMG market. They estimated that the government may open up the market in Jun-

16. We should not rule out this possibility. A potential increase in the number of players in the CCMG market adds uncertainty.

ASP risk for generic products. We estimate generic products (including generic drugs, pharmaceutical excipients, bulk drugs) form 14%/20%/20% of Chase Sun’s revenue in FY15/16/17F. These drugs are produced by many other players too. Relative to its exclusive product, competition and ASP risk for generic products is much higher.


2015F Earningsbreakdown

c.56% - Concentrated Chinese medicine granulesc.36% - Xuebijing injectionc.8% - Others


c.43% - Concentrated Chinese medicine granulesc.38% - Xuebijing injectionc.19% - Others

COGS structure 8.23% - Staff cost55.64% - Raw materials36.13% - Others

Majorshareholders

21.17% - Tianjin Datong inv estment (天津大通投資 , 70% owned by Mr. Li Zhan Tong 李占通 , director of ChaseSun)18.21% - Mr. Yao Xiao Qin 姚小青 (Chairman of Chase Sun)

Headquater TianjinProduction bases Tianjin, Beijing, Lanzhou (Gansu prov ince), Huzhou (Zhejiang prov ince)

Auditor Ruihua

Corporatemilestones

2000 - Establishment2009 - Listed in Shenzhen stock market2012 - TCMages became wholly -owned subsidiary of Chase Sun. TCMages is one of the few licensed concentratedChinese medicine granule (CCMG) producers in China. CCMG business contributed ov er 50% of Chase Sun's 2014earnings.





FY Dec 2013A 2014A 2015F 2016F 2017F

Xuebijing injection - sales growth %

101.7 26.5 10.0 10.0 10.0 2015F

Concentrated Chinese Medicine Granule - sales growth %

61.3 51.7 30.0 30.0 30.0 Xuebijing injection

gross margin +/- 1ppt

Net Profit +/- 2%

Pulse Oximeter - sales growth %

N/A N/A N/A 243.8 14.5 Concentrated

Chinese medicine granule +/- 1ppt

Net Profit +/- 2.4%

Pharmaceutical excipients - sales growth %

N/A N/A N/A 300.0 30.0


FY Dec 2012A 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Xuebijing injection 501 1,010 1,278 1,406 1,546 1,701 Concentrated Chinese

di i G l 498 803 1,219 1,584 2,060 2,678

Pulse Oximeter 0 0 0 109 374 429 Pharmaceutical excipients 0 0 0 152 606 788 Others 230 284 367 404 444 488 Total 1,229 2,097 2,864 3,654 5,030 6,083 Gross profit (RMB m) Xuebijing injection 447 926 1,189 1,308 1,438 1,582 Concentrated Chinese Medicine Granule

371 622 951 1,236 1,607 2,089 Pulse Oximeter 0 0 0 52 183 214 Pharmaceutical excipients 0 0 0 37 158 213 Others 168 232 257 283 311 342 Total 986 1,779 2,396 2,916 3,697 4,440 Gross margin (%) Xuebijing injection 89.2 91.6 93.0 93.0 93.0 93.0 Concentrated Chinese Medicine Granule

74.4 77.4 78.0 78.0 78.0 78.0 Pulse Oximeter N/A N/A N/A 48.0 49.0 50.0 Pharmaceutical excipients N/A N/A N/A 24.6 26.0 27.0 Total 80.2 84.8 83.7 79.8 73.5 73.0 Source: Company, DBS Vickers




FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

2013A 2014A 2015F 2016F 2017F


Revenue 1,229 2,097 2,864 3,654 5,030 6,083 Cost of Goods Sold (244) (318) (467) (738) (1,333) (1,644) Gross Profit 986 1,779 2,396 2,916 3,697 4,440 Other Opng (Exp)/Inc (684) (1,394) (1,909) (2,291) (2,872) (3,425) Operating Profit 302 385 487 624 825 1,015 Other Non Opg (Exp)/Inc (1) 15 31 31 31 31 Associates & JV Inc 0 0 0 0 0 0 Net Interest (Exp)/Inc 7 1 1 10 27 36 Dividend Income 0 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 0 Pre-tax Profit 308 401 519 665 882 1,081 Tax (48) (60) (70) (93) (124) (151) Minority Interest (30) (1) (2) (2) (3) (4) Preference Dividend 0 0 0 0 0 0 Net Profit 231 340 447 569 756 926 Net Profit before Except. 231 340 447 569 756 926 EBITDA 323 444 568 707 915 1,113 Growth Revenue Gth (%) 118.8 70.6 36.5 27.6 37.7 20.9 EBITDA Gth (%) 85.4 37.5 28.0 24.6 29.4 21.6 Opg Profit Gth (%) 90.8 27.6 26.4 28.2 32.0 23.1 Net Profit Gth (%) 89.2 46.9 31.7 27.4 32.7 22.6 Margins & Ratio Gross Margins (%) 80.2 84.8 83.7 79.8 73.5 73.0 Opg Profit Margin (%) 24.6 18.4 17.0 17.1 16.4 16.7 Net Profit Margin (%) 18.8 16.2 15.6 15.6 15.0 15.2 ROAE (%) 19.7 22.1 22.1 15.2 13.8 14.9 ROA (%) 14.4 16.9 17.0 12.8 12.1 13.2 ROCE (%) 19.1 20.0 19.4 13.6 12.5 13.6 Div Payout Ratio (%) 10.8 11.3 13.6 13.0 13.0 13.0 Net Interest Cover (x) NM NM NM NM NM NM Source: Company, DBS Vickers

Higher interest income from higher cash balance resulting from issuance of new shares in Mar-15 to raise c.Rmb950m.



Quarterly Income Statement (RMB m) Margins Trend

FY Dec 2Q2014 3Q2014 4Q2014 1Q2015

0%

5%

10%

15%

20%

25%

1Q2013

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015


Revenue 744 767 849 610 Cost of Goods Sold (107) (126) (159) (107) Gross Profit 637 641 690 502 Other Oper. (Exp)/Inc (490) (521) (576) (401) Operating Profit 146 120 114 101 Other Non Opg (Exp)/Inc 13 10 14 3 Associates & JV Inc 0 0 0 0 Net Interest (Exp)/Inc 0 1 0 (1) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 159 133 130 106 Tax (21) (17) (15) (14) Minority Interest 0 (1) (1) 0 Net Profit 137 114 112 88 Net profit bef Except. 137 115 114 91 Growth (QoQ) Revenue Gth (%) 47.4 3.1 10.7 (28.2) Opg Profit Gth (%) 48.6 (17.9) (5.0) (11.4) Net Profit Gth (%) 65.3 (16.8) (1.8) (21.4) Growth (YoY) Revenue Gth (%) 37.7 56.3 27.5 20.8 Opg Profit Gth (%) 19.5 20.3 26.4 2.6 Net Profit Gth (%) 32.0 29.6 30.2 6.1 Margins Gross Margins (%) 85.6 83.6 81.3 82.4 Opg Profit Margins (%) 19.7 15.7 13.4 16.6 Net Profit Margins (%) 18.5 14.9 13.2 14.5 Source: Company, DBS Vickers





Assocs'/JVs -0.0%


Assets -41.4%

Inventory -11.1%

Debtors -26.5%

Net Fixed Assets 677 706 749 871 985 972 Invts in Associates & JVs 0 0 0 0 0 0 Other LT Assets 145 204 313 1,640 1,636 1,632 Cash & ST Invts 479 401 594 1,713 2,129 2,631 Inventory 112 211 323 460 503 608 Debtors 350 627 985 1,096 1,258 1,521 Other Current Assets 39 70 80 80 80 80 Total Assets 1,802 2,219 3,043 5,860 6,590 7,444 ST Debt 43 29 177 160 150 130 Creditors 163 157 103 146 201 243 Other Current Liab 132 288 380 380 380 380 LT Debt 52 19 0 0 0 0 Other LT Liabilities 25 23 24 24 24 24 Shareholder’s Equity 1,376 1,691 2,346 5,135 5,816 6,644 Minority Interests 11 12 13 15 18 22 Total Cap. & Liab. 1,802 2,219 3,043 5,860 6,590 7,444 Non-Cash Wkg. Capital 206 463 904 1,110 1,259 1,586 Net Cash/(Debt) 384 353 416 1,553 1,979 2,501 Debtors Turn (avg days) 76.4 85.0 102.7 103.9 85.4 83.4 Creditors Turn (avg days) 184.0 213.0 113.9 66.3 49.8 51.5 Inventory Turn (avg days) 170.4 214.6 233.3 208.2 138.1 128.7 Asset Turnover (x) 0.8 1.0 1.1 0.8 0.8 0.9 Current Ratio (x) 2.9 2.8 3.0 4.9 5.4 6.4 Quick Ratio (x) 2.5 2.2 2.4 4.1 4.6 5.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) (0.3) (0.2) (0.2) (0.3) (0.3) (0.4) Capex to Debt (%) 232.7 221.5 100.5 106.3 113.3 38.5 Z-Score (X) NA NA NA NA NA NA Source: Company, DBS Vickers

Cash balance increase after issue of new shares in Mar 2015, which raised capital of around Rmb950m.

Reason for the increase of “Other LT Assets”: The acquisition of ChoiceMMed (pulse oximeter producer) and Zhanwang Pharm (pharmaceutical excipients producer) in FY15 cost Rmb1.57bn in total (funded via issue of new shares). Relative to net assets, the total consideration is estimated to be c.Rmb1.3bn higher, which will be classified as goodwill in FY15 (part of“Other LT assets”).




FY Dec 2012A 2013A 2014A 2015F 2016F 2017F

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

2013A 2014A 2015F 2016F 2017F


RM

Pre-Tax Profit 308 401 519 665 882 1,081 Dep. & Amort. 21 44 52 54 63 71 Tax Paid (55) (63) (93) (93) (124) (151) Assoc. & JV Inc/(loss) 0 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 0 Chg in Wkg.Cap. (139) (263) (426) (206) (149) (326) Other Operating CF 16 25 100 (10) (27) (36) Net Operating CF 152 145 152 410 646 639 Capital Exp.(net) (221) (106) (178) (170) (170) (50) Other Invts.(net) 198 (86) 17 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 20 4 7 18 34 43 Net Investing CF (3) (188) (154) (152) (136) (7) Div Paid (34) (32) (46) (61) (74) (98) Chg in Gross Debt 10 (34) 115 (17) (10) (20) Capital Issues 0 0 0 950 0 0 Other Financing CF 191 31 129 (8) (7) (7) Net Financing CF 166 (34) 198 864 (91) (125) Currency Adjustments 0 0 0 0 0 0 Chg in Cash 316 (78) 195 1,121 419 507 Opg CFPS (RMB) 0.37 0.48 0.67 0.66 0.79 0.96 Free CFPS (RMB) (0.09) 0.05 (0.03) 0.26 0.47 0.59 Source: Company, DBS Vickers

Issue of new shares to raise capital in Mar 2015.

Industry Focus


DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVHK accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVHK and/or DBSVH (and/or any persons associated with the aforesaid entities), that:

a. such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

b. there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his / her spouse and/or relatives and/or associate who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

Industry Focus


COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is

published. 2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity

securities of the subject companies mentioned in this document as of the latest available date of the updated information. 3. Compensation for investment banking services:

DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies mentioned in this document.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or

located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

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Wong Ming Tek, Executive Director, ADBSR

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Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

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China Healthcare Sector - DBS Bank

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