Shanghai Haohai Biological Technology (6826 HK) China Puti · Viscosupplements are formulas made...

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06 January 2016

Wilfred Yuen

[email protected]

(852) 2235 7131

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

35.05/60.30

0.06

160

7,754

Jiang Wei (47.2%)

E&Y

FY15: Mar

Company description

Haohai is a leading company in China focusing on

the R&D, manufacturing and sales of absorbable

biomedical materials, primarily made of sodium

hyaluronate, chitosan, and collagen. The

company’s products cover four therapeutic areas,

namely i) orthopaedics, ii) anti-adhesion and

haemostasis, iii) ophthalmology and iv) wound

care and tissue filling. Haohai was listed in HKSE

on April 2015 and is headquartered in Shanghai.

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HK$

Targeting rapid ageing of PRC urban population

Rating Buy Initiation

Target Price HK$60.00

Current price

HK$48.45 Upside +24%

Leading position in biomedical materials in PRC

Haohai is a leading company in absorbable biomedical materials in PRC, where it ranked no.1 in intra-articular viscosupplement and ophthalmic viscoelastic device (OVD), which are used in the treatment of osteoarthritis and cataract surgery respectively. We attribute the company’s leading status to i) first-mover advantage in chitosan (幾丁糖), thanks to its proprietary technology and patented products, ii) an extensive sales and distribution network, iii) production capacity expansion, and iv) China’s favourable policy towards domestic medical device manufacturers. Haohai is poised to benefit from the robust demand for biomedical materials in PRC, driven by rapid ageing of urban population and senile diseases such as osteoarthritis and cataract.

Tapping into the PRC medical aesthetics market As the second domestic manufacturer of cross-linked HA dermal filler (交聯透明質酸填充劑) receiving the CFDA approval, Haohai is well positioned to ride on the growth in demand for dermal fillers (for wrinkle removal/ facial shaping) in PRC. Matrifill, the company’s first HA dermal filler product, was launched in Mar 2014. The company plans to launch its 2

nd- and 3

rd-generation dermal fillers, namely

Janlane and QST gel, in 2016 and 2017 respectively. We estimate the company’s sales of dermal fillers to grow from RMB26mn in FY14 to RMB187mn in FY17E, representing a CAGR of 94%.

Pioneer in chitosan and new product pipeline As a pioneer in chitosan, Haohai developed the first chitosan-based products used in anti-adhesion, viscosupplement, and eye drop in China. Going forward, the company intends to further expand the indications of chitosan in areas of sustained-release preparation and brain (spinal) membrane defect repair, through developing a new thermal-sensitive chitosan technology. The company currently has a pipeline of 11 products, among which three late-stage pipeline products including i) fibrin sealant for anti-adhesion and haemostasis, ii) dermal filler Janlane, and iii) high concentrations OVD product, are expected to be launched in 2016.

Undervalued, initiate at Buy with Target Price of HK$60.0 We initiate Haohai with BUY rating and target price of HK$60.0. We derive the target price on a 10-year DCF valuation, which implies a FY16E P/E of 23x. Haohai is currently trading at 19x FY16E P/E vs. peers average of 25x, including Bloomage (963 HK) for 20x; and with Haohai’s earnings CAGR of 30% over 2014-17E (vs. 27% for Bloomage), we believe the stock is attractive.

RMB mn FY13A FY14A FY15E FY16E FY17E

Revenue 401 516 688 892 1,082

EBIT 163 212 289 353 437

Net Profit 142 184 256 332 405

EPS (RMB) 1.18 1.53 1.60 2.08 2.53

P/E (x) 33.7 26.0 24.8 18.9 15.7

Sources: Company, CIRL estimates

Shanghai Haohai Biological Technology (6826 HK)

China Puti

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Leading positions in biomedical materials in PRC

Product portfolio and therapeutic area (TAs)

Haohai manufactures absorbable biomedical materials, primarily made of sodium

hyaluronate (透明質酸), chitosan (幾丁糖), and collagen (膠原蛋白).

The company currently sells 14 biomedical products in 9 categories (due to multiple

brand names in two product series). In terms of categories, 7 are classified by CFDA

as Class III medical devices and two are classified as pharmaceutical products

(including one chemical drugs and one biological product). The company’s products

cover four therapeutic areas, namely i) orthopaedics, ii) anti-adhesion and

haemostasis, iii) ophthalmology and iv) wound care and tissue filling.

Exhibit 1: Product Matrix

Exhibit 1:

*Products in pipeline

Source: Company, CIRL

Exhibit 2: Product Portfolio by TAs

Exhibit 2:


Orthopedics HA injection

(Pharmaceutical)

Medical Chitosan

(Medical Device)

Anti-adhesion

and

Haemostasis

HA gel

(Medical Device)

Medical Chitosan

(Medical Device)

Medical Collagen

(Medical Device)*

Fibrin Sealant

(Pharmaceutical)

Ophthalmology HA gel

(Medical Device)

Eye Drop

(Medical Device)* rhEGF gel

Wound Care and

Tissue Filling

Cross-Linked HA gel

(Medical Device)

rhEGF

(Pharmaceutical)

Th

era

peu

tic A

reas (

TA

s)

- - -

-

- -

- --

HA Chitosan Medical collagen rhEGF Fibrin Sealant

Biomedical materials

Therapeutic Area (TA) Biomedical Products Brand Names CFDA Classification

Orthopedics Sodium Hyaluronate (HA) Injection "腾" Chemical Drug

Chitosan Injection Chitogel Class III Medical Device

Sodium Hyaluronate (HA) Gel "腾", “其勝”, “建華”

Chitosan Injection Chitogel

Medical Collagen Sponge “奇特邦”

Ophthalmology OVD "腾", “其勝”, “建華”

Lubricant Eye Drops Eyesucom

rhEGF Healin Biological Product

Cross-Linked Sodium Hyaluronate Gel Matrifill Class III Medical Device

Wound Care

and Tissue Filling

Anti-Adhesion

and Hemostasis Class III Medical Device

Class III Medical Device

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Orthopaedics

Haohai manufactures two orthopaedic intra-articular viscosupplement products,

namely i) sodium hyaluronate (HA) injection and ii) chitosan injection.

The products are indicated for the treatment of degenerative osteoarthritis via

intra-articular injection to help minimise joint pains and improve joint mobility.

Osteoarthritis (OA) and Viscosupplement

OA, aka. wear-and-tear arthritis, is a disease of aging, caused by a breakdown in a

joint’s cartilage. Symptoms are pain and stiffness. There is no cure, but treatments are

available to manage symptoms.

Viscosupplements are formulas made with hyaluronic acid (HA), a naturally occurring

substance that can be found in a joint’s synovial fluid for absorbing shocks and

lubricating joints. Viscosupplementation is one of the most conventional methods

recommended over surgery/ joint replacement (as it requires longer time to heal) and

medicines (which offer temporary relief from pain).

Exhibit 3: Osteoarthritis – treatment options

Source: Arthritis Foundation, CIRL

Viscosupplement – a large, untapped market in PRC

The market size of viscosupplement in PRC was RMB1.8bn in 2014, and is estimated

to grow to RMB6.3bn 2019, representing a CAGR of 27% over 2014-19 (vs. 26%

CAGR over 2008-13), according to SME Research. The growth drivers are an aging

population, large patient pool and high prevalence rate of OA (it affects c.68% of

seniors aged 65 or above in China).

The world’s first HA viscosupplement was first released by Seikagaku (4548 JP) in

Japan in 1987. The Japanese market is now the world’s second largest

viscosupplement market in the world (US ranks no.1). According to the company, the

market size in terms of no. of units used annually is 41mn units in Japan vs. less than

10mn units in PRC.

In China, the number of adults suffering from the osteoarthritis reached 85mn in 2013,

according to SME Research. Assuming a 10% of OA patient using viscosupplement

Stages of

OA

Treatment

ApproachRemarks

Lifestyle changes Exercise

Early Conservative Losing weight

Supportive treatments Stretching exercise

Assistive devices

Medications Paracetamol Painkiller but not effective against inflammation

NSAIDs Painkiller and reduce inflammation

Cortisone shots Used for inflammation and pain that is not responsive to NSAIDs

Hyaluronate Acid

Chitosan

Late Agressive Realigning bones

Joint replacement

Treatment

Requires a longer time to heal; joint replacement is a major surgerySurgery

Viscosupplements

Not effective against later stages of OA

Avoid toxicity; Less invasive than surgery

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for treatment (which is on par with the treatment rate in Japan) and an annual

treatment cost per patient of c.RMB1,500 (including two treatment cycles using 10

injections in total), it implies a potential market of RMB12.8bn, more than 7x the

current market size.

Haohai’s viscosupplement – No.1 market share in PRC

The PRC orthopaedic intra-articular viscosupplement market is dominated by four

players, of which Haohai surpassed Shandong Bausch & Lomb Freda Pharmaceutical

as no.1 in 2014, occupying a market share of 32% (2011: 19%).

Exhibit 4: Market share of viscosupplement in PRC (2014) Exhibit 5: Market share of viscosupplement in PRC (2008-14)

Source: Company, SME Research Source: Company, SME Research

HA injection – robust growth

The company’s sales of HA-based injection products grew from RMB42mn in 2011 to

RMB207mn, representing a 3-year CAGR of 70% vs. c.30% for the overall PRC’s

viscosupplement market. We attribute the rapid growth achieved by Haohai to i) the

market’s oligopoly nature where there are only 9 manufacturing permits currently

issued by CFDA and the top 4 players dominate the market (where they occupy a total

of 85% of the market), ii) Haohai’s effective and extensive distribution, where it covers

over 90% and 40% of Class III and Class II hospitals in China, and iii) production

capacity expansion of sodium hyaluronate (1.35mn units in 2013 vs. 5mn units in

2014). We forecast sales of HA injection product to grow at a FY14-17E CAGR of 16%

to RMB322mn in FY17E.

Chitosan-based viscosupplement – strong growth driven by its exclusivity

Haihao is the only company in China that holds a registration certificate for chitosan

products for intra-articular viscosupplement. Comparing to HA-based injection,

chitosan orthopaedics intra-articular injection is characterised by: i) the company’s

exclusive water-soluble technology which significantly reduces infection rate and has

anti-microbial and haemostasis functions, ii) a longer in vivo retention time than HA,

B&L Freda, 27%

Haohai, 32%

Shanghai Jingfeng,

24%

Seikagaku, 17%

15% 15% 17% 19%

27%

29% 32%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012 2013 2014

B&L Freda Haohai

Shanghai Jingfeng Seikagaku

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thereby a longer therapeutic effect, iii) requires 3 injections for each treatment cycle vs.

5 injections for HA-based viscosupplement, and iv) commanding a higher ASP. Sales

of chitosan injection was up 382% YoY to RMB27mn in FY14, reflecting the success

of the product’s commercial launch. With limited competition due to its product

exclusivity, we forecast sales of chitosan injection to grow at a FY14-17E CAGR of

74% to RMB139mn in FY17E.

Exhibit 6: Sales of viscosupplement (FY13-17E)

Source: Company, CIRL estimates

Anti-adhesion and haemostasis

Haohai currently manufactures three post-operative products used for anti-adhesion

and haemostasis, including i) HA gel and ii) chitosan injection, and iii) medical

collagen sponge.

Adhesions are internal scars that can cause abnormal connections between tissues

and organs, due to injuries of various kinds, such as surgery, infection and trauma.

Anti-adhesion products are used during surgery to reduce the incidence and severity

of adhesion. They are mainly used in gynaecological and abdominal surgeries, as the

risk of adhesion following major abdominal surgery is >90% and that of pelvic surgery

is 55%-100%, according to a study in Digestive Surgery.

The anti-adhesion product market in China is dominated by HA and chitosan, of which

these two product categories occupies c.80% of the market share. Other products are

medical polyethylene glycol bebeerine solution and polylactic acid anti-adhesion

membrane/gel. The market size was RMB1.5bn in 2013, and is estimated to grow at a

CAGR of 23.1% over 2014-19 (vs. 32.7% CAGR over 2008-13) to RMB5.2bn in 2019,

according to SME Research. Grower drivers are i) increasing awareness in clinical

practice and ii) increased volume of surgery.

Haohai is the leading manufacturer in the PRC anti-adhesion market, with its market

61.4%

19.1%26.9%

25.0% 23.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

50

100

150

200

250

300

350

400

450

500

FY13 FY14 FY15E FY16E FY17E

RMB mn

HA injection HA gel

Chitosan Injection Sales growth of viscosupplement (% YoY)

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share maintaining at over 50% since 2008, according to SME Research.

Exhibit 7: Market share of PRC anti-adhesion market (2013) Exhibit 8: Market share of PRC anti-adhesion market (2008-13)


Chitosan injection – resume strong growth thanks to capacity expansion

We expect sales of chitosan injection for anti-adhesion will resume above-market

growth rate after production capacity expansion at Shanghai Qisheng facility

completed in 2014, where its annual capacity for HA/chitosan injection had been

increased from 1.925mn units to 4.5mn units. We forecast sales of chitosan injection

to grow at a CAGR of 28% over FY14-17E to RMB195mn in FY17E.

Coupled with steady growth in HA gel and medical collagen sponge, we forecast sales

of anti-adhesion products to grow at a CAGR of 21% over FY14-17E to RMB276mn in

FY17E.

Exhibit 9: Sales of medical injection (FY13-17E) Exhibit 10: Sales of anti-adhesion products (FY13-17E)

Source: Company, CIRL estimates Source: Company, CIRL estimates

53.0%57.9% 58.0% 56.8% 55.1%

50.4%

0%

10%

20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013

Haohai SJZ Yisengtang

Hangzhou Singclean Others

Haohai, 50.4%

SJZ Yisengtang,

16.8%

Hangzhou Singclean,

14.7%

Others, 18.1%

24.1%

6.7%

35.0%

25.0%23.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250


RMB mn

Sales of chitosan Injection % YoY

0

50

100

150

200

250

300


RMB mn

Sodium Hyaluronate Gel Chitosan injection

Medical Collagen Sponge Fibrin sealant

2014-17E CAGR: 21%

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Ophthalmology

Haohai currently manufactures two ophthalmology products, namely i) ophthalmic

viscoelastic device (OVD) and ii) lubricant eye drop, “Eyesucom”.

Cataract surgery rate is low in China – growth potential

Ophthalmic viscoelastic device (OVD) is viscoelastic sodium hyaluronate solution

used in ophthalmic surgery, in which it acts as a cushion or support to maintain a deep

anterior chamber, allowing a faster and safer surgery, with reduced damage to the

corneal endothelial cell and surrounding intraocular tissue.

The market size in PRC was RMB924mn in 2013, and is estimated to grow at a CAGR

of 16.2% over 2014-19 to RMB2.3bn in 2019, according to SME Research. The

growth drivers of the market are i) an aging population with increasing cataract and

cataract surgical rates and ii) the effectiveness of cataract surgery.

Cataract is predominantly a disease associated with ageing (it affects 60%-70% of

people aged 50-60, and 80% aged over 70 in China). It causes cloudy patches in the

eye lens that makes it hard to see. It is responsible for 50% of China’s blind people,

according to WHO. It is estimated that the no. of cataract patient increases by 0.4mn

each year. According to an article from the National Medical Journal of China, CSR

(cataract surgical rate = no. of cataract operations per million population per year) in

China increased from 440 in 2005 to 1,425 in 2014. Although China’s CSR is

increasing, it is still among the lowest in Asia. Moreover, according to NHFPC, no. of

cataract surgeries performed (in 5,854 ophthalmic health institutions registered in the

information system) was 1.46mn in 2014, up 20.8% YoY.

Exhibit 11: no. of cataract surgery performed in China Exhibit 12: China still lags behind in cataract surgery rate (CSR)

Source: NHFPC Source: National Medical Journal of China

1,425

5,000

8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

China India US

8.8%

20.9%

0%

5%

10%

15%

20%

25%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2012 2013 2014

no. of cataract surgury (mn)

Growth rate (% YoY)

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OVD – Haohai has largest market share in PRC

The company is the largest manufacturer of OVD products in China, with a market

share of 41.8% in 2014, according to the SME Research. We forecast the company’s

OVD sales to grow at a CAGR of 15.3% over FY14-17E, mainly driven by i) strong

demand in the PRC market and ii) additional growth provided by new products,

namely “high concentrations OVD”, which had completed clinical trial in 2015 and is

expected to be launched in 2016.

Exhibit 13: Market share of OVD market in PRC (2014) Exhibit 14: Market share of OVD market in PRC (2008-14)


Eyesucom – leverage on OVD

Eyesucom was launched in Oct 2014. The lubricant eye drop is used to protect eyes

from tear deficiency resulting from ophthalmic surgery and damage. Eyesucom is the

only chitosan-based Class III medical device in China for eye protection. The eye drop

is manufactured using imported BFS (blow-fill-seal) filling equipment and unit dose

vial package, which prevents contamination and increase portability.

As Haohai is the largest manufacturer of OVD in PRC and Eyesucom is

complementary to OVD, we see a clear synergy between OVD and Eyesucom in

terms of customer base, in which we forecast sales volume of Eyesucom will reach

5% of the company’s OVD sales volume in FY17E, which translates into sales of

RMB8.2mn in FY17E (vs. RMB1.2mn in 1H15).

Making inroad into intraocular lens:

In Oct 2015, the company acquired 38% stake in Henan Universe at a consideration

of RMB10.9mn. The main products of Henan Universe are intraocular lens, which are

used to treat cataract and other eye diseases. The intraocular lens in PRC market is

mainly imported products, which implies a huge market potential for Haohai in our

view, given the company’s strong sales network.

Haohai42%

AMO Uppsala17%

Bausch & Lomb Freda

16%

LG Life Sciences

8%

Others17% 38.1%

45.2% 46.7%43.5% 42.2%

39.6% 41.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2008 2009 2010 2011 2012 2013 2014

Haohai AMO Uppsala

Bausch & Lomb Freda LG Life Sciences

Others

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Exhibit 15: Sales of ophthalmic products (FY13-17E)


Wound Care and Tissue Filling Products

Haohai currently manufactures two products for wound care and tissue filling,

including i) HA dermal filler, “Matrifill” and ii) rhEGF product, “Healin”.

Matrifill – on track to be a key player

Matrifill, launched in Mar 2014, is the second domestic brand in cross-linked HA

dermal filler receiving CFDA approval. The company guided a sales of RMB75mn for

Matrifill in FY15E (vs. RMB26mn in FY14). We expect the company to ride on the fast

growing medical aesthetics market in PRC and forecast the company’s sales of

dermal fillers to grow from RMB26mn in FY14 to RMB187mn in FY17E, representing

a CAGR of 94%. We discuss and analyse the PRC dermal filler market and the

company’s dermal filler products in the next section (“Tapping into the PRC medical

aesthetics market”).

rhEGF – Haohai is growing market share

rhEGF products are used in treating surgical wounds caused by ulcer, bedsore and

burns, as well as used in ophthalmology (such as ophthalmology cornea transplant

and repair) and diabetic foot.

The market size of rhEGF in PRC market was RMB316mn, and is estimated to grow

at a CAGR of 26.0% over 2014-19 (vs. 24.2% over 2008-13) to RMB1.2bn in 2019,

thanks to its wide application for curing damaged human epidermal, according to SME

Research.

The PRC rhEHG market is dominated by three market players, namely i) Guilin Pavay

Gene Pharmaceutical, a subsidiary of Hua Han Bio-Pharmaceutical (587 HK), ii)

Shenzhen Watsin Genetech, a subsidiary of Uni-Bio Science (690 HK), and iii) Haohai.

In 2014, the company surpassed Shenzhen Watsin Genetech to become the second

4.1%

26.8%

17.1%

18.6%19.3%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120


RMB mn

OVD Lubricant Eye Drop Ophthalmology sales growth (% YoY)

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largest manufacturer of rhEGF, with a market share of 15.3% in 2014 (2013: 11.1%),

according to SME Research. Guilin Pavay Gene Pharmaceutical occupied c.75%

market share, thanks to its gel formulation of rhEGF, which is more convenient for use

(vs. powder due to the need to first dissolving it in injection water before use).

The company’s sales of rhEGF was up 229% YoY to RMB31.2mn, driven by increase

in production capacity (+233% YoY from 300mn units to 1,000mn units). We expect

steady growth of the company’s rhEGF sales and forecast a CAGR of 13.5% over

FY14-17E.

Exhibit 16: Market share of rhEGF market in PRC (2008-13) Exhibit 17: Sales of rhEGF (FY13-17E)

Source: Company, SME Research Source: Company, CIRL estimates

Exhibit 18: Major PRC manufacturers in growth factor based products for wound healing

Exhibit 3:

Source: Company, CFDA, CIRL

29.7%

228.8%

15.0% 13.5% 12.0%

0%

50%

100%

150%

200%

250%

0

5

10

15

20

25

30

35

40

45

50


RMB mn

rhEGF Sales growth (% YoY)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2008 2009 2010 2011 2012 2013

Haohai

Guilin Pavay Gene Pharmaceutical

Shenzhen Watsin Genetech

CompanyBrand

NameCompound Formulation

CFDA

ApprovalSales Performance

Haohai Healin rhEGF Powder 2001Sales was up 229% YoY to RMB31mn in FY14, thanks to capacity

expansion (FY13: 300mn units vs. FY14: 1,000mn units).

Shenzhen Watsin Genetech,

a subsidiary of Uni-Bio

Science (690 HK)

GeneTime rhEGF Spray 2001

GeneTime is the only rhEGF in spray formulation in PRC.

Sales of GeneTime and GeneSoft (rhEGF-based eye drop) w as up

14.3% YoY to HK$66mn in FY14.

Bejing SL Pharma

(002038 SZ)Fujifu rh-bFGF Pow der 2002

Sales of Fujifu w as RMB10-15mn in FY14.

(The company launched Fuhjifu gel formulation in 2015 and targets

sales of RMB300mn-500mn in 3-5 years.)

Guilin Pavay Gene Pharma,

a subsidiary of Hua Han

(587 HK)

Yi Fu rhEGF Gel 2002Sales of Yi Fu and Yi Bei (rhEGF-based eye drop) w as up 35% YoY to

HK$590mn in FY14.

Essex Bio-Tech (1061 HK)Beifuji

Beifuxinrb-bFGF

Spray / Pow der

Gel

1998

2004

Sales w as up 65% YoY to HK$193mn in FY14, thanks to strong grow th

in gel formulation Beifuxin (+117% YoY to HK$133mn).

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Sales and distribution network

Haohai has an extensive distribution network in China, consisting of over 1,300

distributors, covering over 4,700 hospitals, representing over 90% and 40% of the

Class III and Class II hospitals in China. The company also maintain an in-house sales

force (direct sales) to market and sell medical device products such as HA dermal

fillers to Class III hospitals in 1st- and 2

nd-tier cities.

Production capacity and expansion plan

Haohai has three production facilities in Shanghai, namely i) Haohai Biological, ii)

Shanghai Jianhua, and iii) Shanghai Qisheng, with a total gross floor area of 29,000

sq. m. and 9 production lines.

In 2014, the company completed facility upgrades at all three facilities, which

substantially increased the designed production capacity of HA, chitosan and rhEGF.

Upon the completion of facility upgrade, the designed production capacity of HA at

Haohai Biological increased by 270% from 1.35mn units to 5mn units and that of

HA/chitosan injection at Shanghai Qisheng increased by 130% to 4.5mn units. We

see substantial growth rates in rhEGF and chitosan-based anti-adhesion product in

FY14 and 1H15 respectively, suggesting that production capacity was a constraint to

the company’s growth rates.

Going forward, the company will continue to increase production capacity by

constructing two new production facilities, namely i) Shanghai Likangrui and ii)

Minhang Facility, and further upgrade existing facilities at Haohai Biological. The total

capex through 2017 is estimated to be RMB630mn. Upon completion in 2017, the

total annual production capacity of HA-based and chitosan-based products will be

increased from 9.5mn units to 20mn units.

Exhibit 19: Production expansion plan (2015-17E) Exhibit 20: Designed capacity upon completion of expansion plan

Source: Company Source: Company, CIRL

Production

Facility

Estimated

Capex

(RMB mn)

RemarksDesigned Capacity

(unit: mn units)2014 2017E

Shanghai Likangrui

(under construction)190

Construction of 4 production lines,

including f ibrin sealant, collagen,

HA/chitosan, and raw matrials

Haohai Biological

(existing facilities)190

Upgrading existing production lines;

Expanding capacity for pipeline

products

Minhang Facility

(obtaining land)250

Construction of production lines

for HA, chitosan, collagen,

and eye drops

HA-based injection and gel

Medical chitosan products

rhEGF

Collagen sponge products

Lurbircant eye drop products

Fibrin sealant products

HA/chitosan raw materials

7.5

2.0

1.0

0.5

1.0

0.0

300(kg)

16.0

4.0

2.0

3.0

2.0

1.0

1,300(kg)

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Exhibit 21: Designed production capacity and utilisation rate (2012-14)

*lower utilisation was due to suspension of operation for 9 months during

Note: Designed production capacity is computed based on 8 hours per day and 250 days working days per year.

Actual production volumes exceeded the relevant designed capacity was due to inceasing filling frequency, higher

working hours and days.

Source: Company

Designed Production Capacity ('000 units) 2012 2013 2014

Haohai Biological:

Sodium Hyaluronate 1,350 1,350 5,000

rhEFG 300 300 1,000

API 200kg 200kg 300kg

Shanghai Qisheng:

Sodium Hyaluronate / Chitosan Injection 1,925 1,925 4,500

Collagen Sponge 50 50 500

Lubricant Eye Drops - 1,000

Chitosan Solution - 300

Shanghai Jianhua:

Sodium Hyaluronate 500 500 700

Utilisation (%) 2012 2013 2014

Haohai Biological:

Sodium Hyaluronate 145.0% 201.3% 69.3%

rhEFG 93.3% 157.9% 56.6%

API 83.1% 134.8% 78.7%

Shanghai Qisheng:

Sodium Hyaluronate / Chitosan Injection 137.7% 26.5%* 77.8%

Collagen Sponge 143.0% 32.0%

Lubricant Eye Drops 11.0%

Chitosan Solution

Shanghai Jianhua:

Sodium Hyaluronate 74.5% 160.2% 70.5%

of 27

Favourable policy towards domestic manufacturers

China has introduced a number of initiatives which favour domestic medical device

manufacturers at the expense of foreign companies; for example, in Aug 2014,

China’s National Health and Family Planning Commission (NHFPC) said it will “push

top level Class III hospitals to use domestically-made products”. With a “top-to-bottom”

public tendering, China’s biggest hospitals (i.e. Class III hospitals) are, in effect,

negotiating on behalf of smaller hospitals, which implies a higher stake for domestic

manufacturers by consolidating the market.

Haohai, which distributes its products to 1,700 or 90% of all Class III hospitals, has

been able to steadily capture market share at the expense of its rival foreign

competitors such as Bausch & Lomb Freda in orthopaedics viscosupplement and

AMO Uppsala AB in OVD market.

Exhibit 22: Viscosupplement market share: Haohai vs. B&L Freda Exhibit 23: OVD market share: Haohai vs. AMO Uppsala

Source: SME Research, CIRL Source: SME Research, CIRL

15%

29%

48%

29%

0%

10%

20%

30%

40%

50%

60%

2008 2013

Haohai B&L Freda

38%

42%

23%

17%

0%

10%

20%

30%

40%

50%

60%

2008 2014

Haohai AMO Uppsala

of 27

Tapping into the PRC medical aesthetics market

PRC medical aesthetics market

The aesthetic medical service market can be defined into two categories, namely

surgical (invasive) and non-surgical (minimally invasive and energy-based

procedures). Major aesthetic surgical procedures are liposuction, eyelid surgery, nose

reshaping and breast augmentation, whereas minimally invasive procedures are

injections of botulinum toxin Type A, collagen, poly-L-lactic acid or HA dermal filler into

the target areas of the face or the body; and energy-based procedures are performed

with devices such as laser, radiofrequency and ultrasound.

The market size of PRC aesthetic medical service market was US$5.5bn in 2014, and

it is estimated to grow at a CAGR of 15.5% from 2014-19 to US$11.3bn in 2019

(surgical CAGR: 10%; non-surgical CAGR: 25%), according to Frost & Sullivan. The

growth drivers are i) relatively low penetration rate of aesthetic medical services (2.4%

in PRC vs. 15.7% in the US), ii) higher disposable income, iii) higher aesthetic

consciousness, and iv) wider acceptance and improved standard of medical services

and products.

Exhibit 24: Non-surgical procedures are on the rise in PRC Exhibit 25: Penetration rates of aesthetic medical services

Source: Frost & Sullivan Source: Frost & Sullivan

HA dermal filler – a decade of blistering growth in the US

Dermal fillers (aka. soft tissue fillers) are used to fill up defects in the soft tissues,

typically wrinkles, folds, and dents in the face, according to ISAPS.

HA-based dermal filler is the most popular type of soft tissue fillers in the US;

according to the American Aesthetic Association, the no. of HA dermal filler

procedures jumped from 0.49mn in 2005 to 1.80mn in 2014, representing a CAGR of

15.6%. Its market share (in terms of no. of dermal filling procedures) increased from

56% in 2004 to 78% in 2014, whereas the market share of collagen-based dermal filler

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

2

4

6

8

10

12

USD bn

Surgical

Non-surgical

proportion of revenues from non-surgical

1.5% 2.4%

3.6%

0%

5%

10%

15%

20%

25%

2009 2014 2019E

PRC Hong Kong US Japan Korea

of 27

shrank from 25% to 1% over the same period. According to statistics from the ASPS

Cosmetic Surgery National Data Bank, the value of the filler market in the US is more

than US$1bn.

Exhibit 26: HA dominates soft tissue fillers market in the US (2014) Exhibit 27: No. of HA dermal filler treatment in the US (2005-14)

Source: American Society of Plastic Surgeons Source: American Society of Plastic Surgeons

HA dermal filler – fast catching up in PRC

In China, the CFDA approved the first dermal filler Restylane (an imported product

manufactured by Q-Med) in 2008, whereas the US FDA approved Restylane in 2003.

According to ISAPS, no. of HA dermal filling treatment in PRC was up 46% YoY to

146,700 in 2011.

In Jul 2012, the CFDA approved Bloomage (963 HK)’s HA dermal filler, BioHyalux.

According to Bloomage, sales of its dermal filler were RMB160mn (+84% YoY) and

RMB100mn (+22% YoY) in FY14 and 1H15 respectively, currently occupying c.30%

market share vs. Restylane’s c.40%. As of now, there are four foreign manufacturers

and six domestic manufacturers approved by CFDA for manufacturing dermal fillers in

China. Among the approved domestic brands, Haohai was the second domestic

company receiving CFDA approval to launch its cross-linked HA dermal fillers into the

PRC market, where its market share is growing. We estimate the market size of HA

dermal filler market in PRC is currently c.RMB1.5bn, and forecast it to grow at a

CAGR of 25% over 2014-17.

Hyaluronic acid (HA),

78%

Calcium Hydropxylapatite

, 11%

Collagen, 1%

Fat, 3%

Polyactic acid, 6%

Polymethyl-methacrylate

microspheres, 1%

56%

78%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

No. of HA dermal filler procedures in US (mn)

market share of HA dermal filler (%)

of 27

Exhibit 28: Approved dermal filler manufacturers in PRC

* (hydroxypropyl methyl cellulose)-HA product, not pure HA

Source: Company,CFDA, CIRL

Stricter government regulation to tackle grey market

The market of HA dermal filler in PRC is currently dominated by smuggled and

counterfeit products. Industry participants estimate that these illegal products make up

more than 2x the official market size.

In Oct 2015, the CFDA released a notice stating that it will launch a 6-month

nationwide campaign to check the manufacture, sale, and use of HA dermal fillers

during Oct 2015 to Mar 2016. We believe a more stringent regulation will benefit the

industry development and the approved domestic brands, whose HA dermal fillers

with competitive prices will capture market share at the expense of illegal and grey

market.

Haohai’s dermal filler – on track to be a key player

Haohai launched its first generation HA dermal filler product, Matrifill, in Mar 2014.

The company conducted over 500 cases for clinical trials of Matrifill in Class III

hospitals including Nangfang Hospital, Peking University Third Hospital and Shanghai

Ninth People’s Hospital. The company also obtained European Union’s CE Mark for

Matrifill in 2012.

The company established a dedicated team of 50 for direct sales of Matrifill to certain

hospitals and expansion of distribution network, as well as handling sales & marketing

for the Matrifill brand. In 1H15, the company launched a series of marketing

campaigns with 40 famous plastic surgery organisations throughout the nation.

As the second domestic manufacturer of cross-linked HA dermal filler receiving the

CFDA approval, as well as a strong distribution channel among Class III hospitals,

Haohai is well positioned to ride on the growth in demand for dermal fillers in PRC.

Matrifill’s sales of 1H15 was up 239% YoY to RMB32.2mn, and the company guided a

Company Name Product Brand Name CFDA Approval Remarks

Imported Medical Device

1 Q-Med Restylane (瑞蓝2号) Dec 2008 Premium brand

Jan 2014 (renewal)

2 LG Life Science YVOIRE (伊婉) Jul 2013 Korean brand

3 Humedix Elravie (艾莉薇) Jan 2015 Korean brand

4 Allergan Juverderm (乔雅登) Jun 2015 Premium brand

Domestic Medical Device

1 Bloomage (963 HK) BioHyalux (润百颜) Jul 2012 First mover advantage

2 Bejing Aimeike EME (逸美)* Oct 2009

Dec 2013 (renewal)

Bonita (宝尼达)* Oct 2012

爱芙莱 Apr 2015

3 Haohai Matrifill (海薇) Sep 2013 Domestic top brand

4 Beijing Mengborun Through Young (舒颜) Feb 2014

5 SciVision Biotech Facille (法思丽) Apr 2014 Taiwanese brand

6 Hangzhou Singclean Singfiller (欣菲聆) Jul 2015

of 27

sales of RMB75mn in FY15E, which is on par with Bloomage’s BioHyalux sales as its

2nd

year after launch (FY14) recorded a sales of RMB87mn. This also suggests the

competition landscape of HA dermal filler in PRC remains benign.

The company plans to launch its 2nd- and 3rd-generation HA dermal fillers, namely

Janlane and QST gel, in early 2016 and 2017 respectively. According to the company,

the clinical trial of Janlane has completed and the product will achieve complementary

advantages with Matrifill in terms of efficacy, according to the company. We forecast

the company’s sales of dermal fillers (Matrifill and Janlane) to grow from RMB26mn in

FY14 to RMB187mn in FY17E, representing a CAGR of 94%.

Exhibit 29: Haohai’s HA dermal fillers sales (FY14-17E) Exhibit 30: HA dermal fillers - Haohai vs. Bloomage


0

20

40

60

80

100

120

140

160

180

200

FY14 FY15E FY16E FY17E

RMB mn

Matrifill Janlane

0

50

100

150

200

250

1 2 3 4

Rmb mn

Haohai's dermal filler sales

Bloomage's dermal filler sales

Year after launch

of 27

R&D Capabilities and Product Pipeline

Pioneer in chitosan

As a pioneer in chitosan, Haohai launched the first chitosan-based product used in

anti-adhesion in 1997. With a series of chitosan-based products for anti-adhesion,

intra-articular viscosupplementation and eye protection, the company’s medical

chitosan technology was awarded the Second Prize of the National Science and

Technology Progress Award in 2009 by State Council. Currently, Haohai’s chitosan

orthopaedics intra-articular injection and Eyesucom are the only chitosan-based Class

III medical device in China for viscosupplementation and eye protection respectively.

Haohai’s R&D team (consist of c.100 research staff, including 5 PhD and 23 MSc

holders in medical/pharmaceutical related fields) focuses on upgrading existing

products, such as second generation HA/chitosan products, as well as different

specifications of existing products, such as high concentration OVD.

Exhibit 31: Haihao’s milestone on medical chitosan


New Product Pipeline

Haohai has a pipeline of 11 products in various stages of development, among which

three late-stage pipeline products including i) fibrin sealant product for anti-adhesion

and haemostasis, ii) Janlane, and iii) high concentrations OVD, are expected to be

launched in 2016. In the longer term, the company intends to further expand the

indications of medical chitosan in areas of sustained-release preparation,

anti-adhesion, brain (spinal) membrane defect repair and intra-vascular

viscosupplementation, through developing a novel thermal-sensitive chitosan

technology. The technology – which features chitosan being liquid under room

temperature while becoming gel after injected into human body – is currently in the

type inspection stage, according to the company.

Year Milestone

1997 Developed the first chitosan-based product used in anti-adhesion

2009Awarded the Second Prize of National Science and Technology

Progress Award by State Council

2010Cooperated with The Second Military University in Shanghai, and developed innovative water-

soluble and thermal-sensitive medical chitosan

2013Obtained CFDA registration certficate for chitosan orthopedics intra-articular injection, which was

the only Class III medical device in China

2014Obtained CFDA registration certificate for lubricant eye dop product, which was the only chitosan-

based Class III medical device in China for eye protection

of 27

Exhibit 32: Product development pipeline

Source: Company

Product SeriesCFDA

Classification

Therapeutic

AreaIndications Development Status

Expected

Launch

Date

Fibrin Sealant (powder) PharmaceuticalAnti-adhesion and

hemostasis

Cavity filling

Hemostasis

Anti-adhesion

preparing for

manufacturing

permit application

2016

Cross-linked HA gel II

(Janlane)

Class III medical

device

Wound care and

tissue fillingDermal filling Clinical trial completed 2016

Medical HA gel

(High concentrations OVD)

Class III medical

deviceOphthalmology OVD Clinical trial completed 2016

Thermal-sensitive chitosan gelClass III medical

device

Orthopedics;

general surgery

Cerebrospinal fluid leakage plugging

during orthopedic surgery or neurosurgeryType inspection 2018

QST gelClass III medical

device

Wound care and

tissue filling;

ophthalmology

Correction of moderate to severe

facial wrinkles; OVDType inspection 2017

HAL gel for ophthalmology use Pharmaceutical Ophthalmology Local anesthetic for ophthalmology surgeries Applying for clinical trial After 2018

rhEGF gel for ophthalmology use Pharmaceutical OphthalmologyCorneal injuries resulted from trauma or

corneal ulcerPre-clinical trial study After 2018

Chitosan wound healing hydrogel PharmaceuticalWound care and

tissue filling

Enhance the concentration of drug administration site

Improve the contact of drugs and the wound

Maintain and promote the growth of epithelial tissues

Promote wound healing, anti-infection, reduce scars

Pre-clinical trial study After 2018

Nerve TubeClass III medical

device

Peripheral nerve

defect

Guiding and protecting the nerve

during nerve regeneration process

to improve the nerve recovery

Preparing for type inspection After 2018

Drug loaded sustained-release

artificial lacrimal canaliculus

Class III medical

deviceOphthalmology Reliieving lacrimal duct clogging Technology research After 2018

Fibrin Sealant (solution) PharmaceuticalAnti-adhesion and

hemostasis

Cavity filling

Hemostasis

Anti-adhesion

Technology research After 2018

of 27

Valuation

Undervalued, initiate at Buy with Target Price of HK$60.0

We derive the target price of HK$60.0, based on a 10-year discounted cash flow (DCF)

analysis. We assume a WACC of 9.5% and a terminal growth rate of 4%, given the

growth potential of the absorbable biomedical materials market in China. Our target

price of HK$60.0 implies a FY16E P/E of 23x. Haohai is currently trading at 19x FY16E

P/E vs. peers average of 25x, including Bloomage (963 HK) for 20x; and with Haohai’s

earnings CAGR of 30% over 2014-17E (vs. 27% for Bloomage), we believe the stock is

attractive.

Exhibit 33: DCF analysis of Haohai


RMB mn 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EBIT 289 353 437 505 570 627 673 704 718 711

NOPAT 246 300 371 429 484 533 572 599 610 604

Capex (190) (231) (250) (218) (232) (239) (235) (220) (194) (157)

Working Capital (53) (63) (70) (81) (92) (102) (110) (116) (119) (119)

D&A 30 44 60 83 99 117 135 152 169 183

Free Cash Flow 33 50 111 213 259 309 362 415 466 512

WACC 9.5%

Terminal grow th 4.0%

PV (CF over next 10 years) 1,592

PV(Terminal value) 4,280

Enterprise Value 5,872

- Debt 0

- Minority interests 0

+ Cash 2,001

+ Non-operating assets 0

Equity Value (RMB mn) 7,873

Total share outstandings 160

Equity value per share (HK$) 60.0

Sensitivity analysis:

60.0 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%

8.0% 65.2 69.0 73.5 79.1 86.4 96.1 109.7

8.5% 60.5 63.4 67.0 71.3 76.7 83.7 93.0

9.0% 56.4 58.8 61.7 65.1 69.2 74.4 81.1

9.5% 53.0 55.0 57.3 60.0 63.3 67.2 72.2

10.0% 50.0 51.7 53.6 55.8 58.4 61.5 65.3

10.5% 47.4 48.8 50.4 52.2 54.3 56.8 59.8

11.0% 45.2 46.3 47.7 49.2 50.9 52.9 55.3

Terminal growth

WA

CC

of 27

Exhibit 34: Peer comparison

Source: Bloomberg, CIRL

Financials

Strong revenue growth

Haohai’s revenue grew at a CAGR of 31% over 2012-14 to RMB516mn, thanks to i)

capacity expansion and ii) successful commercialisation of new products (chitosan

injection for viscosupplement, rhEGF, and dermal filler). In 1H15, revenue was up

34.8% YoY to RMB313mn, of which orthopaedics, anti-adhesion and haemostasis,

ophthalmology, and wound care and tissue filling accounted for 45%, 28%, 12%, and

15% of total revenue respectively.

We forecast revenue to grow at a CAGR of 28% over FY14-17E to RMB1,082mn in

FY17E, mainly driven by i) orthopaedics sales, with a CAGR of 24.9% to RMB462mn

in FY17E and ii) wound care and tissue filling, with a CAGR of 60.0% to RMB233mn in

FY17E.

Exhibit 35: Revenue breakdown

Source: Company, CIRL Source: Company, CIRL

Name Ticker Mkt Cap Price

(US$ mn) (LC) 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Global peers

Bloomage 963 HK 828 18.30 21.0 25.6 19.5 71.7 25.9 33.2 4.5 5.5 4.4

Anika Therapeutics ANIK US 557 38.08 16.2 20.2 24.8 86.2 (24.4) (17.4) 3.4 2.9 2.6

Grandhope Biotech 300238 CH 2,166 56.67 114.1 NA NA 23.5 NA NA 10.7 NA NA

Seikagaku 4548 JP 878 1783.00 16.5 27.4 31.7 45.7 (23.1) (12.3) 1.2 1.5 NA

Average 41.9 24.4 25.3 5.0 3.3 3.5

Haohai 6826 HK 997 48.45 26.0 24.8 18.9 29.7 39.5 31.5 8.0 2.4 2.1

P/E (x) Earnings growth (%) P/B (x)

Wound Care and Tissue

Filling15%

1H15

Orthopaedics 45%

Anti-adhesion and hemostasis 28%

Ophthalmogy 12%

Wound Care and Tissue

Filling11%

FY14

Orthopaedics 46%

Anti-adhesion and hemostasis 30%

Ophthalmogy 13%

of 27

Exhibit 36: Revenue growth (FY13-17E)


Exhibit 37: Revenue model (FY13-17E)


32%

29%

33%

28%

23%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

200

400

600

800

1,000

1,200


RMB mn

Orthopedics Anti-Adhesion and Hemostasis

Ophthalmology Wound Care and Tissue Filling

Revenue Growth Rate (% YoY)

Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E

Sodium Hyaluronate Injection 166 207 244 280 322

Sodium Hyaluronate Gel 28 4 0 0 0

Chitosan Injection 6 27 57 95 139

Orthopedics 199 237 300 376 462

Sodium Hyaluronate Gel 47 52 54 55 57

Chitosan Injection 88 94 127 158 195

Medical Collagen Sponge 5 9 13 16 20

Fibrin sealant 0 0 0 0 4

Anti-Adhesion and Hemostasis 140 155 193 230 276

OVD 53 67 76 87 103

Lubricant Eye Drops 0 0 2 6 8

Ophthalmology 53 67 78 93 111

rhEGF 10 31 36 41 46

Matrif ill 0 26 80 136 170

Janlane 0 0 0 7 17

Wound Care and Tissue Filling 10 57 116 184 233

Revenue (RMB mn) 401 516 688 882 1082

Growth Rate (% YoY)

Sodium Hyaluronate Injection 82% 25% 18% 15% 15%

Sodium Hyaluronate Gel -7% -87% -100% - -

Chitosan Injection 118% 382% 113% 68% 47%

Orthopedics 61% 19% 27% 25% 23%

Sodium Hyaluronate Gel 9% 10% 3% 3% 3%

Chitosan Injection 24% 7% 35% 25% 23%

Medical Collagen Sponge -39% 100% 40% 25% 25%

Fibrin sealant - - - - -

Anti-Adhesion and Hemostasis 15% 11% 25% 19% 20%

OVD 5% 27% 14% 15% 18%

Lubricant Eye Drops - - - 130% 47%

Ophthalmology 4% 27% 17% 19% 19%

rhEGF 30% 229% 15% 14% 12%

Matrif ill - - 213% 70% 25%

Janlane - - - - 150%

Wound Care and Tissue Filling 30% 498% 104% 58% 27%

Revenue Growth Rate (% YoY) 32% 29% 33% 28% 23%

of 27

Margin analysis

The gross profit margins of the company’s products range from 65%-95%. Blended

GPM increased from 83.4% in FY12 to 87.2% in FY14, driven by i) increase in ASP

per unit of HA injection (FY12: RMB64 vs. FY14: RMB76) and ii) the launch of new

dermal filler products in 2014 (with a GPM of 97%). In 1H15, blended GPM was down

2ppt YoY to 85.0%, due to the upgrading and industrialisation reform in 2H14 which

led to an addition of fixed asset and depreciation. Going forward, we expect blend

GPM to remain largely stable through FY17E, due to a higher sales contribution by

dermal filler.

SG&A ratio decreased by 5.1ppt YoY to 37.9% in 1H15, and we forecast SG&A ratio

to decline by 2.0ppt YoY to 42.8% in FY15E, and continue to decline to 42.2% in

FY16E and 41.6% in FY17E. We forecast R&D ratio to remain at 5.0% of sales

through FY17E.

Exhibit 38: Margin performance (FY13-17E) Exhibit 39: SG&A and R&D ratio (FY13-17E)


Exhibit 40: Net profit growth (FY13-17E)


86.3% 87.2% 85.1% 85.0% 85.2%

40.6% 41.1% 42.0% 40.6% 40.4%

35.3% 35.6% 37.2% 38.2% 37.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Gross profit margin EBIT margin Net margin

44.3%45.8%

42.8% 41.6% 41.6%

5.9% 5.1% 5.0% 5.0% 5.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


SG&A ratio R&D ratio

24%

30%

39%

30%

22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50

100

150

200

250

300

350

400

450


RMB mn

Net profit % YoY

of 27

Company Background

Exhibit 41: Company History

Source: Company

Exhibit 42: Management Profile

Source: Company

Year History

2007

Haohai Limited w as established in the PRC.

Gained control of Songjiang Factory, w hich manufactures HA and rhEGF products

Shanghai Jianhua w as acquired by the company.

Shanghai Qisheng w as consolidated into the company.

2010

Haohai Limited w as converted into a joint stock limited company and renamed to Shanghai Haohai Biological Technology Co., Ltd.

Shanghai Likangrui w as acquired by the company, for expanding product offerings (f ibrin sealant) in anti-adhesion and

haemostasis

2011The company w as entrusted by STCSM to sponsor the establishment of the Shanghai Strategic Alliance for Innovation of Medical

Absorbable Biomaterial

2014The company w as approved by STCSM to establish the Shanghai Engineering and Research Center of Medical Absorbable

Biomaterial

2015The company made an investment for 60% shareholding in Shanghai Baiyue by capital injection.

The company acquired 38% stake in Henan Universe.

Name Age Position Experience and Responsibility

Dr. Hou Yongtai 53Chairman and

Executive Director

Dr. Houresponsible for formulate strategies, overseas business, and R&D.

Dr. Hou engaged in postdoctoral research at the pharmacology department of University of

Pennsylvania from 1992-1995.

From 2000-2003, he served as a researcher and doctoral degree supervisor at Shanghai Institute of

Materia Medica, Chinese Academy of Sciences.

Mr. Wu Jianying 50Executive Director and

general manager

Mr. Wu is responsible for daily operation and management.

He w orked as a surgeon at the General Surgery Department of the Second Affiliated Hospital of the

Second Military Medical University from 1991-1999.

Mr. Wu obtained a master’s degree in clinical medicine from the Second Military Medical University in

1997 and the practicing doctor qualif ication in the PRC in 1999.

Mr. Ling Xihua 60Executive Director and

CFO

Mr. Ling is respobsible for overall f inancial management.

He served as the CFO at Haohai Chemical from 2000-2007.

Mr. Ling obtained a graduation certif icate in accounting from Shanghai University of Finance and

Economics in 1986.

Mr. Huang Ping 39Executive Director and

Secretary of the Board

Mr. Huang is responsible for the preparation of Board meetings and handling information disclosure.

He w orked as a manager in Haoyang Investments from September 2008 to June 2010, a director of

Haohai Changxing.

Mr. Huang obtained a bachelor of law s in 1998 and a master of law s in 2005 from East China

University of Political Science and Law , and a doctoral degree in corporate management from Fudan

Ms. Ren Caixia 57 Deputy general manager

Ms. Ren is responsible for production, quality control, planning and procurement.

She served various positions at Shanghai Huayuan from 2002 to 2007.

Ms. Ren obtained a bachelor’s degree in inorganic chemicals from the Department of Chemicals,

Hefei University of Technology in 1982.

Mr. Wang Wenbin 48 Deputy general manager

Mr. Wang is responsible for the technology upgrade, w ork safety etc.

He has served as the executive deputy general manager in Shanghai Qisheng from 1995 to until

present.

Mr. Wang obtained a bachelor’s degree in medicine from the Second Military Medical University in

1991 and the

Mr. Zhang Jundong 40 Deputy general manager

Mr. Zhang is responsible for reseach, project development, new product management.

He engaged in postdoctoral research in clinical medicine at the Second Military Medical University

from 2006 to 2010.

Betw een 2009 to 2013 he served at the prescription medicine business division of Xinyi Institute of

Materia Medica in Shanghai Pharmaceuticals as a director of the institute and he served as the

of 27

Exhibit 43: Shareholding Structure

Source: Company

Risk Factors

Competition risks

The company competes with other local and overseas medical devices, chemical

drugs and biological products companies. Their products can be used as substitute for

the company if they provide similar indications.

Uncertainty for development of new products

There are risks of failure to meet safety, efficacy or other standards during the R&D

process, or the failure to obtain necessary regulatory approvals, including CFDA

approvals. Moreover, competition risks and rapidly changing market demand would

make commercialization efforts more complex and less certain.

Failure to obtain and maintain licenses

In the event that the company fails to receive or maintains the GMP certifications for

its products in a timely manner, the business and operation of relevant products may

be materially and adversely affected.

of 27

Exhibit 44: Financial Summary


Income statement Cash flow

Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E

Revenue 401 516 688 882 1,082 PBT 166 216 301 396 477

Gross profit 346 450 586 750 922 Taxes -24 -38 -45 -59 -71

EBITDA 175 235 320 404 499 D&A 13 23 31 45 62

D&A -13 -23 -31 -45 -62 CFO before WC change 150 196 275 344 427

EBIT 163 212 289 358 437 Change in working capital -4 -54 -54 -68 -75

Net interest income 4 4 12 38 40 Cashflow from operation 147 142 222 277 352

PBT 166 216 301 396 477 CAPEX 134 103 190 231 250

Tax -25 -32 -45 -59 -71 Free cash flow 12 39 32 46 102

Minority Interests 0 0 0 0 0 Dividends 0 0 0 0 0

Net Profit 142 184 256 337 405 Balance Sheet adj. 24 -55 -75 38 40

Dividends 0 0 0 0 0 Shares issued 0 0 1,864 0 0

Others 0 0 0 0 0

Balance Sheet Net cash flow 36 -16 1,820 84 142

Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E Net cash (debt) start 161 197 181 2,001 2,085

Cash & cash equivalents 197 181 2,001 2,085 2,226 Net cash (debt) start at year-end 197 181 2,001 2,085 2,226

Inventories 43 76 103 137 173

Trade receivables 44 62 89 123 162 Ratios

Other receivables 12 19 20 20 20 Year to Dec FY13A FY14A FY15E FY16E FY17E

Other current assets 2 9 3 3 3 Growth rate (%)

PPE 271 352 512 700 890 Revenue 32.3% 28.6% 33.4% 28.2% 22.6%

Other intangible assets 5 4 4 4 4 EBITDA 21.3% 33.9% 36.5% 26.0% 23.5%

Other non-current assets 48 48 48 48 48 EBIT 24.2% 30.3% 36.4% 23.9% 22.0%

Total assets 621.178 752 2,781 3,120 3,527 Net profit 24.2% 29.7% 39.5% 31.5% 20.3%

Margins (%)

Trade payables 7 9 10 15 20 Gross profit margin 86.3% 87.2% 85.1% 85.0% 85.2%

Other payables 63 125 120 115 110 EBITDA 43.7% 45.5% 46.6% 45.8% 46.1%

Other current liabilities 7 5 5 5 5 EBIT 40.6% 41.1% 42.0% 40.6% 40.4%

Deferred tax liabilities 1 1 1 1 1 Net margin 35.3% 35.6% 37.2% 38.2% 37.4%

Deferred income 14 18 18 18 18 Other ratios

Total Liabilities 91 158 153 153 153 ROE (%) 30.8% 32.6% 15.9% 12.0% 12.8%

ROA (%) 26.5% 26.7% 14.5% 11.4% 12.2%

Share capital 120 120 160 160 160 Net gearing (%) -37.2% -30.5% -76.1% -70.3% -66.0%

Reserves 411 474 2,468 2,806 3,213 Interest coverage (x) NA NA NA NA NA

Shareholders' equity 531 594 2,628 2,966 3,373 Receivables days 33 38 40 44 48

Minorities 0 0 0 0 0 Payables days 44 43 33 34 40

Total equity 531 594 2,628 2,966 3,373 Inventory days 278 330 320 331 353

Net cash (debt) 197 181 2,001 2,085 2,226 Effective tax rate (%) 15% 15% 15% 15% 15%

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Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Antony Cheng Research Director (852) 2235 7127 [email protected]

Hayman Chiu Associate Director (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]

Johnny Yam Research Assistant (852) 2235 7653 [email protected]

Analyst Certification

I, Wilfred Yuen hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

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