equity research 59% 120% china pharmaceutical sector...

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28 January 2014

Asia Pacific/China

Equity Research

Healthcare

China Pharmaceutical Sector SECTOR FORECAST

The running horse needs a break

Figure 1: China pharma sector is trading at historical high against the market

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

■ The running horse needs a break. The HK-listed China pharma stocks have

recently rallied about 20% after the government reiterated encouraging private

investments in the healthcare services sector in its Third Plenary Session; the

valuation has reached the historical high against the market. We believe the

near-term upside in the sector's further rerating is limited, because the share

prices of the sector are more sensitive to policy changes when the valuation is

rich, based on our analysis of historical share price movement.

■ Cautious about a derating after the sprint. Our channel-check indicates that

the government's efforts against corruption in the healthcare sector are still

continuing, and the impact could be more far-reaching than the market

previously expected. And some provincial non-EDL drug tenders could be

further delayed to 2015. We are cautious about a potential derating, if the

following happens: (1) the government tightening the anti-bribery campaign after

the release of a bribery blacklist, (2) drug tenders' progress turning out to fall

behind investors' expectations, or (3) investors taking profit at peak valuations.

■ Picking the right horses who can run longer in 2014. While the sector may

experience derating, we believe different companies are impacted in different

ways. We recommend that investors switch to pharmas with minor policy risk

exposure, new drugs and potential positive earnings surprises, such as Sihuan

(OUTPERFORM, raise TP to HK$10.11), China Medical System

(OUTPERFORM, raise TP to HK$10.61) and Dawnrays; and we are cautious

on potential earnings downside for Sino Biopharm (NEUTRAL, increase TP to

HK$5.93) and CSPC Pharma (initiate with NEUTRAL, TP HK$5.97). We prefer

Shanghai Pharma (upgrade to OUTPERFORM, TP HK$24.0) to Sinopharm for

its new business initiatives in centralisation of sales and marketing.

0

5

10

15

20

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Credit Suisse China Pharma Index PE (12m blended) MSCI China Index PE (12m blended)

-52%

59%120%

Research Analyst

Iris Wang

852 2101 7646

[email protected]

[email protected] FIRST LAST 01/28/14 03:28:46 PM Hong Kong Highpower

28 January 2014

China Pharmaceutical Sector 2

Focus chart Figure 2: Pharma stock trading at historical high against market

Source: Company data, Credit Suisse estimates

Figure 3: Anti-corruption campaign had a negative impact

on drug sales

Figure 4: Only a third of provinces have completed non-

EDL drug tenders

Note: Based on sales of 58/18/3 key products of Shanghai

Pharma/Sino Biopharm/CSPC, respectively. Source: Company data


Figure 5: Policies have different impact on different drug

companies

Figure 6: Comps table

Ticker Company 2014 P/E PEG

460 HK Sihuan 18.8 0.7

1093 HK CSPC 28.9 0.8

1177 HK Sino Biopharm 25.8 1.6

867 HK CMS 19.3 0.6

1666 HK Tong Ren Tang 22.4 0.9

2877 HK Shineway 9.1 0.9

2005 HK Lijun 14.6 0.5

3933 HK United Lab 19.4 0.3

2348 HK Dawnrays 16.1 0.6

950 HK Lee's Pharma 20.8 0.8

Average 19.5 0.8

Source: Company data, Credit Suisse estimates Source: Bloomberg consensus, Credit Suisse estimates

0

5

10

15

20

25



Apr 8th: Announcement of new round of healthcare reform and

additional healthcare spending of850 bn

Jun 13rd: GSK bribery investigation reports

emerged

Apr 6th: 2010 Healthcare Key Work Arrangement

explicated erasing drug mark-up

Mar 1st: Enforced revised version of GMP regulation

Mar 28th: Government announced price cut for over 1,300 drugs

July 28th: Government announced another round of price cut for over

700 drugs

May 6th: Commencement of 2011 rectif ication program for antibiotics

medicine

-52%

59%120%

0%

20%

40%

60%

Shanghai Pharma Sino Biopharm CSPC

Sales Growth

1H13 YoY 3Q13 YoY


28 January 2014


The running horse needs a break Limited near-term upside in sector's further re-rating

In the past three months, the Hong Kong-listed China pharma stocks have rallied about 20%.

Our Credit Suisse China Pharma Index is trading at the historical high of 18.4x 12-month

blended P/E, or at a 51% premium to the historical average of 12.2x. We believe this is

driven by a lasting effect of the Third Plenary Session, where the government reiterated

improving operational efficiencies and encouraging private investments in the healthcare

services sector. However, we believe the near-term upside in the sector's further re-rating

is limited, because the share prices of the sector are more sensitive to policy changes

when the valuations are rich, based on our analysis of historical share price movement.

Cautious about a derating due to policy uncertainty

Looking forward, we believe policy uncertainty is an overhang in 2Q-3Q14. Our channel-

check indicates that the government's efforts against corruption in the healthcare sector is

continuing and the impact could be more far-reaching than the market previously expected.

The government has announced the release of a bribery blacklist as an extended

crackdown on corrupt activities in the healthcare sector, following the GSK investigation

and the anti-corruption campaign in mid-2013. The impact of the anti-bribery campaign

would be long lasting and the "blacklist" system may create structural changes in drugs

sales and marketing practices.

In addition, while many pharma companies are on the edge of the chair for the forthcoming

provincial drug tenders, the exact implementation timeline of the majority of the drug tenders

has not been announced. It is still uncertain how soon the forthcoming tenders would have

an impact on pharma companies' profitability and the sector's competitive landscape.

We are cautious about policy uncertainty and believe pharma stocks are likely to

experience a derating in 2Q-3Q14, if any of the following happens: (1) the government

tightening the anti-bribery campaign after the release of a bribery blacklist, (2) drug

tenders' progress turning out to fall behind investors' expectations, or (3) investors taking

profit at peak valuations.

Picking the right horses who can run longer in 2014

While the sector may experience derating, we believe different companies are impacted in

different ways. Sihuan, Dawnrays and CSPC should benefit from forthcoming drug tenders

because they have new drugs which could get hospital access if they win the tenders. On

the contrary, Sino Biopharm will likely face stiffer competition as its competitors entered

the markets between this and the last round of drug tendering process.

The anti-corruption campaign has minimal impact on: (1) CMS, for its unique academic

promotion business model (detailing doctors by academic events and education); (2)

Sihuan, for its sales agency model (outsourcing sales to thousands of locally based small

sales agencies across the countries); and (3) Dawnrays, for its conservative accounting

practices (booking revenue as sales revenue to sales agencies). However, Sino Biopharm

and CSPC could be affected more as they use in-house sales and will likely strengthen the

whole company's internal compliance during the anti-corruption campaign.

We recommend that investors switch to pharmas with minor policy risk exposure, new

drugs and potential positive earnings surprises such Sihuan, China Medical System and

Dawnrays; we are cautious on potential earnings downside for Sino Biopharm and CSPC

Pharma. We prefer Shanghai Pharma to Sinopharm for its new business initiatives in

centralisation of sales and marketing.

Policy uncertainty regarding

anti-bribery campaign and

drug tenders is an overhang

in 2014

Different companies are

impacted in different ways

during policy changes


28 January 2014


Limited near-term upside in sector's further re-rating In the past three months, The Hong Kong-listed China pharma stocks have rallied about 20%.

Our Credit Suisse China Pharma Index is trading at the historical high of 18.4x 12-month

blended P/E, or at a 51% premium to the historical average of 12.2x. We believe this is

driven by the lasting effect of the Third Plenary Session, where the government reiterated

improving operational efficiencies and encouraging private investments in the healthcare

services sector. However, we believe the near-term upside for the sector's further rerating

is limited, because the share prices of the sector are more sensitive to policy changes

when the valuations are rich, based on our analysis of historical share price movement.

China pharma sector is trading at its historical high

In order to study the performance of China pharma stocks, we tracked stock performance

of nine pharmaceutical companies listed in Hong Kong since 2008 and composed an in-

house, equal-weighted Credit Suisse China Pharma Index with the said stocks. Our Credit

Suisse China Pharma Index is trading at the historical high of 18.4x 12-month blended P/E,

or at a 51% premium to historical average of 12.2x.

Figure 7: Credit Suisse China Pharma Index is composed of nine stocks

Gross return YoY

Ticker Company 2008 2009 2010 2011 2012 2013

950 HK Lee's Pharm -14.9% 361.2% 109.4% -18.3% 83.4% 41.0%

1177 HK Sino Biopharm -23.0% 314.4% 31.8% -17.5% 62.1% 65.3%

2348 HK Dawnrays -5.3% 94.4% 200.6% -36.2% -23.2% 207.6%

1666 HK Tong Ren Tang -58.6% 138.6% 79.8% 10.8% 106.1% 46.0%

2005 HK Lijun -59.7% 141.9% 87.3% -59.6% 191.4% 2.1%

3933 HK United Lab -52.1% 104.8% 302.5% -71.4% -8.8% -20.6%

2877 HK Shineway -13.9% 262.1% 52.2% -49.0% 22.5% -18.7%

460 HK Sihuan n/a n/a 0.9% -49.7% 29.2% 117.3%

867 HK CMS n/a n/a 37.5% -11.4% 78.8% 36.4%

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

The valuation gap between Credit Suisse China Pharma Index and MSCI China Index has

reached to the historical high of 120%.

Figure 8: China pharma sector is trading at historical high against the market

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

0

5

10

15

20

25



Apr 8th: Announcement of new round of healthcare reform and

additional healthcare spending of850 bn

Jun 13rd: GSK bribery investigation reports

emerged

Apr 6th: 2010 Healthcare Key Work Arrangement

explicated erasing drug mark-up

Mar 1st: Enforced revised version of GMP regulation

Mar 28th: Government announced price cut for over 1,300 drugs

July 28th: Government announced another round of price cut for over

700 drugs

May 6th: Commencement of 2011 rectif ication program for antibiotics

medicine

-52%

59%120%

Our proprietary research

shows that pharma stocks

can be very sensitive to

sharp drop in overall stock

market and industry-specific

bad news


28 January 2014


Pharma stocks' performance is policy driven

We believe the long-term growth driver for the pharma sector is intact because: (1) the

pharma sector is largely driven by the inevitable trend of an aging population and

increasing awareness of wellbeing, and (2) massive government funding hedges the

sector against long-term rising cost. However, the sector's short-term growth is largely

driven by policy due to the complexity of the sector value chains and multiple stakeholders

structure.

Multiple market access steps and stakeholders involved in China pharma business

Pharma business in China involves multiple market access steps and stakeholders.

1) Multiple market access steps involved: There are multiple pharma market access

steps that each company has to address, from product registration, provincial hospital

tendering, hospital listings to physician prescriptions and final drug dispensing to

patients. Further, to make the product ready to sell, the company not only needs to

obtain a drug manufacturing permit from the SFDA, but also needs to negotiate the

pricing in each provincial or local pricing bureau and lobby for inclusion into the

national and provincial drug reimbursement lists. (see Figure 9).

2) Multiple stakeholders involved: Since China’s pharma market is decentralised and

highly regulated by the government, multiple government agencies are involved in

pharma commercialisations. For example, the hospital tendering is conducted at a

provincial level, so the company needs to bid in at least 30 provinces and at the same

time lobby for inclusion in that many provincial drug reimbursement lists. Further,

government insurance schemes financing are decentralised to prefecture city level, so

each prefecture city is in charge of its own insurance plans. In any tendering, several

government bodies are involved, such as National Health and Family Planning

Commission (NHFPC), China Food and Drug Administration (CFDA), National

Development and Reform Commission (NDRC) and Ministry of Labour and Social

Security (MOLSS). (see Figure 10)

Figure 9: Main participants of China’s pharma market

Source: CMS, Credit Suisse estimates

Long term growth driver for

the pharma sector remains

intact

Pharma business in China

involves multiple market

access steps and

stakeholders


28 January 2014


Figure 10: An overwhelming number of government bodies are involved in drug industry

Regulated activity Lead national government body Lead local government body

Pricing NDRC 30+ provincial NDRC; Provincial price bureau

Product registration CFDA 30+ provincial SFDA

Pharma company set up SAIC Local SAIC

Reimbursement (Detailed in below

four schemes)

Rural new cooperative scheme NHFPC, MOF 2000+ local NHFPC and MOF

Urban residence scheme MOLSS 300+ local MOLSS

Urban employee scheme MOLSS 300+ local MOLSS

Social aid scheme MCA 300+ local MCA

Manufacturing company operation MIIT 30+ provincial MIIT

Distribution company operation MOC 30+ provincial MOC

Services company operation NHFPC 30+ provincial NHFPC

R&D MOST 30+ provincial MOST

Tendering NHFPC; State council office for rectifying

malpractices; NDRC; MOF; SAIC; SFDA

30+ MOH; 30+ provincial council office for rectifying

malpractices; 30+ provincial NDRC; 30+ provincial MOF; 30+

Price Bureau; 30+ provincial SAIC and 30+ provincial SFDA

Vaccine CDC 300+ local CDC

Note: NDRC (National Development and Reform Commission); CFDA (China Food and Drug Administration); SAIC (State Administration For

Industry & Commerce); NHFPC ( National Health and Family Planning Commission); MOLSS (Ministry of Labour and Social Security); MIIT

(Ministry of Industry and Information Technology); MOC (Ministry of Commerce); MOST (Ministry of Science and Technology); CDC (Centers for

Disease Control); MCA (Ministry of Civil Affairs) MOF (Ministry of Finance);

Source: Expert interviews, NDRC,NHFPC, State Council

Pharma market is vulnerable to policy changes

The complicated structure in China's pharma market makes it extremely sensitive to policy

changes that may affect the participants or the link between the participant.

Figure 11: Multiple links in pharma market are sensitive to policy changes

Link Policy impact

Drug registration A pharma company's drug pipeline is not only dependent on its own R&D capabilities,

but also highly relies on the drug registration's rate of progress. With the fall from power

of the former director of CFDA Mr. Zheng Xiaoyu, the drug registration process takes a

significantly longer time than before.

Manufacturing A pharma company's production process must abide by the quality control requirements

set by the government. The revised GMP regulation announced in 2011 has squeezed

out a great number of small manufacturers who were not able to upgrade their

production facilities.

Provincial drug

tender

A drug can only be sold in a province given it has won the drug tenders in the said

province. If drug tenders gets delayed or the tendering process is remarkably in favour

of low-price drugs, pharma companies' will have to wait a long time before they can

launch their products or sacrifice their margins.

Prescription Intensifying anti-corruption campaign generally leads to slowdown of marketing activities

in the whole sector, as both companies and physicians will be more cautious about

prescription.

Payment Healthcare insurance coverage could significantly relieve the financial burden on the

patients and often influence their choice of drugs. Also, from time to time, government

would announce price cut for certain drugs so that more patients can afford cheap and

effective medicine.

Source: Credit Suisse estimates

Share prices of the sector are more sensitive to policy changes when the valuation is rich

Since pharma stocks are entering the "expensive" zone, they are more sensitive to "bad"

news than when the valuation is low. In the year of 2010 when pharma stocks are at their

highest valuation, multiple policy headwinds hit the sector and led to a lasting de-rating

period of 1.5 years. By contrast, when a large-scale price cut was announced in 2012 July

when the sector was just trading slightly above historical average, pharma stocks only

slipped slightly and rebounded soon afterwards.

The complicated structure in

China's pharma market

makes it extremely sensitive

to policy changes


28 January 2014


Cautious about a potential sector derating due to policy uncertainty Looking forward, we believe policy uncertainty is an overhang in 2Q-3Q14. Our channel-

check indicates that the government's efforts against corruption in the healthcare sector

are continuing and the impact could be more far-reaching than the market previously

expected. The government has announced the release of a bribery blacklist as an

extended crackdown on corrupt activities in the healthcare sector, following the GSK

investigation and the anti-corruption campaign in mid-2013. The impact of the anti-bribery

campaign would be long lasting and the "blacklist" system may create structural changes

in the drugs sales and marketing practices.

In addition, while many pharma companies are on the edge of the chair for the forthcoming

provincial drug tenders, the exact implementation timeline of the majority of the drug tenders

has not been announced. It is still uncertain how soon the forthcoming tenders would have

an impact on pharma companies' profitability and the sector's competitive landscape.





profit at the peak of valuation.

Is the anti-bribery campaign over? Not yet

The National Health and Family Planning Commission (NHFPC) released a Circular on 27

Dec 2013 that in March 2014 China will introduce a new system to monitor the bribery

practices of healthcare companies in an on-going basis; drug makers and medical device

manufacturers who are charged with or investigated for bribery will be put on a blacklist.

Although the blacklist is not new, the NHFPC has more specific punishment regulation this

time. The act is a continued effort to crack down on commercial corruption in the

healthcare sector following the GSK bribery investigation in 2013.

Recap: Doctor bribery investigation hit drug companies' sales in 3Q13

In June 2013, reports emerged that GSK was investigating allegations that its staff bribed

doctors with lavish gifts to prescribe GSK drugs. Starting from mid-July, other multinational

drug companies that have businesses in China, including Novartis, Roche, Astra Zeneca,

Bayer, and Pfizer, were investigated as well. The allegations soon spilled over to domestic

drug companies too.

On 11 September 2013, 21st Century Business Herald reported that Gan & Lee Pharma, a

local pharma specialising in human insulin drugs, had been paying kickbacks to doctors

since 2008 or earlier; with total kick-back amount estimated at Rmb800 mn.

On 12 September 2013, Sino Biopharm's subsidiary, Jiangsu Tianqing, was reported on

Topics in Focus, one of the most influential programmes on China Central Television

(CCTV), to have bribed doctors with overseas leisure trips.

Based on the reported 3Q earnings, Shanghai Pharma, Sino Biopharm and CSPC have all

seen growth deceleration for their key products that contribute to majority of drug profit.

According to our channel check, a number of other pharma companies who did not report

3Q earnings also took a hit for 3Q sales.

Policy uncertainty regarding

anti-bribery campaign and

drug tenders linger into

2014

The government will release

a bribery blacklist in 2014

March

The anti-bribery

investigations in mid-2013

had a negative impact on

pharma companies' revenue

performance


28 January 2014


Figure 12: Anti-corruption campaign had a negative impact on 3Q13 drug sales

Note: The sales data is based on 58 key products of Shanghai Pharma, 18 key products of Sino Biopharm

and 3 innovative drugs of CSPC. Source: Company data, Credit Suisse estimates

Bribery blacklist expected to release in March 2014

We believe the blacklist system, which is expected to be released in March by NHFPC,

may create a structural change in China's drug market. It seems that healthcare regulators

are extending the crackdown on the doctors' bribery issue. The NHFPC Circular explicated

that companies on the blacklist will be banned for two years from selling their products to

public hospitals (and those who received government financial support) within the province

in which they are implicated and will get published in the tenders of other provinces. And if

the company is on the list twice in a five-year period, it will be banned nationally for two

years. The blacklist will include not only those found guilty of bribery in court, but also

those who have received minor administrative punishments from sector regulators.

Can drug tenders finally start? Probably not

Drugs tenders are known to have an immediate and direct impact on drug companies'

revenue growth. 2013 came as a disappointment to many drug companies in light of the

further delayed drug tendering progress. Whether the new round of drug tenders can start

on time has been the central question and its progress will largely affect the revenue

growth of many pharma companies in 2014. It may take as long as 1-1.5 years from

tender announcement to tender implementation.

The progress of non-EDL drug tenders has been slow in 2013

Since the new round of non-Essential Drug List tenders started in 2011, only ten provinces

have completed the tendering process. As of now, another five provinces have either

announced tendering rules or have started the bidding process. Many pharma companies

are anxiously waiting for the completion of more tenders so that they can unleash the

revenue potential of their new drugs. Among all the provinces that have not completed

non-EDL drug tenders, we believe Guangdong, Shanghai, Beijing, Jiangsu and Zhejiang

are critical as they collectively account for over 20% of China's overall drug market.

Based on the current progress we expected in 2014 there will be only five to eight

provinces that can complete and implement the non-EDL drug tenders, less than the

previously expected low teens.

0%

20%

40%

60%

Shanghai Pharma Sino Biopharm CSPC

Sales Growth

1H13 YoY 3Q13 YoY

The blacklist system, which

is expected to release in

March by NHFPC, may

create a structural change in

China's drug market

The progress of drug

tenders will largely affect the

revenue growth of many

pharma companies in 2014

Since the new round of non-

Essential Drug List tenders

started in 2011, only 10

provinces have completed

the tendering process.


28 January 2014


Figure 13: Only a third of provinces have completed non-EDL drug tenders

Source: Provincial drug tender platform, Credit Suisse estimates

Forthcoming tenders take time to materialise

We believe that investors should not be overly optimistic about the timing of drug tenders.

The commencement of drug tenders depends on the progress of the revision of the

provincial EDL, while currently only six provincial lists have been released. It can take up

to six months to complete a tendering process and even longer for the results to

materialise. A tendering process includes rules announcement, document submission,

online bidding and result announcement. If the newly announced rules receive too much

controversy, the government may revise the rules and further delay the tender. For

provinces such as Shanghai and Guangzhou that have started the tendering process in

end-2013 or early 2014, the impact can be factored in second half of 2014. For the

provinces which won't be able to start tendering by 1H14, it is under question whether the

impact can be reflected in 2014 full-year result.

Cautious about a potential sector de-rating





profit at valuation peaks.

Investors should not be

overly optimistic about the

timing of drug tenders and it

often takes time for tender

results to materialize

There remains10-15% in

pharma sector in the next

two months


28 January 2014


Picking the right horses who can run longer in 2014 While the sector may experience derating, we believe different companies are impacted in

different ways. We prefer drug companies which have limited risk exposure, new drugs

and potential positive earnings surprises such as Sihuan (OUTPERFORM, raise TP to

HK$10.11), China Medical System (OUTPERFORM, raise TP to HK$10.61) and

Dawnrays; and we are cautious for potential earnings downside for Sino Biopharm

(NEUTRAL, increase TP to HK$5.93) and CSPC Pharma (initiate with NEUTRAL, TP

HK$5.97). We also prefer Shanghai Pharma (upgrade to OUTPERFORM, TP HK$ 24.00)

to Sinopharm for its new business initiatives in centralisation of sales and marketing and

the new management incentive plan.

Figure 14: Valuation comps

Market 2013-15

cap P/E EV/EBITDA EPS PEG P/B ROE

Ticker Name (US$) Price Curr 2013 2014 2012 2013 CAGR (x) 2013 2014 2013 2014 2015

460 HK Sihuan 5,287.4 7.9 HKD 25.2 18.8 25.1 19.8 27.3 0.7 4.0 3.5 15.9 18.5 19.4

1093 HK CSPC 4,598.7 6.4 HKD 41.8 28.9 38.3 24.4 35.8 0.8 5.1 4.5 12.2 15.7 17.6

1177 HK Sino Biopharm 4,048.8 6.4 HKD 29.6 25.8 15.8 18.6 16.2 1.6 5.9 5.1 20.0 19.8 20.2

867 HK CMS 2,653.6 8.5 HKD 25.5 19.3 29.2 22.1 30.0 0.6 5.2 4.4 20.3 23.1 25.1

1666 HK Tong Ren Tang 2,120.3 25.7 HKD 27.5 22.4 14.1 n/a 25.5 0.9 3.8 3.5 15.4 16.4 18.6

2877 HK Shineway 1,189.0 11.2 HKD 9.9 9.1 8.1 5.2 10.2 0.9 1.6 1.4 17.0 16.9 16.9

2005 HK Lijun 894.6 2.4 HKD 16.6 14.6 13.7 n/a 26.9 0.5 n/a n/a 15.6 17.9 20.0

3933 HK United Lab 783.9 3.7 HKD 46.8 19.4 13.4 8.6 70.3 0.3 1.0 0.9 2.6 5.5 6.1

2348 HK Dawnrays 564.0 5.5 HKD 20.4 16.1 18.5 13.3 0.3 0.6 3.3 3.0 16.2 18.5 20.7

950 HK Lee's Pharma 496.5 7.2 HKD 26.0 20.8 16.5 n/a 24.2 0.9 5.4 4.4 22.7 25.2 23.8

Average 26.9 19.5 19.3 14.6 26.7 0.8 3.9 3.4 15.8 18.0 19.0

Source: the BLOOMBERG PROFESSIONAL™ service consensus, Credit Suisse estimates

Drug tenders have different impact on different drug companies

Sihuan, Dawnrays and CSPC will benefit from coming drug tenders because they have

new drugs which can get hospital access if they can win the tenders.

Figure 15: Sihuan, Dawnrays and CSPC will benefit from coming drug tenders

Company Brand name Generic name Indication Launch

year

Tenders

already won

Sihuan Yeduojia Compound Trivitamin B for Injection

(II)

CCV 2011 13

Yuanzhijiu Troxerutin and cerebroprotein

hydrolysate injection

CCV 2011 9

Danshen

Chuanxiongqin

Salivae Miltiorrhizae and

Ligustrazine Hydrochloride Injection

CCV 2011 8

Dawnrays Leiyide Entecavir Dispersible Tablets Hepatitis B 2010 15

Anmeiping Levamlodipine Besylate Tablets Hypertension 2010 6

Jieshitong Potassium Citrate Extended-release

Tablets

Kidney stone 2011 5 Army

hospitals

CSPC NBP injection Butylphthalide and Sodium Chloride

Injection

Acute stroke 2010 18

Oulaining

injection

Oxiracetam for Injection Anti-dementia 2010 15

Duomeisu Doxorubicin Hydrochloride

Liposome Injection

Oncologic 2011 10

Jinyouli PEGylated Recombinant Human

Granulocyte Colony-Stimulating

Factor Injection

Oncologic 2011 5


We prefer drug companies

which have limited risk

exposure, new drugs and

potential positive earnings

surprises

Sihuan, Dawnrays and

CSPC will likely benefit from

forthcoming drug tenders


28 January 2014


Drug tenders are almost neutral to China Medical System because its drugs are mostly

exclusive with stable ASP trend.

By contrast, Sino Biopharm will face more intensifying competition as its competitors

entered into the markets between this and the last round drug tender.

Figure 16: Sino Biopharm’s key products and competitors

Brand name Generic name % Total Sales in 1-3Q13

1-3Q13 sales

YoY%

No. of local competitors

No. of incremental competitors

in the past three years

Key competitors

Non-exclusive Runzhong Entecavir dispersible

tablets

16.7% 60.1% 6 1 Dawnrays

Non-exclusive Mingzheng Adefovir dipivoxil capsules 8.1% -0.7% >10 2 United Lab, Double Crane, Qilu

Pharma, Tasly, Tianjin Pharma

R&D Center, Lukang Chenxin

Pharma

Non-exclusive Kaishi Alprostadil injections 5.6% -2.5% >10 4 Harbin Sanlian, Chongqing

Yaoyou, Harbin Pharma

Non-exclusive Yilunping Irbesartan and

hydrochlorothiazide tablets

4.0% 37.1% 7 4 Zhejiang Huahai

Non-exclusive Tianqingyitai Zolebronate Acid injections 2.2% -14.9% 9 1 Yangzijiang Pharma, Hengrui

Pharma, Chongqing Yaoyou,

Non-exclusive Tianqingning Hydroxyethyl starch

injections

2.4% 3.2% >10 7 Harbin Sanlian, China Stsuka

Non-exclusive Ganlixin Diammonium

glycyrrhizinate injections

and capsules

1.8% -7.8% >10 >15 Lukang Chenxin Pharma,

Shiajiazhuang Pharma, Furen

Pharma

Non-exclusive Fenghaineng Fructose injections 2.3% 35.8% 7 5 Kelun, Double Crane,

Subtotal 43.0%

Exclusive Tianqingganmei Magnesium

isoglycyrrhizinate injections

18.8% 37.4% 0 0

Exclusive Gai San Chun Calcitriol soft capsules 5.7% 33.3% 0 0

Exclusive Tiance Biapenem injections 4.5% 17.4% 3 1 Shijiazhuang Pharma, Simcere

Exclusive Tianqingganping Diammonium

glycyrrhizinate enteric

capsules

3.9% 24.4% 0 0

Exclusive Xinhaineng Carbohydrate and

Electrolyte Injection

5.2% 145.1% 0 0

Exclusive Kaifen Flurbiprofen Axetil

injections

2.5% 20.4% 0 0

Exclusive Getai Diosmin tablets 1.9% 21.9% 1 0 Mayinglong Pharma

Subtotal 42.5%

Note: Only 33.6% of Kaishi and Kaifeng’s sales are consolidated here due to Sino Biopharm’s partial equity

interests in Beijing Tide. Source: Company data, Credit Suisse estimates

Different business models have different risk exposure in the anti-corruption

The anti-corruption campaigns have minimal impact on (1) CMS for its unique academic

promotion business model (detailing doctors by academic events and education), (2)

Sihuan for its sales agency model (outsourcing sales to thousands locally based small

sales agencies across the countries) and (3) Dawnrays for its conservative accounting

practice (booking revenue as sales revenue to sales agencies).

However, Sino Biopharm and CSPC could be more affected as they use in-house sales and will

likely strengthen the whole company's internal compliance during the anti-corruption campaign.

The anti-corruption

campaign has minimal

impact on CMS, Sihuan and

Dawnrays


28 January 2014


Figure 17: Policies have different impact on different drug companies

Source: Credit Suisse estimates


28 January 2014


Asia Pacific / China

Major Pharmaceuticals

Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK / 460 HK)

INCREASE TARGET PRICE

Sales growth momentum to continue in 2014

■ Strong sales momentum. Despite the negative impact from China's bribery

investigation, hospital sales of Sihuan's key drugs remained strong in 2Q-

3Q13. In the first nine months of 2013, Oudimei grew to be Sihuan's best-

selling drug and achieved revenue of Rmb1,192 mn. Other sales drivers

such as Yimaining and Yuanzhijiu managed to keep up their growth

momentum at 47.3% and 93.4%, respectively. Danshen Chuanxiongqin, a

new drug launched in 2012, delivered high growth of 281.7%. Such strong

growth has not seen decelerating yet, based on our recent talks to doctors.

■ Three additional drugs to launch in 2014. We learned from management

that three first-market-generic drugs are likely to get approved in 2014 and

believe this will improve the market's impression on the company's R&D

capabilities and innovation.

■ Catalysts. Single-digit provinces are expected to conclude the non-EDL

drug tenders in 2014, which will give Sihuan's new drugs additional hospital

access. Our forecast of 2013 EPS is 14% above the consensus and we

believe the FY13 results to be announced in March to be a positive surprise.

■ Valuation. Our new target price of HK$10.11 (from HK$7.50) is based on

24x 2014E EPS, above the sector average of 19x given the company's

strong growth outlook in 2013/14/15 driven by the its new drug launches and

hospital coverage expansion along with new drug tenders. Major failure in

drug development and unexpected delays in drug tenders are the major risks.

Share price performance

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 5935.28 on 27/01/14

On 27/01/14 the spot exchange rate was HK$7.76/US$1

Performance Over 1M 3M 12M Absolute (%) 10.9 39.9 133.6 Relative (%) 18.6 44.6 143.6

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (Rmb mn) 3,042.5 5,219.2 6,817.2 8,412.3 EBITDA (Rmb mn) 1,243.9 1,572.1 1,894.0 2,078.2 EBIT (Rmb mn) 770.5 991.7 1,363.4 1,598.3 Net profit (Rmb mn) 904.4 1,268.6 1,698.8 2,054.4 EPS (CS adj.) (Rmb) 0.17 0.25 0.33 0.40 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.22 0.27 0.32 EPS growth (%) 9.9 40.3 33.9 20.9 P/E (x) 35.3 25.2 18.8 15.5 Dividend yield (%) 2.1 1.2 1.6 1.9 EV/EBITDA (x) 25.1 18.9 15.1 13.1 P/B (x) 4.5 4.0 3.5 3.0 ROE (%) 12.9 16.9 19.8 20.8 Net debt/equity (%) net cash net cash net cash net cash


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Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13

Price (LHS) Rebased Rel (RHS)

Rating OUTPERFORM* Price (27 Jan 14, HK$) 7.92 Target price (HK$) (from 7.50) 10.11¹ Upside/downside (%) 27.7 Mkt cap (HK$ mn) 41,042 (US$ 5,287) Enterprise value (Rmb mn) 29,673 Number of shares (mn) 5,182.09 Free float (%) 25.9 52-week price range 8.26 - 3.36 ADTO - 6M (US$ mn) 15.4

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Iris Wang

852 2101 7646

[email protected]


28 January 2014



Pharmaceutical Distribution

China Medical System Holdings Ltd. (0867.HK / 867 HK)


A safe option in the anti-corruption campaign

■ A safe option. We believe CMS is unlikely to resort to bribing doctors in its

direct promotion sales network given: (1) it has achieved substantial

operating leverage – SG&A accounted for 48.5% of its sales revenue in

2006 and only 27.1% in 2012; (2) the 27.1% SG&A ratio is much lower than

the typical industry level of 45-55%; (3) the product life of CMS’s drugs are

longer than the industry average. Deanxit and Ursofalk have been marketed

by CMS in the Chinese market for 16 and 15 years, respectively, and both of

them still enjoy over 20% YoY sales growth. In addition, CMS’s rich

exclusive drug portfolio also has much less downside risks in the tougher

drug tender measures compared to non-exclusive drugs which have to

compete harder, and thus bear higher drug price cut risk than according to

the recently announced Guangdong tender measures.

■ Sales growth to accelerate 2014. Despite the unfinished anti-bribery

campaign, CMS’s academic promotion activities have recovered. We learned

from our industry expert that CMS will sponsor a series of academic

conference to promote its Bioflor to podiatrists. We believe the sales of CMS’s

high potential drugs will ramp up faster in 2014 after years of market education.

■ Catalysts. The phase III clinical trial data of CMS024, a liver cancer drug, is

expected to be unblinded in early March; if the result is positive, we believe

CMS’s share price will react positively as the drug has a potential Rmb2-3 bn

sales per year with 30-40% net margin, guided by management.

■ Valuation. Our new TP of HK$10.61 (from HK$9.00) is based on 24x 2014E

EPS, above the sector average of 19x given the low policy risk inherited in its

academic promotion model and resilient drug ASP and sales growth. Sector-

wise reduced sales activities due to harsh anti-corruption policy is the major risk.







Year 12/12A 12/13E 12/14E 12/15E Revenue (US$ mn) 281.9 359.0 463.1 586.5 EBITDA (US$ mn) 89.5 118.1 156.5 201.1 EBIT (US$ mn) 89.5 110.7 146.6 188.5 Net profit (US$ mn) 85.0 104.2 137.6 176.6 EPS (CS adj.) (US$) 0.04 0.04 0.06 0.07 Change from previous EPS (%) n.a. -3.3 -4.2 -4.1 Consensus EPS (US$) n.a. 0.04 0.06 0.07 EPS growth (%) 34.5 22.5 32.2 28.3 P/E (x) 31.2 25.5 19.3 15.0 Dividend yield (%) 1.3 1.6 2.1 2.7 EV/EBITDA (x) 29.2 22.0 16.3 12.4 P/B (x) 5.9 5.2 4.4 3.8 ROE (%) 20.3 21.7 24.8 27.2 Net debt/equity (%) net cash net cash net cash net cash


0

100

200

300

400

2

7

12



Rating OUTPERFORM* Price (27 Jan 14, HK$) 8.53 Target price (HK$) (from 9.00) 10.61¹ Upside/downside (%) 24.4 Mkt cap (HK$ mn) 20,598 (US$ 2,654) Enterprise value (US$ mn) 2,603 Number of shares (mn) 2,414.75 Free float (%) 29.7 52-week price range 9.14 - 5.77 ADTO - 6M (US$ mn) 4.6




Research Analysts

Iris Wang

852 2101 7646

[email protected]


28 January 2014




Sino Biopharmaceutical Limited (1177.HK / 1177 HK)


Intensifying competition to materialise in 2014

■ Challenging growth outlook in 2014. Among Sino Biopharm's four key

drugs, three were exclusive drugs in the last round tender but are non-

exclusive drugs in this round. Kaishi/Runzhong/Mingzheng have 10+/6+/10+

local competitors, respectively, and we believe these drugs' ASP and volume

market share are under great pressure.

■ Anti-corruption impact affect near-term earnings. As Sino Biopharm

utilises an in-house sales and marketing business model, the company has

strengthened its entire internal compliance during the anti-corruption

campaign. For example, we learned from doctors that Beijing Tide's sales

representative activities are not recovered yet.

■ Catalysts. We expect 4Q13/1Q14 results to be disappointing as the impact

of doctor bribery allegation by CCTV on 11 Sep 2013 will be reflected.

■ Valuation. Our new target price of HK$5.93 (from HK$5.40) is based on 23x

2014E EPS, slightly below our TP valuation for Sihuan and CMS as we

expect the earnings growth deceleration in 4Q13 and 1Q14 to be worse than

market expectation due to rising competition and continued anti-corruption

activities in 2014. We see only 14.9% and 16.8% EPS growth in 2014E and

2015E, respectively, while we maintain our NEUTRAL rating instead of

downgrading the stock because we expect Sino Biopharm’s new blockbuster

drug launches will resume in 2016 and its valuation (measured by PEG)

deserves a premium for its strong R&D capabilities. In addition, its recent

acquisition of private eye hospitals is a good move, in our view. The

government’s on-going anti-bribery effort is the major risk.







Year 12/12A 12/13E 12/14E 12/15E Revenue (HK$ mn) 8,326.7 9,168.7 10,631.1 12,809.5 EBITDA (HK$ mn) 1,834.3 1,555.4 1,801.9 2,175.3 EBIT (HK$ mn) 1,642.4 1,391.6 1,615.3 1,961.4 Net profit (HK$ mn) 890.8 1,061.4 1,216.2 1,433.3 EPS (CS adj.) (HK$) 0.18 0.21 0.25 0.29 Change from previous EPS (%) n.a. -4.4 -4.6 -3.7 Consensus EPS (HK$) n.a. 0.23 0.28 0.34 EPS growth (%) 92.9 19.2 14.6 17.9 P/E (x) 35.3 29.6 25.8 21.9 Dividend yield (%) 0.8 0.9 1.1 1.3 EV/EBITDA (x) 15.8 18.0 15.4 12.3 P/B (x) 6.9 5.9 5.1 4.4 ROE (%) 21.2 21.5 21.3 21.7 Net debt/equity (%) net cash net cash net cash net cash


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400

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8



Rating NEUTRAL* Price (27 Jan 14, HK$) 6.36 Target price (HK$) (from 5.40) 5.93¹ Upside/downside (%) -6.8 Mkt cap (HK$ mn) 31,428 (US$ 4,049) Enterprise value (HK$ mn) 28,069 Number of shares (mn) 4,941.46 Free float (%) 54.0 52-week price range 7.20 - 3.70 ADTO - 6M (US$ mn) 13.0




Research Analysts

Iris Wang

852 2101 7646

[email protected]


28 January 2014




Dawnrays Pharmaceutical (Holdings) Limited (2348.HK / 2348 HK)

An undervalued drug innovator

■ Maintain OUTPERFORM rating. We maintain our OUTPERFORM rating on

Dawnrays Pharma with a HK$6.80 target price. Dawnrays has successfully

upgraded its product offerings from bulk antibiotics drugs to finished

speciality drugs. Finished drugs accounted for all its operating income in

2012.

■ Clear revenue drivers. As one of the first domestic pharma companies to

offer first-line antihypertensive drugs, Dawnrays has a comprehensive

product line (“An-series”) that captures the biggest and fastest-growing

categories with a robust pipeline targeting the most innovative therapy

mechanism. It is also building up its franchise in the liver drug and launched

its blockbuster drug Entecavir in 2010 which has become a strong near-term

growth driver for its earnings. We expect An-series and Entecavir to have

revenue CAGRs of 15% and 50%, respectively, during 2012-15E. Dawnrays

also has a kidney stone medication which we believe should become its next

blockbuster drug with potential annual sales of Rmb1 bn.

■ Catalysts. We see four near-term catalysts: (1) New CEO is expected to

take initiatives to strengthen Dawnrays' sales capabilities; (2) FY13 results,

which will confirm the strong sales growth of Entecavir; (3) more drug

tenders in 2014 to provide hospital access for Dawnrays’ Entecavir; and (4)

a few antihypertensive drugs likely getting approved in 2014 and thus

providing additional earnings upside.

■ Attractive valuation. Dawnrays is trading at 16.2x 2014E EPS, or 0.62 PEG,

significantly below the peers’ average of 0.8-1.1. Our HK$6.80 target price is

based on 20x 2014E EPS and PEG of 0.79 (2013-15E EPS CAGR 26%).

Major risks include delayed tendering process and intensifying competition.



HANG SENG INDEX which closed at 21976.1 on 27/01/14




Year 12/12A 12/13E 12/14E 12/15E Revenue (Rmb mn) 856.5 918.9 999.3 1,099.7 EBITDA (Rmb mn) 178.3 247.6 305.8 374.6 EBIT (Rmb mn) 148.5 215.3 271.8 341.4 Net profit (Rmb mn) 114.5 167.3 212.0 267.1 EPS (CS adj.) (Rmb) 0.14 0.21 0.26 0.33 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rmb) n.a. 0.20 0.24 0.28 EPS growth (%) -21.7 46.1 26.7 26.0 P/E (x) 29.8 20.4 16.1 12.8 Dividend yield (%) 1.6 2.0 2.5 3.1 EV/EBITDA (x) 18.5 13.1 10.2 8.1 P/B (x) 3.6 3.3 3.0 2.6 ROE (%) 12.6 16.9 19.5 21.9 Net debt/equity (%) net cash net cash net cash net cash


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Rating OUTPERFORM* Price (27 Jan 14, HK$) 5.46 Target price (HK$) 6.80¹ Upside/downside (%) 24.5 Mkt cap (HK$ mn) 4,378.3 (US$ 564.0) Enterprise value (Rmb mn) 3,238 Number of shares (mn) 801.88 Free float (%) 40.5 52-week price range 5.90 - 1.76 ADTO - 6M (US$ mn) 1.1




Research Analysts

Iris Wang

852 2101 7646

[email protected]


28 January 2014



CSPC Pharmaceutical Group Ltd (1093.HK / 1093 HK)

Empowered by innovation

■ Initiating coverage with a NEUTRAL rating. We initiate coverage on

CSPC Pharma with a HK$5.97 target price (6.6% potential downside).

CSPC has successfully shifted its main business from bulk drug to

innovative and branded generic drugs which contributes to over 95% of its

operating profit.

■ Blockbuster drugs with rich pipeline. (1) Three innovative cardio-

cerebrovascular drugs drive near-term growth given the double-digit market

growth, expanding indications and patent protection. We expect incremental

revenue of these drugs to drive CSPS's total innovative and branded drug

revenue to grow at 37%/18% in 2014/15. (2) A franchise in oncology with five

existing drugs has been building up to support mid-and-long-term growth, in

particular Jinyouli, a patented immunotherapy biotech drug, and Duomeisu, a

new type of anti-tumour antibiotics with innovative drug delivery method. (3)

Rich pipeline with over 160 drugs targeting key therapeutic areas.

■ R&D expenses to rise quickly. CSPC is increasing its efforts in developing

a rich drug pipeline across key therapeutic. It currently has over 160 drugs in

the pipeline. We believe it is likely to record heavy R&D expenditure from

2.9% of finished drug revenue in 1H13 to ~5% in 2016, as more drugs are

progressing into later phases of clinical trial phase.

■ Fairly valued. Our target price of HK$5.97 is based on 30x 2014E EPS, or

PEG 0.8x (2013-15E EPS CAGR 36%, excluding the non-operating gain/

loss in 2013). It is currently trading at 28.4x 2014E EPS, the most expensive

in the sector, and we believe it is fairly valued and the upside is limited in the

near term given (1) the rising R&D cost, (2) potential sector-wide de-rating in

2Q-3Q14 by policy changes, and (3) the share price upside pressure from

foreseeable share placement by Hony Capital after FY13 results

announcement.



HANG SENG INDEX which closed at 21976.1 on 27/01/14




Year 12/12A 12/13E 12/14E 12/15E Revenue (HK$ mn) 4,146.4 10,000.8 10,980.0 12,552.3 EBITDA (HK$ mn) 954.9 1,500.8 2,000.1 2,448.2 EBIT (HK$ mn) 763.6 1,180.8 1,681.1 2,130.0 Net profit (HK$ mn) 652.8 892.6 1,292.8 1,651.9 EPS (CS adj.) (HK$) 0.14 0.15 0.22 0.28 Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a. 0.18 0.23 0.29 EPS growth (%) -6.5 7.2 44.8 27.8 P/E (x) 44.9 41.8 28.9 22.6 Dividend yield (%) 4.4 0.9 1.0 1.3 EV/EBITDA (x) 38.3 24.1 17.9 14.1 P/B (x) 4.4 5.1 4.5 4.0 ROE (%) 10.5 12.8 16.6 18.8 Net debt/equity (%) 12.8 5.6 0.3 net cash


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Rating NEUTRAL* [V] Price (27 Jan 14, HK$) 6.39 Target price (HK$) 5.97¹ Upside/downside (%) -6.6 Mkt cap (HK$ mn) 35,697 (US$ 4,599) Enterprise value (HK$ mn) 36,110 Number of shares (mn) 5,586.36 Free float (%) 27.1 52-week price range 6.58 - 2.84 ADTO - 6M (US$ mn) 8.7




[V] = Stock considered volatile (see Disclosure Appendix).

Research Analyst

Iris Wang

852 2101 7646

[email protected]


28 January 2014




Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK / 2607 HK)

UPGRADE RATING

New management's initiative to unlock value

■ Centralise sales and marketing. We learned from Shanghai Pharma's

management that the new business initiatives by the new management team

are progressing well. We believe the centralisation of sales and marketing

from subsidiaries to the headquarters is one of the most important initiatives,

as it should enhance the overall sales effectiveness and thus improve

margins and sales revenue growth. Management guided that the sales and

marketing department of headquarters is almost set up and we believe this

initiative will help improve earnings in 2014 and 2015.

■ R&D efforts underestimated. Shanghai Pharma has been committed to

pharmaceuticals R&D for years. By leveraging government support and its

internal resources, the company has built one of the largest in-house R&D

teams and established solid collaboration with innovative research

organisations and leading research institutes. According to management,

select high-potential proprietary drugs are in the pipeline. We believe the

company’s R&D efforts in pharmaceuticals are underestimated—it could

offer a growth platform for a sustainable future.

■ Catalysts. We expect management to provide additional colour on its

initiatives after the FY13 results, and this will improve market's confidence

on the profitability and sustainable growth of the manufacturing business.

■ Valuation: Our new TP of HK$24.0 (from HK$14.80) is based on 19x 2014E

EPS given the 17% 2013-15E EPS CAGR, at a premium of the sector

average PEG 0.8 for the stock's better liquidity and earnings upside in 2015

when the centralised sales and marketing starts to greatly improve margins.

The government’s on-going effort against anti-bribery is the major risk.

Upgrade to OUTPERFORM (from Neutral).





Performance Over 1M 3M 12M Absolute (%) -0.2 17.5 17.2 Relative (%) 5.2 21.3 24.0


Year 12/12A 12/13E 12/14E 12/15E Revenue (Rmb mn) 68,078.1 78,652.6 90,281.6 103,308.1 EBITDA (Rmb mn) 3,177.7 3,444.2 3,986.0 4,621.5 EBIT (Rmb mn) 2,595.4 2,909.5 3,447.9 4,080.4 Net profit (Rmb mn) 2,015.6 2,248.6 2,646.0 3,097.3 EPS (CS adj.) (Rmb) 0.75 0.84 0.98 1.15 Change from previous EPS (%) n.a. 4.9 9.8 11.5 Consensus EPS (Rmb) n.a. 0.84 0.95 1.05 EPS growth (%) 6.2 11.6 17.7 17.1 P/E (x) 19.6 17.6 14.9 12.7 Dividend yield (%) 1.8 1.4 1.6 1.9 EV/EBITDA (x) 9.0 7.9 6.9 5.6 P/B (x) 1.6 1.5 1.4 1.3 ROE (%) 8.4 8.9 9.9 10.9 Net debt/equity (%) net cash net cash net cash net cash


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160

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30

40



Rating (from Neutral) OUTPERFORM* Price (27 Jan 14, HK$) 18.84 Target price (HK$) (from 14.80) 24.00¹ Upside/downside (%) 27.4 Mkt cap (HK$ mn) 47,679 (US$ 6,142) Enterprise value (Rmb mn) 27,106 Number of shares (mn) 2,688.91 Free float (%) 85.7 52-week price range 20.2 - 13.4 ADTO - 6M (US$ mn) 5.8




Research Analysts

Iris Wang

852 2101 7646

[email protected]


28 January 2014

Companies Mentioned (Price as of 24-Jan-2014)

CSPC Pharmaceutical Group Ltd (1093.HK, HK$6.27, NEUTRAL[V], TP HK$5.97) China Medical System Holdings Ltd. (0867.HK, HK$8.75, OUTPERFORM, TP HK$10.61) Dawnrays Pharmaceutical (Holdings) Limited (2348.HK, HK$5.51, OUTPERFORM, TP HK$6.8) Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK, HK$19.76, OUTPERFORM, TP HK$24.0) Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK, HK$7.57, OUTPERFORM, TP HK$10.11) Sino Biopharmaceutical Limited (1177.HK, HK$6.38, NEUTRAL, TP HK$5.93) Sinopharm Group Co (1099.HK, HK$22.35, NEUTRAL, TP HK$21.6)

Disclosure Appendix

Important Global Disclosures

I, Iris Wang, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for China Medical System Holdings Ltd. (0867.HK)

0867.HK Closing Price Target Price

Date (HK$) (HK$) Rating

05-Oct-11 3.15 6.00 O

06-Oct-11 3.24 *

13-Feb-12 3.86 6.00 O

07-Mar-12 3.87 5.33

27-Aug-12 4.06 5.80

04-Dec-12 5.31 7.20 *

21-Feb-13 6.98 8.00

19-Mar-13 7.31 8.70

22-Apr-13 7.75 9.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

3-Year Price and Rating History for Dawnrays Pharmaceutical (Holdings) Limited (2348.HK)



11-Dec-13 4.90 6.80 O *


O U T PERFO RM


28 January 2014

3-Year Price and Rating History for Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK)



23-Jun-11 20.85 24.30 O *

31-Oct-11 14.98 20.00 *

30-Mar-12 12.44 15.00 N

25-Jan-13 16.08 *

06-May-13 15.20 16.00 N

23-Aug-13 14.92 14.80


O U T PERFO RM

N EU T RA L

3-Year Price and Rating History for Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK)



05-Oct-11 2.55 5.00 O

06-Oct-11 2.65 *

04-Jan-12 2.79 5.00 O

06-Mar-12 2.89 4.50

08-Jan-13 3.56 3.00 U *

11-Jul-13 5.04 6.50 O

26-Aug-13 5.18 7.50


O U T PERFO RM

U N D ERPERFO RM

3-Year Price and Rating History for Sino Biopharmaceutical Limited (1177.HK)



30-Jun-11 2.79 3.60 O *

25-Jan-13 3.92 3.60 N *

18-Mar-13 4.80 4.60

20-May-13 5.08 4.90

02-Sep-13 5.55 5.00

12-Sep-13 4.76 4.20 U

08-Oct-13 5.57 5.10 N

14-Nov-13 5.38 5.40

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

N EU T RA L

U N D ERPERFO RM


28 January 2014

3-Year Price and Rating History for Sinopharm Group Co (1099.HK)



23-Aug-11 17.50 30.00 O

15-Mar-12 21.60 28.00

16-Mar-12 21.20 *

26-Mar-12 21.70 28.00 O

25-Jan-13 24.50 26.00 N *

26-Mar-13 26.05 30.00 O

29-Apr-13 22.90 28.00

27-Aug-13 19.40 21.60 N

* Asterisk signifies initiation or assumption of coverage. O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (54% banking clients)

Neutral/Hold* 41% (48% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.


28 January 2014

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Sino Biopharmaceutical Limited (1177.HK)

Method: Our HK$5.93 target price for Sino Biopharmaceutical Limited is based on 23x 2014E EPS (earnings per share) as we expect the earnings growth deceleration in 4Q13 and 1Q14 to be worse than the market expects, due to the rising competition and continued anti-corruption activities in 2014. We see only 14.9% and 16.8% EPS growth in 2014 and 2015, respectively.

Risk: Risks that could cause the share price to diverge from our HK$5.93 target price for Sino Biopharmaceutical Limited include the government’s on-going efforts against bribery.

Price Target: (12 months) for CSPC Pharmaceutical Group Ltd (1093.HK)

Method: Our target price of HK$5.97 for CSPC Pharmaceutical Group Ltd is based on 27x 2014E EPS, or PEG 0.8x (2013-15 EPS CAGR 36%, excluding the non-operating gain/ loss in 2013) in line with sector average. We believe it is fairly valued with limited upside in the near term given: (1) rising R&D costs; (2) a potential sector-wide de-rating in 2Q-3Q14 on policy changes; and (3) share price upside pressure from a foreseeable share placement by Hony Capital.

Risk: Risks that could impede achievement of our target price of HK$5.97 for CSPC Pharmaceutical Group Ltd include: further delays in the tendering process; slower-than-expected launch of new drugs; tightening supervision over pharmaceutical companies as part of government anti-corruption efforts; potential further price controls; significant changes in key personnel; and intensifying competition.

Price Target: (12 months) for Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK)

Method: Our HK$10.11 target price for Sihuan Pharmaceutical Holdings Group is based on 24x 2014E EPS (earnings per share), above the sector average of 19x given the company's strong growth outlook in 2013/14/15 driven by the its new drug launches and hospital coverage expansion along with new drug tenders.

Risk: Risks that could impede achievement of our HK$10.11 ttarget price for Sihuan Pharmaceutical Holdings Group include major failure in drug development and unexpected delays in drug tenders.

Price Target: (12 months) for Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK)

Method: Our target price of HK$24.00 for Shanghai Pharmaceuticals is based on 19x 2014E EPS (earnings per share), given the 2013-15 EPS CAGR of 17%.

Risk: Risks that could impede achievement of our HK$24.00 target price for Shanghai Pharmaceuticals include (1) operational risks; (2) risks from competition; (3) policy risks; (4) acquisition risks; (5) orders risks; (6) product risks; (7) elimination or changes to incentives; and (8) key personnel risks.

Price Target: (12 months) for China Medical System Holdings Ltd. (0867.HK)

Method: Our HK$10.61 target price for China Medical System Holdings Ltd is based on 24x 2014E EPS (earnings per share), above the sector average of 19x given the low policy risk inherited in its academic promotion model and resilient drug ASP and sales growth.

Risk: Risks that could impede achievement of our HK$10.61 target price for China Medical System Holdings Ltd include sector-wise reduced sales activities due to harsh anti-corruption policy.

Price Target: (12 months) for Dawnrays Pharmaceutical (Holdings) Limited (2348.HK)

Method: Our HK$6.80 target price for Dawnrays Pharmaceutical (Holdings) Limited is based on 20x 2014E EPS (earnings per share) and PEG (price-to-earnings growth) of 0.79 (2013-15E EPS CAGR 26%).

Risk: Risks that could impede achievement of our HK$6.80 target price for Dawnrays Pharmaceutical (Holdings) Limited include: further delays in the tendering process; slower-than-expected launch of new drugs; tightening supervision over pharmaceutical companies as part of government anti-corruption efforts; potential further price controls; significant changes in key personnel; and intensifying competition.


28 January 2014

Price Target: (12 months) for Sinopharm Group Co (1099.HK)

Method: Our HK$21.60 target price for Sinopharm Group Co is based on 16x 2014E EPS (earnings per share), given that we forecast 15% EPS CAGR in the next three years.

Risk: Key investment risks to our HK$21.60 target price for Sinopharm Group include: 1) working capital commitments, 2) margin pressure for drug price control, 3) the market's negative reading on financial cost increase and operating cash flow volatility.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (1099.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (1099.HK) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (1099.HK) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1099.HK) within the next 3 months.

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (1099.HK).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1177.HK, 1093.HK, 0460.HK, 2607.HK, 0867.HK, 2348.HK, 1099.HK) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ............................................................................................................................................................ Iris Wang

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28 January 2014

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