September 7, 2012 Pharmaceuticals BUY · 2012. 9. 10. · Pharmaceuticals THIS IS THE TRANSLATION...

Sector Research | China Pharmaceuticals

THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14, 2012

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only.

September 7, 2012

Pharmaceuticals BUY

A healthy prognosis

Investment highlights

China’s pharmaceutical industry is riding out the contraction period of this

business cycle, outperforming other industries. The profit of China’s

pharmaceutical industry grew by 14.39% y-o-y on average in 1Q 2012, the

slowest pace since 2007. Yet we estimate profit growth will inch up

quarter-on-quarter. That said, we maintain our forecast that the revenue growth

and profitability of the pharmaceutical industry would decline in 2011-2014.

The disruptions triggered by policy changes are subsiding. The framework for

healthcare reform has been mapped out, but the separation between healthcare

service charges and drugs income would not materialise in the short term. The

impact from drug-tender regulations and price cuts mandated by NDRC has been

absorbed. No negative news for the industry is expected for the next 3-6 months.

The total market cap of A-share pharmaceuticals has substantial room for

growth. The rapid growth of the pharmaceutical industry justified its premium

over the broader market. The pharmaceutical stocks underwent a correction in

the past two years and their valuations differ markedly from stock to stock.

Some shares that trade at less than 20x 2013 PE and have a PEG ratio of less

than 1x could be good picks for medium-term investment (Exhibit 1 & 4).

The pharmaceutical companies, which are able to deliver growth and maintain

financial health in such a challenging business climate, may well emerge

stronger later (Exhibits 2-3). We dubbed these as “sunshine companies” and

investors are advised to buy these shares on dips caused by policy changes.

We are cautiously optimistic about the pharmaceutical sector for 2H 2012.

Exhibit 1: Earnings forecasts & ratings

Ticker Company Rating Closing price

(RMB)

Market cap

(RMB bn)

EPS (RMB) PE (x)

2012E 2013E 2012E 2013E

600535 Tianjin Tasly Pharmaceutical (600535.CH)

Buy 40.53 19.7 1.50 1.92 27 21

000538 Yunnan Baiyao (000538.SZ) Buy 51.93 35.8 2.15 2.69 24 19

000423 Shandong Dong-E E-Jiao (000423.CH)

Buy 40.30 25.7 1.70 2.11 24 19

600518 Kangmei Pharmaceutical (600518.CH)

Cautious Buy

12.67 27.9 0.64 0.80 20 16

600276 Jiangsu Hengrui Medicine (600276.CH)

Cautious Buy

26.90 31.6 0.88 1.07 31 25

600267 Zhejiang Hisun Pharmaceutical (600267.CH)

Buy 15.72 12.7 0.72 0.89 22 17

000963 Huadong Medicine (000963.CH)

Buy 27.60 12 1.10 1.35 26 21

600079 Wuhan Humanwell Healthcare (600079.CH)

Buy 21.34 10.4 0.75 0.99 29 22

000028 China National Accord Medicines (000028.SZ)

Buy 27.05 7.2 1.44 1.74 19 15

002038 Beijing SL Pharmaceutical (002038.CH)

Cautious Buy

28.41 10.4 1.24 1.54 23 18

000999 China Resources Sanjiu Medical & Pharmaceutical (000999.CH)

Cautious Buy

19.91 19 0.98 1.16 20 17

Source: Wind, Guosen Securities Economic Research Institute (data as on May 30, 2012)

Analyst

He Pingge 0755-82133396 [email protected] S0980510120026

Sales Contact

Dan Weil Global Head of Institutional Sales and Trading Managing Director +852 2248 3588 [email protected]

Chris Berney Managing Director +852 2248 3568 [email protected]

Roger Chiman Managing Director +852 2248 3598 [email protected] Andrew Collier Director +852 2248 3528 [email protected]

Joe Chan Director +852 2248 3578 [email protected]

Cancy Kong Vice President +852 2248 3538 [email protected] Gary Wong Associate +852 2248 3548 [email protected] Ma Ning Associate +852 2248 3536 [email protected]

mailto:[email protected]

Pharmaceuticals Sector September 7, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 14, 2012

Guosen Securities (HK) Bespoke translation by Guosen Securities (HK) strictly for use by its clients only

2

Exhibit 2: Stock picking for 2H 2012 from the perspective of sustainability and earnings power

Investment theme Investment highlights Stock picks Stocks to watch

1. Companies with unique resources/ proprietary products or brands

1) Companies that have proprietary medicines would be better placed to cope with competition and drug-price cuts than those that do not.

2) It is more likely that the sales volume of patent drugs would rise faster than generic drugs.

3) Some branded Chinese drugs are aimed at the OTC market and their retail prices are stable. Price hikes are likely and the brands could be utilised in the consumer goods segments.

4) Some Chinese medicine makers have their own plantations, and could better cope with the increases in raw material prices.

Tianjin Tasly Pharmaceutical (600535.CH)

Shandong Dong-E E-Jiao (000423.CH)

Zhangzhou Pientzehuang Pharmaceutical (600436.CH)

Yunnan Baiyao (000538.SZ)

Shijiazhuang Yiling Pharmaceutical (002603.CH)

Guangxi Wuzhou Zhongheng (600252.CH)

Kangmei Pharmaceutical (600518.CH)

China Resources Sanjiu Medical & Pharmaceutical (000999.CH)

Kunming Pharmaceutical (600422.CH)

Jiangsu Kanion Pharmaceutical (600557.CH)

Tianjin Chase Sun Pharmaceutical (300026.CH)

Guizhou Yibai Pharmaceutical (600594.CH)

Mayinglong Pharmaceutical (600993.CH)

2. Companies focusing on drugs treating serious diseases, producing FGD (First Generic Drug) and opportunities brought by industry upgrade

1) With an aging population and rising chronic diseases, the demand for high-end treatments and preventive medicine is growing and such demand is relatively inelastic.

2) Some leading Chinese pharmaceutical companies are becoming more competitive as their products are more cost-effective and make good alternatives to imported ones.

3) A large proportion of the products offered by leading companies are high margin.

4) Some companies are set to benefit from the reshuffle in the global pharmaceutical industry.

Jiangsu Hengrui Medicine (600276.CH)

Huadong Medicine (000963.CH)

Beijing SL Pharmaceutical (002038.CH)

Wuhan Humanwell Healthcare (600079.CH)

Changchun High & New Technology Industries (000661.CH)

Zhejiang Hisun Pharmaceutical (600267.CH)

Huahai Pharmaceutical (600521.CH)

Hualan Biological Engineering (002007.CH)

Shenzhen Salubris Pharmaceuticals (002294.CH)

Zhejiang Hisoar Pharmaceutical (002099.CH)

Staidson (Beijing) Biopharmaceuticals (300204.CH)

Hybio Pharmaceutical (300199.CH)

Walvax Biotechnology (300142.CH)

3. Conglomerates with manufacturing and distribution businesses or medical service providers.

1) Conglomerates with both production and distribution operations enjoy an advantage over peers. Besides, leading regional companies could easily enlist support from local governments.

2) Their M&A activities could boost earnings quickly.

China National Accord Medicines (000028.SZ)


Jiangsu Yuyue Medical Equipment & Supply (002223.CH)

Aier Eye Hospital Group (300015.CH)

Topchoice Medical Investment (600763.CH)

Shanghai Pharmaceuticals (601607.CH)

Source: Guosen Securities Economic Research Institute



3

Exhibit 3: Stock picking for 2H 2012 from the perspective of sub-sectors

Sub-sector Investment highlights “Sunshine” enterprises

1. Chinese medicine Watch companies that have proprietary brands and products. Some proprietary Chinese brands will raise prices.

Shandong Dong-E E-Jiao (000423.CH), Zhangzhou Pientzehuang

Pharmaceutical (600436.CH), Yunnan Baiyao (000538.SZ), Beijing

Tongrentang (600085.CH), Mayinglong Pharmaceutical (600993.CH),

Jiuzhitang (000989.CH)

Tianjin Tasly Pharmaceutical (600535.CH), Shijiazhuang Yiling

Pharmaceutical (002603.CH), Guangxi Wuzhou Zhongheng

(600252.CH), Kunming Pharmaceutical (600422.CH), Jiangsu Kanion

Pharmaceutical (600557.CH), Tianjin Chase Sun Pharmaceutical

(300026.CH), Shanghai Kaibao Pharmaceutical (300039.CH), China

Resources Sanjiu Medical & Pharmaceutical (000999.CH), Kangmei

Pharmaceutical (600518.CH)

2. Chemical medicine 1) Chemical drug preparations: Focus on producers of high-end specialist drugs and innovative drugs

2) Chemical APIs: Focus on industry upgrade and dominant products.

Jiangsu Hengrui Medicine (600276.CH), Zhejiang Hisun

Pharmaceutical (600267.CH), Huadong Medicine (000963.CH),

Wuhan Humanwell Healthcare (600079.CH), Beijing SL

Pharmaceutical (002038.CH), Shenzhen Salubris Pharmaceuticals

(002294.CH), Hybio Pharmaceutical (300199.CH)

Zhejiang Hisun Pharmaceutical (600267.CH), Huahai Pharmaceutical

(600521.CH), Zhejiang Hisoar Pharmaceutical (002099.CH), Zhejiang

NHU (002001.CH), Zhejiang Medicine (600216.CH)

3. Biomedicine 1) Blood products: focus on the approvals for new plasma collection stations

2) Vaccines: focus on high-margin vaccines

3) Recombinant protein drugs

Hualan Biological Engineering (002007.CH), Shanghai RAAS Blood

Products (002252.CH)

Walvax Biotechnology (300142.CH), Chongqing Zhifei Biological

Products (300122.CH), Changchun High & New Technology Industries

(000661.CH), Guangzhou Pharmaceutical (600332.CH), Liaoning

Cheng Da (600739.CH)

Changchun High & New Technology Industries (000661.CH), Tianjin

Tasly Pharmaceutical (600535.CH), Beijing SL Pharmaceutical

(002038.CH)

4. Medical services 1) Medicine distribution: regional leaders deliver superior results.

2) Medical devices: exports are slowing while domestic sales are steady.

3) Medical services: High-end medical services are booming as regulations are relaxed.

China National Accord Medicines (000028.SZ), Huadong Medicine

(000963.CH), Shanghai Pharmaceuticals (601607.CH), Yunnan Baiyao

(000538.SZ)

Jiangsu Yuyue Medical Equipment & Supply (002223.CH), Chinva

Medical Instrument (600587.CH)

Aier Eye Hospital Group (300015.CH), Topchoice Medical Investment

(600763.CH) Source: Guosen Securities Economic Research Institute

Exhibit 4: Stock picking for 2H 2012 from the perspective of valuations and catalysts

Investment theme Investment highlights “Sunshine” enterprises

1. 1st-tiered stocks

1) Valuation: A P/E of 25x/20x/15x for 2012-2012, with a PEG ratio around 1x

2) Companies: leaders in segments with continual growth

3) Return: Annualized rate of return--- around 25%

Tianjin Tasly Pharmaceutical (600535.CH), Shandong Dong-E E-Jiao

(000423.CH), Yunnan Baiyao (000538.CH), Huadong Medicine

(000963.CH), Wuhan Humanwell Healthcare (600079.CH), Jiangsu

Hengrui Medicine (600276.CH), Kangmei Pharmaceutical

(600518.CH), Shijiazhuang Yiling Pharmaceutical (002603.CH)

2. 2nd-tiered stocks 1) Valuation: A P/E of less than 20x/17x/15x for 2012-2014, with a PEG ratio less than 1x

2) Companies: generic drug producers and companies making improvement in results

3) Return: Annualized rate of return for generic drug makers--- around 15%

China National Accord Medicines (000028.CH), Guangxi Wuzhou

Zhongheng (600252.CH), Kunming Pharmaceutical (600422.CH),

China Resources Sanjiu Medical & Pharmaceutical (000999.CH),

Guizhou Yibai Pharmaceutical (600594.CH), Livzon Pharmaceutical

(000513.CH)

3. Expectations about restructuring

Focus on the events that could drive up results. Changchun High & New Technology Industries (000661.CH),

Guangzhou Pharmaceutical (600332.CH), Tianjin Chase Sun

Pharmaceutical (300026.CH), Changhai Fosun Pharmaceutical

(600196.CH)

4. High-potential stocks The development roadmap is not totally clear, but there are initial signs of growth. The PEG ratio is less than 1x.

Shanghai Kaibao Pharmaceutical (300039.CH), Staidson (Beijing)

Biopharmaceuticals (300204.CH), Guangdong By-Health

Biotechnology (300146.SZ), Zhejiang D.A. Diagnostics (300244.CH),

Jiangsu Yuyue Medical Equipment & Supply (002223.CH),

Guangdong Zhongsheng Pharmaceutical (002317.CH), Sichuan Kelun

Pharmaceutical (002422.CH)




4

1 The profit growth rate of China’s

pharmaceutical industry has bottomed

out and is poised for a pickup

1.1 The industry’s profit growth rate fell to a 5-year new low in 1Q

2012 but is expected to pick up quarter-on-quarter in 2012

The 1Q 2012 profit growth of China’s pharmaceutical industry averaged 14.39%, the

lowest since 2007. Yet we forecast the profit growth rate would improve

quarter-on-quarter in 2012.

For medium-term investment, we maintain our forecast that China’s pharmaceutical

industry will see revenue growth and profitability moderate in 2011-2014.

1.2 Prior to 2004, the industry enjoyed rapid growth, with profit

growth outpacing revenue growth.

After China’s reform and opening-up, China’s pharmaceutical industry shifted from a

planned economy to a market-oriented model. Pharmaceutical multi-nationals penetrated

China in droves and private Chinese pharmaceutical companies mushroomed.

Meanwhile, the healthcare institutions adopted market approaches by taking

responsibility for their own P&L. Subsiding medical services with mark-ups in drugs sales

has become the norm. The industry saw a tremendous growth in supply, due to a low

base as well as attractive profitability.

1.3 2004-2006: a flurry of tough regulations was introduced,

hitting the bottom line of the industry. The financial results of

pharmaceutical companies became markedly divergent.

2004-2006 was the most difficult period in the recent decade for China’s pharmaceutical

industry. The National Development and Reform Commission (NDRC) mandated five

rounds of cuts in drug-price ceilings. A clean-up campaign was launched to target doctors

taking kickbacks from pharmaceutical companies and to tackle the issue of

oversubscription. Profit growth lagged revenue growth for three years in a row. In 2006,

profit in China’s pharmaceutical industry grew by 9.26%, the lowest in the past decade.

Among the 105 listed pharmaceutical companies we looked at, only 18 posted earnings

growth after extraordinary gains and losses for three consecutive years and only 16

companies saw their net profit CAGR outpace revenue growth between 2004 and 2006.

The divergence of results was fairly evident.

1.4 2007-2010: increased government spending, widened

healthcare coverage and favourable policies contributed to

robust growth

The government has assessed the previous healthcare reform efforts since 2007 and

initiated a “new healthcare reform” in 2009 by stepping up input into the healthcare



5

system. The greater input of resources and wider coverage pushed up the revenue

growth of pharmaceutical companies.

Between 2004 and 1H 2007, cuts in the ceilings of retail drug prices were lessened in

both extent and frequency. The profit growth rate of the pharmaceutical industry

outpaced that of revenue for four straight years.

1.5 2011-2014: revenue growth would slow down and profitability

is on the wane

The “new healthcare reform” is progressing to tackle deep-rooted and structural

problems. The difficulty of balancing medicine sales and medical service spells policy

uncertainty. The industry would be hard-pressed by the so-called “2 drops, 1 increase

and 1 cap”. The growth of medical insurance expenditure would moderate and lead to a

slowdown in the revenue of the pharmaceutical industry.

2 drops: The bid-winning price and bid-winning rate for the drugs included in the National

Essential Drugs List and the drugs for Basic National Medical Insurance are set to drop.

With the current bidding mechanisms, the drug prices tend to spiral downwards.

1 increase: All costs, including raw materials, labour, energy and financial expenses, are

increasing in general. The implementation of the new pharmacopoeia and new version

GMP would increase the costs of many drug makers as they would have to upgrade

production lines.

1 cap: the constraints on prescribing antibiotics by hospitals have become the norm.

1.6 1Q 2012: a relatively low level in a contraction period

1Q12: The industry’s profit grew at a much slower pace than revenue. The revenue and

profit grew by 23.2% and 14.39% y-o-y, 1.9% and 2.91% higher than the growth rate for

the period of Jan. and Feb. The gross profit margin declined by 10.3% y-o-y to 29.71%

and net profit margin fell by 0.65% to 9.58%. Considering base effects, we estimate the

sector will see its profit grow at a slower pace than revenue. We forecast the revenue and

profit of the pharmaceutical sector to grow 23% and 17% y-o-y in 2012.

The latest statistics for Jan.-April 2012 point to the trend we have predicted. In Jan-April,

the pharmaceutical industry generated RMB493 billion in revenue and RMB47 billion in

profit, representing 20.6% and 15.75% y-o-y increases respectively. The profit growth

rate lagged revenue growth.

Profitability-wise, the gross and net profit margin of the pharmaceutical sector was

29.52% and 9.54% for Jan-April, 0.6% and 9.54% lower than in the same period of last

year.



6

1.7 2015-2018: the focus of healthcare reform will shift from

medicine to medical service. The pharmaceutical sector will

be more concentrated and profitability would climb again

The separation between healthcare service charge and drugs income would materialise.

The threshold of entry into the industry would be raised and the profitability of

pharmaceutical companies will inch up.

1.8 Compared with other manufacturing industries, the

pharmaceutical industry delivers more robust growth in a

more sustainable way.

We forecast the profitability of the pharmaceutical sector will generally be weak in 2012,

hitting lows before turning up. Yet, compared with other industries in the secondary sector,

the pharmaceutical industry enjoys relatively greater profitability and more stable growth.

Exhibit 5: Comparison with other industries: 1Q2012 revenue growth

Source: Wind, Guosen Securities Economic Research Institute

Exhibit 6: Comparison with other industries: 1Q2012 net profit growth


26.49% 26.28% 24.09% 23.15% 22.82%

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7

Exhibit 7: Comparison with other industries: 1Q2012 gross profit margin


Exhibit 8: Comparison with other industries: 1Q2012 net profit margin


In the past two decades, the revenue growth of the pharmaceutical sector was robust

and smooth and will likely remain so in the next 5-10 years due to the inelastic demand

for medical care and consumption upgrades. But the profit growth would wax and wane

as the economy moves from expansion to contraction every 3-4 years.

2 Policy-triggered disruptions: the worst

period is over and the impact has been

absorbed

In 2011, the low-price-oriented bidding mechanism for essential drugs took a toll on

generic drugs makers in 2011. The market is concerned that the bidding mechanism for

non-essential drugs would follow suit. The introduction of the new version of GMP (good

manufacturing practice) has increased the costs of most drug makers. A scandal about

13.59% 11.78%

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8

contaminated capsules has sapped public confidence in Chinese pharmaceutical

companies.

Although the framework of China’s medical reform for the 12th Five-Year Plan period and

the priorities for 2012 have been set, weaning hospitals from mark-ups in medicine sales

is not achievable in the short term and there is no fundamental change to the dynamics of

competition in the sector. Government policies, which had triggered an impact, are

accepted as a new norm. At present, we do not expect any adverse policies will be

released in 2H 2012.

2.1 Curbing the expenditure of medical insurance: the current

pilot scheme will be widened

The sliding growth rate of public medical insurance expenditure prompted us to forecast

the pharmaceutical sector would see slowing revenue growth this year when we issued

our annual strategy report for 2012.

Exhibit 9: The balance sheet of the Urban Resident Basic

Medical Insurance Scheme (URBMI) (RMB billion)

Exhibit 10: The balance sheet of New Rural Cooperative

Medical Scheme (NRCMS) (RMB billion)


Source: the Ministry of Health, Guosen Securities Economic

Research Institute

The accumulative surplus of China’s medical insurance schemes is relatively decent but

the surplus rate is easing. The Urban Resident Basic Medical Insurance Scheme

(URBMI) was estimated to have RMB502.5 billion in proceeds, RMB422.1 billion in

expenditure, resulting in an RMB585.1 million surplus. Yes, the surplus rate has been on

the decline. The New Rural Cooperative Medical Scheme (NRCMS) has a decent

balance sheet, with a surplus of RMB33.7 billion. Overall, China’s medical insurance

schemes are well-financed.

But the pocket of medical insurance schemes varies with regions. In 2010, the surplus

rate of the URBMI in Beijing, Hunan, Shanghai and Tianjin was lower than 10%.

24.5% 23.2%

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600

800

2004 2005 2006 2007 2008 2009 2010 2011E

RM

B b

n

Proceeds (LHS, RMB billion) Expenditure (LHS, RMB billion) Accumulative surplus (LHS, RMB billion) Surplus rate for the year (RHS, %)

34.6%

18.1%

27.1%

18.9%

15.6%

2.3%

9.3%

16.5%

0%

10%

20%

30%

40%

-200

-100

0

100

200

300

2004 2005 2006 2007 2008 2009 2010 2011

RM

B b

n

Proceeds (LHS, RMB billion) Expenditure (LHS, RMB billion) Accumulative surplus (LHS, RMB billion) Surplus rate for the year (RHS, %)



9

Exhibit 11: The balance sheet of Basic Medical Insurance of major provinces in 2010

Province/city Proceeds Expenditure

Accumulative surplus

Surplus rate in 2010

Surplus rate in 2009

1 Beijing 298 290 196 3% 13%

2 Hunan 113 106 149 6% 31%

3 Shanghai 330 300 205 9% 13%

4 Tianjin 115 104 51 10% 3%

5 Yunan 98 86 108 12% 23%

6 Xinjiang 94 81 92 14% 19%

7 Liaoning 216 182 252 16% 27%

8 Shandong 264 222 263 16% 18%

9 Fujian 109 91 175 16% 22%

10 Anhui 99 82 126 17% 26%

11 Jilin 64 53 101 17% 39%

12 Henan 132 108 166 18% 27%

13 Inner Mongolia 79 64 88 18% 28%

14 Hubei 128 104 159 18% 25%

Source: China Statistical Yearbook 2011, Guosen Securities Economic Research Institute

Curbing medical insurance expenditure is a growing trend. China has set up a basic

public medical insurance scheme covering most citizens, and the medical expenditure is

poised to accelerate. Better stewardship of the pubic insurance funds will come to the

fore and reining in wasteful expending would also be a top priority.

In May 2011, the government issued a document to reform healthcare payment methods.

The reform package included a portfolio of payment models, including payment based on

diagnosis-related groups (DRGs), per diem payment for inpatient care and a pre-pay

system for outpatient care. In November, 2011, the first batch of 40 cities to implement

the reform was announced. In May 2012, another guideline for the payment method

reform for the New Rural Cooperative Medical Scheme was announced, suggesting a

pre-pay system for outpatient care and payment based on (DRGs or number of days of

using of ward beds.

We expect more reform efforts are in the pipeline. Curbing public health expenditure

would be high on the government agenda for a long time.

2.2 Tender drug prices spiral downwards

Since the introduction of the 2009 version of the Catalogue of Drugs for Basic National

Medical Insurance, the NDRC has mandated price cuts in the antibiotics and drugs for

circulatory, nervous, digestive and endocrine system included in the catalogue. Price cuts

in anti-tumor drugs, blood products and Chinese medicine are also on the cards.

A slew of new policies concerning price adjustment for new entries in the catalogue and

centralised pricing for proprietary essential drugs are expected to be introduced in

2012-2013. The new drug price regulations are already in the consultation period.

We maintain our previous opinion that drug prices would spiral downwards in the

provincial-level drug tender invitations due to the price cuts ordered by the NDRC. The

level of tender prices is essential to pharmaceutical companies. But the impact to

proprietary drugs would be less significant.



10

Exhibit 12: Price cuts for the drugs included in the 2009 version of the Catalogue of Drugs for Basic National Medical Insurance

Time Price cuts Average drop Lost revenue in the sector

(RMB billion)

November, 2010

Cuts were made into the maximum retail prices of many separately priced drugs in 17 categories of drugs, including antibiotics, drugs for cardiovascular and cerebrovascular disease etc.

19% 2

March, 2011

Cuts were made in the maximum retail prices of antimicrobial drugs and drugs for circulatory systems in 162 kinds and over 1300 specifications.

21% 10

August, 2011

Cuts were made into the maximum prices of hormones and drugs for endocrine and nervous system in 82 kinds and over 400 specifications.

14% N.A

March, 2012

Cuts were made in the prices of digestive drugs in 53 kinds and over 300 specifications and the average slash was 17%.

17% 3

Source: NDRC, Guosen Securities Economic Research Institute

2.3 Reforming public hospitals: the pilot reform scheme of

county-level hospitals is the focus for 2012, with the

short-term impact on pharmaceutical companies being

insignificant

The release of the guiding opinions on the pilot reform on public hospitals on February 23,

2012 marked the beginning of public hospital reforms. Sixteen “representative” cities

were singled out for the pilot scheme. Most of the cities are 2nd-tier cities, except Beijing

and Shenzhen. We estimate the reform would have limited impact on the pharmaceutical

industry in the short term, but may well be a game-changer in the medium and long term.

It is important to watch the evolvement of the reimbursement system and the introduction

of private investment in hospitals.

Reform of city-level public hospitals is making progress slowly. For example, Beijing

announced in May that it will select several municipal public hospitals on a trial basis to

try “two separations and 3 mechanisms”. The two separations mean the separation

between regulation and operation and the separation between healthcare service charge

and drugs income. 3 mechanisms mean the corporate governance mechanism, fiscal

reimbursement mechanism and medical insurance payment mechanism.

In contrast, reform of county-level hospitals is a primary concern for the government in

2012. A newly released government document stressed the importance of pressing

ahead with the reform of county-level public hospitals. The reform efforts would be

directed at reimbursement system, drug pricing, medical insurance payment, clear-cut

government responsibility for public healthcare and modern managerial practice at

hospitals.

We estimate the reform of city-level public hospitals would not have much impact on the

pharmaceutical industry in 2012-2014, as China’s 12th FYP for healthcare reform

indicates that wholesale reform of city-level public hospitals would start in 2015.

3 Finding “sunshine” companies

Reform proposals caused disruptions to pharmaceutical companies. Good

pharmaceutical companies could also be blindsided and edged out of the market by bad

ones, as happened in 2004-2006 and 4Q2010-1Q2012. But eventually, the rules of the

market economy would prevail, sending promising “sunshine” companies to dominant

positions.



11

The dips in the share prices of “sunshine” pharmaceutical companies would represent

good buying opportunities.

Some leading companies have posted spectacular growth in a challenging environment.

Once the business climate in the sector takes a turn for the better, they are on course for

faster growth and greater profitability.

3.1 A glance at results: slower growth, shrinking profitability and

greater divergence of performance among players

The growth rate of profit is slower than that of revenue, which is due to an overhaul of

GMP (good manufacturing practice), rising costs of raw materials and labour, and this is

in line with our forecast. The revenue growth rate of the listed pharmaceutical companies

were 19.76% and 17.41% y-o-y for 2011 and 1Q 2012, while the gross profit margin

declined by 1.83% and 0.77% y-o-y. Net profit after extraordinary gains and losses grew

3.29% and 7.63% y-o-y.

Accounts receivable and notes receivable increased dramatically and operating cash

flow was weak. Accounts receivable and notes receivable of the listed pharmaceutical

companies grew 42% and 31% in 2011 and the trend continued in 1Q 2012, suggesting a

slow turnover of capital.

Exhibit 13: Comparison of financial results of A-share pharmaceutical sector: 2010 vs. 2011, 1Q11 vs. 1Q2012 (RMB billion)

2010 2011 y-o-y change 1Q 2011 1Q 2012 y-o-y change

Operating revenue 337 403.6 19.76% 96.2 113 17.41%

Operating costs 237.1 291.3 22.87% 69.4 82.4 18.67%

Gross profit margin 29.66% 27.83% -1.83% 27.82% 27.04% -0.77%

Selling expenses 39.3 45.8 16.54% 10.5 12.7 20.05%

Operating expenses ratio 11.66% 11.35% -0.31% 10.96% 11.21% 0.25%

Administrative expenses 22.9 26.7 16.76% 5.9 6.6 12.97%

Administrative expense ratio 6.78% 6.61% -0.17% 6.10% 5.87% -0.23%

Financial expenses 2.8 3.3 14.38% 0.7 0.9 26.29%

Financial expenses ratio 0.84% 0.81% -0.04% 0.73% 0.78% 0.05%

Profit after short-term investment income and non-operating income and expense

33.2 34.3 3.29% 9.4 10.1 7.63%

Effective income tax rate 16.05% 16.93% 0.88% 17.25% 17.85% 0.60%

Net profit attributable to parent company 29.3 32.1 9.87% 8.5 8.2 -3.44%

Notes receivables 17.5 24.8 41.99% 16.7 25.4 51.88%

Account receivables 50.3 65.9 31.10% 62.8 83.3 32.75%

Operating cash flow 25.7 18.4 -28.27% --3 1.8 709.91%


Performance of sub-sectors diverged considerably and whether underperformers could

improve remains to be seen. The revenue slowdown in the chemical drugs sector and

biomedicine sector are the most evident, posting single-digit growth and negative growth

respectively. The revenue of the chemical drugs sector slowed because of overcapacity,

falling selling prices and restraints on antibiotics prescriptions. The revenue of

biomedicine companies slowed due to the persistent bottleneck of blood plasma

collection. The gross profit margin of the Chinese medicine sector fell the most among

the sub-sectors because the prices of Chinese medicine raw materials advanced in 2011,



12

but it is expected to recover in the future as the growth in raw material prices is losing

momentum. All sub-sectors, except the biomedicine sector, saw their financial expenses

rise. The financial expenses of the medicine distribution sector surged 74% in 2011

before leveling off in 1Q 2012. The pharmaceutical industry struggled from rising notes

receivables and account receivables, and weakening operating cash flow in 2011 and it

remains to be seen whether there is an improvement in 2012.

Exhibit 14: Comparison of financial results of A-share pharmaceutical sub-sectors: 2011 vs. 2012 and 1Q 2011 vs. 1Q 2012

Chemical drug preparations sector

Chemical medicine sector

Health care device sector

Biomedicine sector

Chinese medicine sector

Medicine distribution

sector

10/11

11Q1/

12Q1 10/11

11Q1/

12Q1 10/11

11Q1/

12Q1 10/11

11Q1/

12Q1 10/11

11Q1/

12Q1 10/11

11Q1/

12Q1

Operating revenue 20.24% 13.36% 8.59% -5.79% 21.57% 14.36% -7.19% 3.87% 22.31% 29.97% 27.17% 29.25%

Gross profit margin -1.50% 0.42% -2.89% -0.57% -1.39% 0.83% 0.69% 5.89% -1.32% -1.72% -0.86% -0.48%

Selling & administrative expenses

21.05% 15.87% 12.31% 6.25% 22.78% 26.15% 17.04% 23.15% 15.09% 26.18% 17.55% 22.58%

Financial expenses 33.07% 56.24% 2.90% -0.18% 868.64% 147.51% -820.00% -166.78% 25.58% 56.89% 74.09% 38.37%

Net profit after extraordinary gains and losses

2.57% 6.43% -28.79% -23.61% 20.55% 10.39% -21.51% 11.99% 22.28% 19.99% 7.04% 25.44%

Notes receivables 31.42% 52.44% 21.91% 3.61% 17.26% 0.46% 86.46% 37.36% 64.41% 59.03% 88.88% 102.99%

Account receivables 30.69% 30.64% 19.72% 15.19% 34.79% 46.65% 16.38% 39.82% 27.14% 34.12% 39.82% 41.69%

Inventory 17.25% 17.35% 18.27% 19.49% 15.90% 28.49% -12.86% -8.33% 38.60% 44.70% 34.51% 31.79%

Operating cash flow -24.08% 174.95% -5.14% -48.24% 12.86% 148.24% 19.76% 84.84% -54.46% 26.76% -87.98% -23.76%


A league table of leading companies for 2011: the companies with a distribution business

and generic drugs maker took the lead in the ranking in terms of revenue. The

large-scale pharmaceutical companies producing branded, special or proprietary

products dominated the rankings for profitability.



13

Exhibit 15: A league table of listed pharmaceutical companies for 2011

Revenue (RMB billion) Net profit (RMB

billion) ROIC (%) ROIC (%) (excluding the ChiNext Board)

CAGR of net profit after extraordinary gains and losses for 2008-2011

CAGR of net profit after extraordinary gains and losses for 2008-2011 (excluding the ChiNext Board)

1 Shanghai Pharmaceuticals (601607.CH)

54.9 Shanghai Pharmaceuticals (601607.CH)

2.04 Changsha Sinocare (300298.CH)

65.0 Haisco Pharmceutical (002653.CH)

50.2 Changsha Sinocare (300298.CH)

146% PKU International Healthcare Group Southwest Pharmaceutical (000788.CH)

114%

2 Jointown Pharmaceutical (600998.CH)

24.8 Yunnan Baiyao (000538.SZ)

1.21 Haisco Pharmceutical (002653.CH)

50.2 Beijing SL Pharmaceutical (002038.CH)

37.2 Zhuhai Hokai Medical Instruments (300273.CH)

133% Guangxi Wuzhou Zhongheng (600252.CH)

87%

3 Nanjing Pharmaceutical (600713.CH)

17.2 Changhai Fosun Pharmaceutical (600196.CH)


37.2 Shandong Dong-E E-Jiao (000423.CH)

27.7 Walvax Biotechnology (300142.CH)

119% Guangzhou Baiyunshan Pharmaceutical (000522.CH)

85%

4 China National Accord Medicines (000028.SZ)

15.1 Zhejiang NHU (002001.CH)


27.7 Renhe Pharmacy (000650.CH)

27.4 PKU International Healthcare Group Southwest Pharmaceutical (000788.CH)

114% Zhejiang CONBA Pharmaceutical (000590.CH)

81%

5 Harbin Pharmaceutical (600664.CH)

13.5 Zhejiang Medicine (600216.CH)



24.4 Grandhope Biotech (300238.CH)

104% Topchoice Medical Investment (600763.CH)

79%

6 North China Pharmaceutical (600812.CH)

12.1 Kangmei Pharmaceutical (600518.CH)

1.01 Ningbo David Medical Device (300314.CH)

25.4 Topchoice Medical Investment (600763.CH)

23.9 Zhejiang D.A. Diagnostics (300244.CH)

103% Tibet Rhodiola Pharmaceutical (600211.CH)

73%

7 Yunnan Baiyao (000538.SZ)

11.3 Sichuan Kelun Pharmaceutical (002422.CH)

0.97 Leadman (300289.CH) 25.1 Shanghai RAAS Blood Products (002252.CH)

23.0 Hebei Changshan Biochemical Pharmaceutical (300255.CH)

96% Chinva Medical Instrument (600587.CH)

66%

8 Huadong Medicine (000963.CH)

11.1 Jiangsu Hengrui Medicine (600276.CH)



22.9 Hunan Er-Kang Pharmaceutical (300267.CH)

95% Kunming Pharmaceutical (600422.CH)

65%

9 Zhejiang Int’l (000411.CH)



23.9 Shanghai Kehua Bio-Engineering (002022.CH)

22.7 Guangxi Wuzhou Zhongheng (600252.CH)

87% Renhe Pharmacy (000650.CH)

63%

10 China National Medicines (600511.CH)


0.76 Shanghai RAAS Blood Products (002252.CH)

23.0 Jiangsu Yuyue Medical Equipment & Supply (002223.CH)

22.6 Guangzhou Baiyunshan Pharmaceutical (000522.CH)

85% Zhejiang CONBA Pharmaceutical (600572.SH)

60%

11 Tianjin Tasly Pharmaceutical (600535.CH)

6.6 Shenzhen Hepalink Pharmaceutical (002399.CH)

0.62 Boya Biochemical (300294.CH)


22.3 Guangdong By-Health Biotechnology (300146.SZ)

85% Wuhan Humanwell Healthcare (600079.CH)

57%

12 Changhai Fosun Pharmaceutical (600196.CH)

6.5 Tianjin Tasly Pharmaceutical (600535.CH)


22.9 Guizhou Yibai Pharmaceutical (600594.CH)

20.9 Zhejiang CONBA Pharmaceutical (000590.CH)

81% Zhejiang Hisoar Pharmaceutical (002099.CH)

55%

13 Chongqing Taiji Industry (600129.CH)

6.4 Harbin Pharmaceutical (600664.CH)

0.58 Shanghai Kehua Bio-Engineering (002022.CH)

22.7 Zhangzhou Pientzehuang Pharmaceutical (600436.CH)


79% Shenzhen Salubris Pharmaceuticals (002294.CH)

52%

14 Double-crane Pharmaceutical (600062.CH)

6.4 Double-crane Pharmaceutical (600062.CH)

0.53 Jiangsu Yuyue Medical Equipment & Supply (002223.CH)


19.2 Staidson (Beijing) Biopharmaceuticals (300204.CH)

78% Changchun High & New Technology Industries (000661.CH)

50%

15 Beijing Tongrentang (600085.CH)



22.3 Shenzhen Salubris Pharmaceuticals (002294.CH)

19.2 Tibet Rhodiola Pharmaceutical (600211.CH)

73% Kangmei Pharmaceutical (600518.CH)

50%

16 Kangmei Pharmaceutical (600518.CH)

6.1 Zhejiang Hisun Pharmaceutical (600267.CH)

0.5 Lepu Medical Technology (300003.CH)

21.4 Zhejiang CONBA Pharmaceutical (000590.CH)

19.0 Xiamen Kingdomway (002626.CH)

67% Guangzhou Pharmaceutical (600332.CH)

50%


5.5 Lepu Medical Technology (300003.CH)

0.47 Guizhou Yibai Pharmaceutical (600594.CH)

20.9 Harbin Pharm.Group Sanjing Pharmaceutical (600829.CH)

17.8 Chinva Medical Instrument (600587.CH)

66% Jiangsu Yuyue Medical Equipment & Supply (002223.CH)

45%

18 Guangzhou Pharmaceutical (600332.CH)

5.4 Shijiazhuang Yiling Pharmaceutical (002603.CH)

0.45 Zhangzhou Pientzehuang Pharmaceutical (600436.CH)

20.6 Zhejiang Int’l (000411.CH)

17.4 Shanghai Tofflon Science and Technolog (300171.SZ)

65% Shijiazhuang Yiling Pharmaceutical (002603.CH)

44%

19 Shenzhen Neptunus Bioengineering (000078.CH)

5.3 Beijing Tongrentang (600085.CH)



17.3 Kunming Pharmaceutical (600422.CH)

65% Tianjin Zhongxin Pharmaceutical (600329.CH)

43%

20 Zhejiang Hisun Pharmaceutical (600267.CH)



19.2 Tonghua Dongbao Pharmaceutical (600867.CH)


63% Sichuan Kelun Pharmaceutical (002422.CH)

43%

21 Sichuan Kelun Pharmaceutical (002422.CH)


0.4 Hunan Er-Kang Pharmaceutical (300267.CH)

18.2 China Resources Sanjiu Medical & Pharmaceutical (000999.CH)

16.6 Zhejiang CONBA Pharmaceutical (600572.SH)

60% Shandong Realcan Pharmaceutical (002589.CH)

41%

22 Zhejiang Medicine (600216.CH)

4.8 Huadong Medicine (000963.CH)

0.38 Shanghai Tofflon Science and Technolog (300171.SZ)

18.1 Hualan Biological Engineering (002007.CH)

16.3 Wuhan Humanwell Healthcare (600079.CH)

57% Shandong Dong-E E-Jiao (000423.CH)

41%

23 Joincare Pharmaceutical (600380.CH)

4.8 Guangxi Wuzhou Zhongheng (600252.CH)


17.8 Guilin Sanjin Pharmaceutical (002275.CH)

15.5 Zhejiang Hisoar Pharmaceutical (002099.CH)

55% Jiuzhitang (000989.CH) 41%

24 Chongqing Tong Jun Ge (000591.CH)

4.8 Jointown Pharmaceutical (600998.CH)

0.37 Zhejiang Int’l (000411.CH)

17.4 China National Medicines (600511.CH)

14.9 Chongqing Tong Jun Ge (000591.CH)

53% Jiangsu Nhwa Pharmaceutical (002262.CH)

39%

25 Jiangsu Hengrui Medicine (600276.CH)

4.6 Hualan Biological Engineering (002007.CH)


17.3 Changchun High & New Technology Industries (000661.CH)


52% Yunnan Baiyao (000538.SZ) 39%




14

4 Unearthing “sunshine” companies in the

sub-sectors

4.1 Chemical drug preparations: focus on pharmaceutical

companies producing high-end specialist and innovative

medicine

In the last decade, some Chinese drug-makers entered into the high-end segment of

specialist drugs in pursuit of higher margins by producing FGD (First Generic Drugs) and

developing innovative drugs. At present, there is an overproduction in the industry. A

possible scenario for increased industry concentration: most generic drug makers are

stifled by measures to curb medical care expenditure and are left with limited resources

for developing new drugs. In contrast, specialist drug makers could expand market share

due to inelastic demand and competitive pricing, as they have accumulated technical

know-how and capital and also built up a sales network and product portfolio in the

process of developing drugs that are alternatives to imported ones.

Companies to watch: Jiangsu Hengrui Medicine (600276.CH), Zhejiang Hisun

Pharmaceutical (600267.CH), Huadong Medicine (000963.CH), Wuhan Humanwell

Healthcare (600079.CH), Beijing SL Pharmaceutical (002038.CH), Shenzhen Salubris

Pharmaceuticals (002294.CH) and Hybio Pharmaceutical (300199.CH).

Exhibit 16: Makers of chemical drug preparations: earnings & investment highlights

2011 1Q 2012 Net profit growth

forecasts Investment highlights

Revenue growth

Net profit growth

Revenue growth

Net profit growth

12E 13E 14E

Jiangsu Hengrui Medicine (600276.CH)

22% 21% 20% 19% 24% 22% 19% The company is growing steadily and we expect its innovative drugs to significantly enhance profitability.


24% 20% 37% 34% 25% 23% 23% The company is well-managed and delivers good results.

Wuhan Humanwell Healthcare (600079.CH)

64% 39% 51% 34% 23% 31% 28% A leader in anesthetic: its grant prices of stock options are close to its current share price, which provides safety margin.

Shenzhen Salubris Pharmaceuticals (002294.CH)

14% 14% 14% 19% 24% 20% 19% The sales of Clopidogrel (also known as Plavix) are expected to grow steadily in the short term. Some new products are expected to be marketed.

Sichuan Kelun Pharmaceutical (002422.CH)

28% 46% 15% 15% 27% 22% 20% There is a recovery in the sales of large volume parenteral (LVP) solutions. The company is upgrading its product lines.

Guangzhou Baiyunshan Pharmaceutical (000522.CH)

15% 28% 8% 12% 15% 15% 15% The company is in a period of stable growth. Focus on the sales of Wanglaoji after its merger with Guangzhou Pharmaceutical (600332.CH).

Harbin Pharm.Group Sanjing Pharmaceutical (600829.CH)

20% 19% 11% 8% 9% 13% 12% A leader in OTC drugs: stable growth plus low valuation

Livzon Pharmaceutical (000513.CH)

16% -14% 19% -7% 15% 18% 16% The company faces an inflection point and the 2012 results may dip in 1H and pick up later in 2H.

Average 24% 13% 25% 8%

Note: The net profit growth figures are released by National Bureau of Statistics.

Source: Source: Wind, Guosen Securities Economic Research Institute



15

4.2 Chemical APIs(active pharmaceutical ingredients): focusing

on industry upgrade as well as dominant products

Bulk APIs (active pharmaceutical ingredients): Results are subject to price fluctuations.

Most products have a low entry barrier. As such, when selling prices advance, capacity is

expanded, and when selling prices fall, some producers are forced to halt production to

wait for a recovery in prices. We advise investors to watch Vitamin E and Vitamin A

producers, like Zhejiang NHU (002001.CH) and Zhejiang Medicine (600216.CH).

Special APIs: Results are subject to the pace of product replacement. The prices of such

products tend to decline continually. New products could be priced more profitably than

mature and old ones. The strategy followed by producers of special APIs is to develop

and launch new products to replace existing ones as soon as possible. The shape of

things to come is industry upgrade.

US$250 billion worth of patent drugs would see their patent expire in 2009-2012, and

many of such drugs are mainstay of leading pharmaceutical companies. In the West, the

sales of generic drugs account for over 60% of total sales. Both the governments and

insurance companies would promote the use of generic drugs.

The global pharmaceutical industry is going through a re-alignment, with big international

players outsourcing manufacturing and research overseas and India and China being the

most popular destinations. Despite the small scale at present, the Contract Research and

Manufacturing Services (CRAMS) in both India and China have seen annual growth

rates of over 40% in recent years. We estimate the growth potential is enormous down

the road.

The route of industry upgrade of special API producers is getting clearer. Export of

special APIs→ customized production (from APIs to preparations)→co-development→

export of preparations→filing for patents/producing authorised generic drugs. China’s

pharmaceutical companies, which have made investment in preparation for this

outsourcing trend, would benefit from this precious opportunity. But investors need to

beware of the volatility of overseas orders, which may substantially affect earnings.

Companies to watch: Zhejiang Hisun Pharmaceutical (600267.CH), Huahai

Pharmaceutical (600521.CH), Zhejiang Hisoar Pharmaceutical (002099.CH), Zhejiang

NHU (002001.CH) and Zhejiang Medicine (600216.CH).



16

Exhibit 17: Makers of chemical APIs: earnings & investment highlight


projections Investment highlights

Revenue growth

Net profit growth

Revenue growth

Net profit growth

12E 13E 14E

Zhejiang Hisun Pharmaceutical (600267.CH)

14% 38% 17% 3% 20% 24% 22% The earnings for the 1st to the 3rd quarter would be under pressure. Yet, we are positive on its long-term prospects.

Huahai Pharmaceutical (600521.CH)

79% 132% -14% 2% 36% 25% 19% The sales of Irbesartan tablets would continue to climb in 2012, contributing to its results.

Zhejiang Hisoar Pharmaceutical (002099.CH)

21% 23% 5% 42% 42% 23% 17% Its export of antibiotics keeps growing and the sales of customised products would rebound in the 2nd half.

Zhejiang NHU (002001.CH) 10% 6% 0% -10% -3% 4% 12% Its selling prices of Vitamin E and Vitamin A are stable. The growth will largely come from its essence, fragrance and new material business.

Zhejiang Medicine (600216.CH)

6% -12% 19% 10% 10% 0% 5% Its selling prices of Vitamin E and Vitamin A are stable. It is expected to develop special API in the future.

Average 23% 21% 11% -11%

Overcapacity plagues most categories of chemical API products.



4.3 The Chinese medicine is for all

Focus on the pharmaceutical companies with proprietary products or brands, as some of

them would grow into leading companies.

Proprietary Chinese medicine products face less stiff competition in tenders and could

maintain decent prices. Proprietary Chinese medicines treating cardiovascular and

cerebrovascular diseases, tumor and diabetes enjoy even better growth potential. We

advise watching Tianjin Tasly Pharmaceutical (600535.CH) and Shijiazhuang Yiling

Pharmaceutical (002603.CH).

Drug makers with well-received brands are able to pass on the rising costs and could

increase profits by raising prices, as Shandong Dong-E E-Jiao (000423.CH) and

Zhangzhou Pientzehuang Pharmaceutical (600436.CH) have done. Also, some players

may widen their business scope, as Yunnan Baiyao (000538.SZ) has started to produce

toothpaste and shampoo, and Guangzhou Pharmaceutical (600332.CH) tapped into the

herbal tea market after regaining the Wanglaoji brand.

Besides, the prices of some medicinal materials are declining, easing the cost pressure

of Chinese medicine producers.

Companies to watch: Tianjin Tasly Pharmaceutical (600535.CH), Shandong Dong-E

E-Jiao (000423.CH), Zhangzhou Pientzehuang Pharmaceutical (600436.CH), Yunnan

Baiyao (000538.SZ) and Guangzhou Pharmaceutical (600332.CH) etc. (Refer to the

table below.)



17

Exhibit 18: Chinese medicine producers: results & investment highlights

2011 1Q 2012Q1

Net profit growth forecasts


Revenue growth

Net profit growth

Revenue growth

Net profit growth

2012E 2013E 2014E

Tianjin Tasly Pharmaceutical (600535.CH)

41% 36% 55% -8% 26% 28% 24% The sales of salvia dripping pills keep rising, leading to a pickup in the sales of its second-tier products.

Yunnan Baiyao (000538.SZ) 12% 31% 14% 29% 23% 25% 23% The products of health-related products keep rising.

Shandong Dong-E E-Jiao (000423.CH)

12% 47% 1% 24% 30% 24% 24% It hiked the prices of donkey-hide gelatin.

Zhangzhou Pientzehuang Pharmaceutical (600436.CH)

17% 31% 0% 37% 32% 25% 23% Zhangzhou Pientzehuang Pharmaceutical (600436.CH) is embarking on price hikes.

Kangmei Pharmaceutical (600518.CH)

84% 40% 83% 69% 39% 25% 23% A leading manufacturer of Chinese medicine decoction piece

Shijiazhuang Yiling Pharmaceutical (002603.CH)

18% 44% 5% 15% 18% 31% 31% Its business model is special and the results are turning around.

Kunming Pharmaceutical (600422.CH)

34% 52% 50% 88% 38% 32% 24% Panax pseudoginseng and rhizoma gastrodiae-made products are posting high growth.

Guangxi Wuzhou Zhongheng (600252.CH)

-19% 1% -18% -2% 118% -8% 28% Panax pseudoginseng-made injections still have growth potential, with sales improving q-o-q.

Guizhou Yibai Pharmaceutical (600594.CH)

30% 36% 17% 22% 34% 26% 25% The valuation is attractive.

China Resources Sanjiu Medical & Pharmaceutical (000999.CH)

27% -7% 32% 37% 15% 10% 9% Its cost pressure is alleviated. It embarks on organic growth and explores M&A opportunities.

Tianjin Chase Sun Pharmaceutical (300026.CH)

46% 20% 53% 96% 15% 15% 15%

Jiangsu Kanion Pharmaceutical (600557.CH)

13% 1% 9% -26% 18% 26% 17%

Guangzhou Pharmaceutical (600332.CH)

21% 8% 33% 40% 42% 24% 18% The sales of rabies vaccination surge dramatically and Wanglaoji herbal tea would add to its total revenue significantly.

Average 23% 26% 28% 18%

Growth in this segment is stable.

Note: The earnings forecast for Guangzhou Pharmaceutical (600332.CH) factors in the merger of Guangzhou Baiyunshan

Pharmaceutical (000522.CH).The net profit growth figures are released by National Bureau of Statistics.


4.4 Biomedicine: focus on the grants of approvals for plasma

collection stations and pharmaceutical companies with

strong R&D capabilities

Blood products: The demand is strong but supply is constrained by the limited supply of

plasma. Considering the decent gross and net profit margin of such products, the

chances are slim that the NDRC would allow price hikes. But price cuts would also

dampen producers’ enthusiasm for stepping up supply. We estimate the price of blood

products would remain stable. We suggest to watch Hualan Biological Engineering

(002007.CH) and to see how its plasma collection station expansion plan is faring.

Vaccines: Homogeneous competition is intensifying. Though the profitability of Class II

vaccines like vaccines against Hib and chicken pox are still good, competition is set to be

stiffer and may hurt profitability. The introduction of new vaccines is essential to the

development in the industry. Investors are advised to watch Walvax Biotechnology

(300142.CH), Hualan Biological Engineering (002007.CH) and Guangzhou

Pharmaceutical (600332.CH).



18

Recombinant protein drugs: The 1st-generation generic biochemical drugs like

interleukin grapple with homogeneous competition and weak profitability. The difficulty of

producing recombinant protein drugs like growth hormone is enormous, so there are not

many producers and as a result they enjoy excellent potential. We advise watching

Changchun High & New Technology Industries (000661.CH) and Beijing SL

Pharmaceutical (002038.CH) as they possess technical advantage.

Exhibit 19: Leading biomedicine producers: results & highlights


forecasts Investment highlights

Revenue growth

Net profit growth

Revenue growth

Net profit growth

2012E 2013E 2014E

Beijing SL Pharmaceutical (002038.CH)

36% 92% 31% 31% -10% 24% 22% The company provides a wealth of products and the growth momentum of its main business is gaining.

Hualan Biological Engineering (002007.CH)

-24% -39% 3% -3% 27% 6% 13% Watch weather it can obtain licenses for new plasma collection stations and how its Chongqing-based subsidiary fares.

Changchun High & New Technology Industries (000661.CH)

19% 37% 42% 44% 37% 29% 23% The takeover of GeneScience Pharmaceuticals, a profit-making business, would add to its profitability significantly, if the acquisition is successful.

Shanghai RAAS Blood Products (002252.CH)

17% 8% -5% -5% 12% 12% 12% Stable growth in earnings

Beijing Tiantan Biological Products (600161.CH)

16% 33% 25% 10% -16% 2% 3% The profit margin of its class I vaccines is small but its offerings of blood products are to be marketed soon.

Walvax Biotechnology (300142.CH)

32% 34% 15% 17% 27% 21% 15% The market share of its Hib vaccines is increasing. Focus on its newly developed products.

Hybio Pharmaceutical (300199.CH)

36% 52% 22% 23% 25% 25% 25% The sales of its current offerings are surging. It has a large number of products under development. But its valuation is not attractive.

Staidson (Beijing) Biopharmaceuticals (300204.CH)

61% 81% 117% 220% 63% 43% 30% Its key task for 2012 is to take full advantage of its products’ presence in hospital pharmacies.

Average 26.73% 6.45% 18.25% 20.69%

The business climate varies greatly in different segments.



4.5 Medical devices: the growth rate of exports is slowing, while

domestic sales are growing steadily

The medical devices sector has many segments with varying development levels. The

listed companies in this sector only represent a slice of the whole sector.

China’s producers of diagnostic and monitoring devices have seen their export growth

slow since 3Q 2011. The export outlook is still unclear now. Yet therapeutic device

makers with a focus on the domestic market still enjoyed growth in 2011 and 1Q 2012.

The sales growth of household medical devices slowed generally but Jiangsu Yuyue

Medical Equipment & Supply (002223.CH) was able to maintain high growth in 2011 and

is expected to see its sales grow by more than 25% in 2012.

The introduction of the new version of cGMP (current good manufacturing practice) has

boosted the business climate of drug manufacturing devices. The revenue and profit of

Shinva Medical Instrument (600587.CH) keep growing rapidly.

The diagnostic reagent segment is growing steadily, with the growth rate of biochemical

and immune reagents outpacing that of hospital visits. The Chinese population suffering



19

from diabetes is growing, boosting the demand for real-time blood sugar monitors. The

sales of Changsha Sinocare (300298.CH) grew 68.35% y-o-y in 1Q 2012.

As the government offers more assistance to children suffering from congenital heart

disease, the sales of occluders are growing at an annual rate of more than 20%. In 2011,

the occluders sales of Lepu Medical Technology (300003.CH) and LifeTech Scientific

(8122.HK) were up by 22.2% and 25.8% y-o-y.

4.6 Medicine distribution: some regional leaders would deliver

superior performance

The revenue growth of medicine distributors are slowing, as that of upstream drug

makers is. The tender prices of drugs tend to spiral downwards, and costs including

labour and financial expenses are trending up, sending the gross profit margin in the

distribution sector to ease slowly.

Some regional medicine distributors are able to maintain gross profit margin and

increase market shares at the same time, as China National Accord Medicines

(000028.SZ) and Huadong Medicine (000963.CH) do. Shandong Realcan

Pharmaceutical (002589.CH) is also gaining market share rapidly after its floatation in

2011.

4.7 Medical services: high-end medical services grow rapidly as

regulations are relaxed

China’s demand for medical services is steadily rising due to an aging population. The

high-end medical services, which are paid out of pocket, are growing faster than basic

medical services.

The Ministry of Health has relaxed regulations and encourages private capital to invest in

both for-profit and non-profit hospitals.

Aier Eye Hospital Group (300015.CH) and Topchoice Medical Investment (600763.CH)

are expanding organically and through exploring M&A opportunities.



20

Exhibit 20: Major players in the distribution, medical devices and services sub-sectors

2011 1Q 2012

Net profit growth forecasts


Revenue growth

Net profit growth

Revenue growth

Net profit growth

2012E 2013E 2014E


China National Accord Medicines (000028.SZ)

16% 26% 21% 40% 26% 21% 19% It explores M&A opportunities within the province where it is based.

Shanghai Pharmaceuticals (601607.CH)

42% 40% 36% -35% -4% 10% 15% M&A activities are slowing and organic growth is steady.

China National Medicines (600511.CH)

19% -13% 25% 13% 16% 17% 14% Its sales growth is moderating towards the industry average.

Medical devices

Jiangsu Yuyue Medical Equipment & Supply (002223.CH)

32% 41% 5% 10% 27% 33% 28% It is marketing new products like blood sugar monitors and air purifiers. The growth rate of its revenue is expected to recover on a quarterly basis.

Chinva Medical Instrument (600587.CH)

57% 78% 38% 53% 35% 15% 10% The introduction of new version of GMP and upgraded use of large volume parenteral (LVP) solutions will bring more orders.

Average of medical devices sub-sector

29% 24% 21% 15%

Medical services

Topchoice Medical Investment (600763.CH)

30% 43% 25% 19% 34% 36% 30% Its branches in Ningbo and Kunming city are booming and its operation in Hangzhou is consolidating its lead.

Note: The net profit growth figures are released by National Bureau of Statistics..


5 Valuation: the medium-term investment

value of good pharmaceuticals is

evident

5.1 The valuation of A-share pharmaceuticals

China’s pharmaceutical industry is on course for long-term growth. An aging population,

a changing disease spectrum and the launch of new healthcare reform are all significant

contributors to the rapid growth of China’s pharmaceutical industry, which grew at a

CAGR of 20.82% in the last decade, twice the pace of GDP growth. Compared with other

cyclical industries, the growth of the pharmaceutical industry is more stable, as it could

maintain growth momentum when the economy contracts (Exhibit 15).

The total market cap of A-share pharmaceutical companies has substantial room for

growth. On May 25, 2012, the total market cap of A-share pharmaceutical companies

was RMB1.0251 trillion, 2.88 times more than it was in 2001 and accounting for 4.05% of

total market cap of the A-share market. The increase in the market cap of pharmaceutical

companies came from the growth of leading pharmaceutical companies and a large

number of new listings of pharmaceutical companies on China’s SME Board and ChiNext

Board. Of the less than 180 listed pharmaceutical companies, the vast majority are drugs

makers. We estimate there would be more listings of medical services and healthcare

providers as well as medical device manufacturers in the future.



21

Exhibit 21: The growth of combined market cap of China’s

listed pharmaceutical companies in 2001-2012

Exhibit 22: The combined market cap of pharmaceutical sector

companies as a share of total A-share market cap in 2001-2012

Source: Wind, Guosen Securities Economic Research Institute Source: Wind, Guosen Securities Economic Research Institute

As the growth of the pharmaceutical sector outstrips GDP growth, the pharmaceuticals

sector maintains a premium above the A-share market. For 2001- 2011, the premium was

60.98%. If we factor out the large-cap financials, the premium rate for 2007-2011 would be

35.36%. We forecast the annual growth rate of China’s pharmaceutical industry would be

around 20% in the next three years, around twice the GDP growth. As such, some premium

of pharmaceuticals above the market would continue to exist.

Exhibit 23: The growth rate of pharmaceutical sector vs. GDP Exhibit 24: Revenue growth rates: pharmaceutical industry vs.

other industries

Source: National Bureau of Statistics, Guosen Securities

Economic Research Institute Source: Wind, Guosen Securities Economic Research Institute

The PE ratio (ttm) of the pharmaceutical sector is around 22.65x, representing a

107.61% premium above the A-share market and a 54.19% premium if we factor out

financials in the A-share market. The valuation is moderately high compared with historic

levels, but is at a record low level if we use an absolute valuation method.

5.2 Add positions in good pharmaceuticals for medium-term

investment

After two years of doldrums, companies in the pharmaceutical sector are seeing a

divergence of valuation, with companies with well-received brands or strong R&D

capacity valued at around 25x 2012 PE and generic drug makers trading at below 20x

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jan/01 Jan/03 Jan/05 Jan/07 Jan/09 Jan/11

RMB bn

Market Cap of S&P Healthcare Economic Indices

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Jan/01 Jan/03 Jan/05 Jan/07 Jan/09 Jan/11

The Proportion of Market Cap of S&P Healthcare Economic Indices to that of S&P 500 Index

-5%

0%

5%

10%

15%

20%

1990 1993 1996 1999 2002 2005 2008 2011

U.S. Prescription Medicine Expences Growth

U.S. GDP Growth

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

May/93 May/96 May/99 May/02 May/05 May/08 May/11

Premium Rate of S&P Healthcare Economic Indices' PE to S&P 500 Index



22

2012 PE. As China’s economy is expected to slow and no major policy change are

expected to be released in 2H, pharmaceutical companies, which trade at below 20x

2013 PE and have a PEG ratio of less than 1x, would be good picks. We recommend

buying pharmaceuticals for medium-term investment. If investors buy pharmaceutical

stocks with a good earnings power track record at the current valuation level, they could

expect to generate a 15%-30% return in the following year. There is some safety margin,

even if the median valuation across the market falls by 10%-15%.

Exhibit 25: A-share pharmaceuticals: earnings forecasts and valuation

Ticker Company Share price On May 30,

2012

Market cap (RMB

billion)

EPS (RMB) PE (x) PB

(x)

EV/

EBITDA

ROE PEG Growth Rating

11A 12E 13E 14E 11 12E 13E 14E 11A 12E 12~14

Branded Chinese medicine

000538 Yunnan Baiyao 51.00 35.4 1.74 2.15 2.69 3.32 29 24 19 15 6 25 22% 0.99 24% Buy

000423 Shandong Dong-E E-Jiao 38.87 25.4 1.31 1.70 2.11 2.61 30 23 18 15 7 23 25% 0.88 26% Buy

600085 Beijing Tongrentang 14.88 19.4 0.34 0.42 0.51 0.62 44 36 29 24 5 19 13% 1.60 22% Cautious Buy

600436 Zhangzhou Pientzehuang Pharmaceutical

82.86 11.6 1.82 2.42 3.04 3.75 46 34 27 22 10 35 22% 1.26 27% Cautious Buy

600332 Guangzhou Pharmaceutical

23.68 19.2 0.35 0.56 0.67 0.78 67 42 35 30 5 33 8% 1.41 30% Neutral

600993 Mayinglong Pharmaceutical

14.08 4.7 0.42 0.54 0.63 0.71 34 26 22 20 4 22 12% 1.34 20% Unrated

Average 19.3 42 31 25 21 6 26 17% 1.25 25%

Modern Chinese medicine

600535 Tianjin Tasly Pharmaceutical

38.19 19.7 1.18 1.50 1.92 2.38 32 26 20 16 6 20 17% 0.97 26% Buy

002603 Shijiazhuang Yiling Pharmaceutical

33.19 14.1 1.07 1.27 1.66 2.18 31 26 20 15 4 21 12% 0.98 27% Buy

600518 Kangmei Pharmaceutical 12.53 27.5 0.46 0.64 0.80 0.98 27 20 16 13 3 18 11% 0.68 29% Cautious Buy

600252 Guangxi Wuzhou Zhongheng

10.87 11.9 0.34 0.75 0.69 0.88 32 14 16 12 5 23 19% 0.39 37% Cautious Buy

600422 Kunming Pharmaceutical 16.89 5.3 0.41 0.57 0.75 0.93 41 30 23 18 7 24 16% 0.96 31% Cautious Buy

600557 Jiangsu Kanion Pharmaceutical

12.08 5 0.44 0.52 0.65 0.76 28 23 19 16 4 19 13% 1.16 20% Cautious Buy

600594 Guizhou Yibai Pharmaceutical

17.37 6.3 0.74 0.88 1.10 1.30 24 20 16 13 5 16 24% 0.94 21% Cautious Buy

300026 Tianjin Chase Sun Pharmaceutical

21.76 4.9 0.54 0.72 0.91 1.14 40 30 24 19 5 25 13% 1.06 28% Cautious Buy

600750 Jiangzhong Pharmaceutical

27.20 8.5 0.73 0.99 1.28 1.54 37 28 21 18 5 23 12% 0.98 28% Unrated

300039 Shanghai Kaibao Pharmaceutical

19.63 5.2 0.64 0.84 1.04 1.27 31 23 19 15 4 22 13% 0.90 26% Unrated

002317 Guangdong Zhongsheng Pharmaceutical

20.64 3.7 0.84 1.00 1.24 1.49 25 21 17 14 3 16 10% 0.97 21% Unrated

000919 Jinling Pharmaceutical 9.58 4.8 0.33 0.43 0.49 0.56 29 22 20 17 2 13 8% 1.14 20% Neutral

600572 Zhejiang CONBA Pharmaceutical

9.43 6.6 0.40 0.41 0.45 0.50 24 23 21 19 5 15 20% 3.03 8% Unrated

Average 9.5 31 24 19 16 4 20 14% 1.09 25%

Biomedicine

002038 Beijing SL Pharmaceutical 27.34 10.4 1.37 1.24 1.54 1.88 20 22 18 15 6 16 32% 2.00 11% Cautious Buy

002007 Hualan Biological Engineering

24.03 13.8 0.64 0.82 0.87 0.98 37 29 28 25 5 24 16% 1.95 15% Cautious Buy

300142 Walvax Biotechnology 37.55 6.8 1.15 1.43 1.73 1.99 33 26 22 19 3 22 8% 1.31 20% Cautious Buy

002022 Shanghai Kehua Bio-Engineering

10.72 5.3 0.46 0.52 0.57 0.63 23 21 19 17 6 16 23% 1.89 11% Neutral

600161 Beijing Tiantan Biological Products

14.86 7.7 0.45 0.51 0.56 0.62 33 29 26 24 6 19 18% 2.67 11% Neutral

002030 Da An Gene 9.69 3.4 0.20 0.24 0.28 0.32 49 41 35 30 7 28 14% 2.33 18% Neutral

300204 Staidson (Beijing) Biopharmaceuticals

47.82 6.4 0.78 1.28 1.83 2.37 61 37 26 20 6 49 9% 0.84 45% Unrated

002252 Shanghai RAAS Blood Products

13.78 6.7 0.41 0.46 0.51 0.57 34 30 27 24 8 26 22% 2.51 12% Unrated

Average 7.6 36 30 25 22 6 25 18% 1.94 18%



23

Ticker Company Share price On May 30,

2012

Market cap (RMB

billion)

EPS (RMB) PE (x) PB

(x)

EV/

EBITDA

ROE PEG Growth Rating

11A 12E 13E 14E 11 12E 13E 14E 11A 12E 12~14

Chemical drug preparation

600276 Jiangsu Hengrui Medicine 25.60 31.7 0.71 0.88 1.07 1.28 36 29 24 20 8 27 21% 1.34 22% Cautious Buy

000963 Huadong Medicine 27.49 11.9 0.88 1.10 1.35 1.65 31 25 20 17 7 17 25% 1.06 23% Buy

600079 Wuhan Humanwell Healthcare

20.83 10.3 0.61 0.75 0.99 1.26 34 28 21 17 4 17 11% 1.02 27% Buy

000522 Guangzhou Baiyunshan Pharmaceutical

19.01 8.9 0.56 0.64 0.73 0.84 34 30 26 23 6 21 19% 2.01 15% Cautious Buy

002294 Shenzhen Salubris Pharmaceuticals

25.08 10.9 0.93 1.15 1.38 1.64 27 22 18 15 5 21 19% 1.04 21% Unrated

300199 Hybio Pharmaceutical 15.50 3.1 0.40 0.50 0.63 0.78 39 31 25 20 3 28 8% 1.24 25% Unrated

002422 Sichuan Kelun Pharmaceutical

44.91 21.6 2.01 2.56 3.12 3.74 22 18 14 12 3 17 12% 0.77 23% Cautious Buy

002437 Harbin Gloria Pharmaceuticals

18.54 5.2 0.42 0.54 0.68 0.81 44 34 27 23 2 29 5% 1.37 25% Neutral

300006 Chongqing Lummy Pharmaceutical

15.48 2.8 0.40 0.52 0.65 0.78 39 30 24 20 5 25 12% 1.20 25% Unrated

600062 Double-crane Pharmaceutical

17.67 10.1 0.93 1.06 1.17 1.28 19 17 15 14 2 11 12% 1.47 11% Unrated

Average 11.6 33 26 22 18 5 21 15% 1.25 22%

Chemical APIs

600267 Zhejiang Hisun Pharmaceutical

15.45 13 0.60 0.72 0.89 1.10 26 21 17 14 3 15 11% 0.97 22% Buy

600521 Huahai Pharmaceutical 13.02 7 0.40 0.55 0.68 0.81 32 24 19 16 5 20 14% 0.91 26% Buy

002099 Zhejiang Hisoar Pharmaceutical

10.02 3.2 0.33 0.46 0.57 0.67 31 22 18 15 5 19 14% 0.80 27% Cautious Buy

002001 Zhejiang NHU 21.56 15.7 1.60 1.55 1.62 1.80 13 14 13.3 12.0 3 9 21% 3.48 4% Cautious Buy

600216 Zhejiang Medicine 24.69 11.1 2.25 2.47 2.47 2.60 11 10 10.0 9.5 2 7 23% 2.03 5% Neutral

Average 10 23 18 15 13 3 14 17% 1.64 17%


000028 China National Accord Medicines

24.82 7.2 1.15 1.44 1.74 2.07 22 17 14 12 5 14 24% 0.79 22% Buy

601607 Shanghai Pharmaceuticals

10.50 28.2 0.76 0.73 0.80 0.92 14 14 13 11 1 5 9% 2.18 7% Cautious Buy

600511 China National Medicines 13.33 6.4 0.57 0.66 0.77 0.88 24 20 17 15 4 16 18% 1.28 16% Neutral

600998 Jointown Pharmaceutical 11.91 16.9 0.26 0.23 0.28 0.33 45 52 43 36 4 28 9% 6.60 8% Neutral

Average 14.7 26 26 22 19 4 16 15% 2.71 13%

Medical devices and services

300003 Lepu Medical Technology 13.14 10.7 0.58 0.64 0.73 0.81 23 20 18 16 5 18 20% 1.75 12% Neutral

002223 Jiangsu Yuyue Medical Equipment & Supply

14.40 7.7 0.43 0.54 0.72 0.92 34 27 20 16 7 26 21% 0.92 29% Unrated

600587 Chinva Medical Instrument

22.47 3.9 0.62 0.83 0.96 1.05 36 27 23 21 3 24 14% 1.38 20% Unrated

600055 Beijing Wandong Medical Equipment

11.43 2.5 0.18 0.26 0.29 0.33 62 45 39 34 4 34 7% 2.05 22% Unrated

300030 Guangzhou Improve Medical Instruments

9.59 1.4 0.24 0.33 0.42 0.52 40 29 23 18 2 23 6% 0.99 29% Unrated

600529 Shandong Pharmaceutical Glass

10.39 2.7 0.51 0.44 0.45 0.49 20 24 23 21 1 11 7% -14.47 -2% Neutral

600763 Topchoice Medical Investment

19.88 3.2 0.44 0.59 0.80 1.04 46 34 25 19 9 27 21% 1.01 34% Unrated

300244 Zhejiang D.A. Diagnostics 44.79 2.3 0.83 1.15 1.50 1.79 54 39 30 25 5 36 9% 1.32 30% Unrated

Average 3.2 49 36 31 28 4 29 10% 1.71 21%

Conglomerates and others

600664 Harbin Pharmaceutical 6.89 13.2 0.30 0.29 0.49 0.54 23 24 14 13 2 13 9% 1.10 21% Neutral

000513 Livzon Pharmaceutical 25.03 7.4 1.22 1.40 1.65 1.92 21 18 15 13 3 9 13% 1.09 16% Cautious Buy


19.38 19 0.78 0.98 1.16 1.35 25 20 17 14 4 17 17% 0.98 20% Cautious Buy

600829 Harbin Pharm.Group Sanjing Pharmaceutical

11.20 6.5 0.69 0.75 0.85 0.95 16 15 13 12 3 12 22% 1.30 12% Cautious Buy

300146 Guangdong By-Health Biotechnology

59.23 13 0.85 1.41 2.11 3.06 69 42 28 19 8 60 11% 0.79 53% Unrated

Average 11.8 31 24 17 14 4 22 14% 1.05 25%

Sector average 11 33 26 22 18 5 21 15% 1.16 21%

Source: Wind, Guosen Securities Economic Research Institute.



24

Information Disclosures

Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months.

Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the

next six months.

Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the

next six months.

Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months.

Sector Ratings:

Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months.

Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the

next six months.

Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next

six months.

Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months

Disclaimers

This report is based on public data. Guosen does not warrant the accuracy and completeness of the information contained herein. This

report is published solely for reference purposes and shall in no way be construed as a solicitation or an offer to buy or sell securities or

related financial instruments stated herein. Guosen and its employees do not accept responsibility for any direct or indirect losses arising

from the use of this report. Guosen or its affiliates may hold or trade securities issued by the companies mentioned in this report, and

provide or seek to provide investment banking services for these companies. All rights of this report are reserved by Guosen. Without the

prior written consent of Guosen, no one may copy, reproduce or publish part or whole of this report.

September 7, 2012 Pharmaceuticals BUY · 2012. 9. 10. · Pharmaceuticals THIS IS THE TRANSLATION...

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